MARYAM KHANS2016113001MS (ACS) UMT, PakistanCorporate Governance

ENRON

CONTENTIntroductionTrading ModelInternational BusinessManaging TalentReporting ChallengesWhy Company Fail?Auditors and Board Fault?

Welcome to EnronHead quarter: united states

Kenneth Lay Jeffrey skilling Andrew fastow

Top executives and board of directors: Chairman Ken Lay, CEO Jeffrey Skilling, CFO

Andrew Fastow and the accounting firm of Arthur Anderson.

INTRODUCTION

CEO 1986 COO CFO 1990

KENNETH LAYAfter master degree he began his career in 1965 as a corporate economist with Exxon company. And 1984 joined Houston natural gas company as chairman and CEO merged will inter north in 1985 and was later renamed Enron corporations with Enron success (Kenneth lay).

He drew down his $4 million Enron credit line repeatedly and then repaid the company with the Enron shares.

JEFFERY SKILLINGStart career after MBA and 1987 start working as consultant for Enron. In 1991 skilling was subsequently made CEO managing director of Enron capital and trade resources. Equal responsible for the Enron scandal

ANDREW FASTOWAndrew Fastow joined Enron in 1990, Fastow was accused of being mastermind behind the Enron scandal.

In the time period of ten years he manipulated $30 Million for his own enjoyment.

INTRODUCTION: ENRON’S BUSINESS

During 1985 two companies merge with each other, one inter north acquired Houston natural gas pipeline company, that own 37,000 miles for inter and interstates pipeline for transporting natural gas and formed a company named ENRON

Houston natural gas (HNG) was an American energy, commodities, and services company and Inter North Natural Gas dealt in petrochemical, plastic industry and petroleum production..

ENRON was considered as “Americas Most Innovative Company” and front page of FORTURE Magazine for six consecutive years.

TRADING MODEL•ENRON’s major focus on the deregulated market who are highly inefficient market, complex distribution channels, deregulated, low supply and services quality, etc.

• In UK 1993, TESSIDE was the largest gas and power plant in the world. It was the first project with investment of $1.4bn.

• In 1997, ENRON acquired electric power generation, transmission and distribution expertise by Portland General Electric for $ 2.1bn.

• In 1997, Risk Assessment and Control (RAC) for $675m with 150 staff. It evaluate risk and reward of the company’s investment.

Cont…• In 1998, acquired AZURIX subsidiary for water industry & its development.

• In India 1999, DHABOL project for $2,9bn was later criticized by Indian state.“PEAKING PLANT” designed to meet short-term demand.

• In 1999, ENRON sold 76% of Azurix in Public offering on NYSE.

• In January 2001, announced the formation of ENRON Broadband Services (EBS) fro $1bn.

INTERNATIONAL BUSINESS

First major project was the construction of the 1.4 billion, Teesside power plant in the united kingdom and completion 1993 (gas supply provider).

Second large construction and asset management project included $2.9 billion Dabhol power project in Mumbai India and completed in may 1999.

The Dabhol project proved to be particularly troubled, with delays arising local criticism of the Indian state and national governments over the favorable terms offered to Enron. ( china was offer electricity in Pakistan.)

MANAGING TALENTENRON’s major focus on the deregulated market who are highly inefficient market,

complex distribution channels, deregulated, low supply and services quality, etc.

Employee approximately 21,000 staff one of the world’s major electricity gas company. The employees evaluated on performance review committee (PRC), any employee who doesn’t add value to the company and ranked in the bottom 20% risk being fired.

This process was used to drive employees compensation and $750m annually paid to employees as cash bonus.

Superior originators who create new things had average salary of $1,500,00 to $2,000,00.

REPORTING CHALLLENGES

Two issues were particularly challenging:

Involved complex long-term contracts, accounting standards permit to use present value for these contracts. Enron recognized future cash inflows as revenue, and the present value of the expected cost of fulfilling the contract considered as expense.

The second challenge is SPE’s (Special Purpose Entities)

SPE’s( Special Purpose Entities)It is a legal entity created to fulfill narrow, special or temporary objectives. Companies use SPE’s as a back door to remove debt, obligations and other liabilities of the balance sheet . And more than hundred create some physically and some non physically partnership companies.

For example one of its investments was a joint venture Californian public employee’s retirement system (CALPERS) called JEDI. JEDI was an investment fund whose assets included $12 million Enron shares that were marked to market. Since Enron had joint venture over the venture, JEDI was not consolidated and its debt was therefore not included on Enron's balance sheet.

Why did the company FAIL ? 1993-2001: Enron also used complex & dubious accounting schemes to reduce Enron’s tax payments; to inflate Enron’s income and profits; to inflate Enron’s stock price and credit rating; to hide losses in off-balance-sheet subsidiaries; to engineer off-balance-sheet schemes to funnel money to themselves, friends, and family;

to fraudulently misrepresent Enron’s financial condition in public reports.Billions of dollars were manipulated as long as stock prices were high—possible to keep the truth hidden.

Why did the external auditors and board fail to prevent Enron failure?

Enron was fulsome in structuring their transaction and interested in making long-term complex transaction to achieve its desired objective.

ENRON had a external auditor named, ARTHUR ANDERSEN. The Accounting Principle Board (APB) made certain changes to Professional standards

(GAAP), and these amendment made the audit firm at high litigation risk, & also to developed standardized audit procedures to low cost and many of the clients switched to low cost.

Its external auditor ARTHUR ANDERSEN, had a close relation with its client ENRON. It’s internal audit functions outsourced to Andersen. Forty employees of Enron shifted to Andersen payroll.

Andersen employees sifted to Enron as CFO, Chief Accounting Officer, and Treasure Officer.

Cont…

Andersen, also served Enron for risk management, tax work, and appraisal of asset.

Enron paid $25m for audit fee, $27m as consulting fee, $15.7m for other services. Total 67.7 m paid to ANDERESEN.

In 1999 & 2000, In Client Risk Analysis, Enron was classified to HIGH RISK ACCOUNTING. Andersen hide the documents where Enron showed its high risk.

In feb 2001, Andersen outlined a range of issues and discussed, this might be he want to retain with this company, and these concerns never share with audit committee and management.

The board’s Finance Committee review the transaction quarterly.Overlook created SPE’s.Board transfer power to audit committee to look internal and external auditor and financial reporting process. Compensation committee evaluate CEO performance and setting compensation.

The stock price decrease from 80$To 42 $ in august

ANALYSISEnron acted in defiance against a system that they created.Lack of checks & balances for decision-making structure or accountability.

Undefined ethical standards became legal issues.Cornerstone components of leadership affecting behavior and internal practices was absent.

Limitations of leadership in a practical sense were left unexplored.

Underlying problems of compliance require a regular review process.

Senior and middle management failed to create a climate that was conducive to include the organizations goals and objectives.

CONCLUSIONEnron was a massive failure, partly because of its size, complexity, controls to protect the integrity of capital market failed, and especially because of the massive greed and collusion of key participants. Management failed , Auditor failed, Analyst failed, Creditors/Bankers failed, and also regulators failed. The multiple failure sent a signal of management structure.

Recommendations in our point of view

They should Enable safeguards to protect ethical climate.

Comprehensive understanding of assets, tools and resources can prepare leadership and

managers to find new solutions for new problems encountered.

Proper focus on Core values that guide the most useful principles.

Implement systems that measure the effectiveness of ethics initiatives.

Visible code of ethics to encourage ethical business decisions as a priority.

Refuse to tolerate misconduct from the top down (Ferrell, Fraedrich, and Ferrell, 2013).

Supported and clear flow of company work should be followed (Shown in next slide).

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