The Rise and Fall of

ENRON
IV-AMA | GROUP 2
 REPORTERS

LUCERO, JOSUA SAMONTE, JEREMIAH HIPOLITO, ANDREA RAMOS, MONICA MAE DENILA, ANGELA ZETA, FRANCHESKA

GROUP 2 | IV-AMA
THE COMPANY
HISTORY
The Turning Point...

1
Deregulation of Energy Markets

The 1990s saw a wave of deregulation in the energy industry, opening up

markets to competition.
2

3
The Turning Point...

1
Deregulation of Energy Markets

• Increase in Trading Volume

• Electricity Market Expansion
• Market Capitalization Growth
• Wholesale Price Volatility
• Commodity Trading Growth
• Market Share in Gas Trading
The Turning Point...

1
Deregulation of Energy Markets

The 1990s saw a wave of deregulation in the energy industry, opening up

markets to competition.
2
Innovation and Risk-Taking

Under the leadership of CEO Kenneth Lay and later Jeffrey Skilling, Enron
embraced financial innovation.
3
The Turning Point...

2
Innovation and Risk-Taking

• Growth in Trading Revenue

• Weather Derivatives Market
• Natural Gas Forward Contracts
• Electricity Trading Growth
• Broadband Services Investment’
• Creation of Financial Derivatives
The Turning Point...

1
Deregulation of Energy Markets

The 1990s saw a wave of deregulation in the energy industry, opening up

markets to competition.
2
Innovation and Risk-Taking

Under the leadership of CEO Kenneth Lay and later Jeffrey Skilling, Enron
embraced financial innovation.
3
Expanding Horizons

Enron expanded its operations globally, entering international markets and

diversifying into a wide range of industries, including telecommunications, water
services, and even weather derivatives.
The Turning Point...

3
Expanding Horizons

• International Operations
• Geographic Reach
• Diversification into Non-Energy Sectors
• Investment in Broadband Services
• Market Capitalization
• Global Energy Trading Volume
 THE ENRON
PHENOMENON
By the late 1990s, Enron had become a Wall Street
darling, with its stock price reaching
unprecedented heights.
Behind Closed Doors

1 Financial Fraud and Accounting

Irregularities

• Hidden Debt in Special Purpose Entities

(SPEs)
• Revenue Misreporting
• Stock Price Inflation
• Off-Balance-Sheet Liabilities
• Market-to-Market Accounting
• Restated Financial Statements
 1 Lack of Transparency

2 Conflicts of Interest

Behind Closed Doors Failure of Corporate Governance

3

4 Whistleblower Suppression
 6 Regulatory Failures

7 Market Impact

Behind Closed Doors Reforms and Legislation

8

9 Loss of Trust
ICE BREAKER
 RIDDLE ME THIS

I was once an energy titan, soaring high and bright,

But hidden in complexity, I lost my moral light.
With SPEs and schemes, my downfall did begin,
What am I, this scandalous corporate sin?
ANSWER IS....

ENRON
 RIDDLE ME THIS

I'm the practice of masking debt and cooking books,

With creative accounting, I earned some dirty looks.
Arthur Andersen's failure, my secrets to uphold,
What term am I, in Enron's story told?
ANSWER IS....

FINANCIAL
FRAUD
 RIDDLE ME THIS
In darkness I thrived, behind closed boardroom doors,
With conflicts of interest, I settled my scores.
I wielded great power, but my governance was flawed,
What am I, in Enron's tale, the ultimate fraud?
ANSWER IS....

CORPORATE
GOVERNANCE
 RIDDLE ME THIS

I'm an act born from Enron's disgrace,

To bring about reforms in the corporate race.
With regulations and rules, I aimed to restore,
The trust that Enron shattered forevermore.
ANSWER IS....

SARBANES-
OXLEY ACT
APPLICATIONS OF BASIC PRINCIPLES
OF CORPORATE GOVERNANCE AND
BEST PRACTICE RECOMMEDATIONS
FOR ENRON
 ENRON’S FOUNDATIONS
AND MANAGEMENT OVERSIGHT
The roles of the board and the management at Enron were
managed in a way that lacked transparency, accountability, and
ethical integrity. Hence, allowing a culture of corruption and
unchecked risk-taking to flourish within the company.
Does it lay solid foundations for
management oversight?

1
Failure to Challenge the Management

2
Excessive dependence

3
Inadequate Risk Management Oversight
 BEST PRACTICES

Establish an Independent Lead Formalized Board Evaluation

Director

Mandatory Board Review of Transparency and Disclosures

Financial Statements

Independent Risk Assessment Clear Risk Appetite Statement

 ENRON’S BOARD STRUCTURE

Enron’s Board of Directors is composed of 17 directors

with so much expertise. However, what seemed to be the
best and competent set of board of directors, did not turned
out positively and even became one of the reasons for its
failure,
What are the problems in Enron’s Board
Structure?

1
Conflict of Interest within Board of Directors

2
Lack of Independence of External Auditors
BEST PRACTICES

1 Even and Effective Composition of

Board of Directors

2
Rotation of External Auditors
 ENRON'S DECISION-MAKING
Enron was functioning in a competitive business climate
that prioritized financial performance. It failed to
promote ethical and responsible decision-making.

The bankruptcy filing of Enron in November 2001

marked the start of an unprecedented wave of corporate
scandals.
Enron is accused of the following, in addition to
questionable partnerships:

1 Borrowing from subsidiaries with 2 Avoiding paying federal taxes despite

the fact that some of its companies,
no intention of repaying the debt.
such as Portland General Electric,
collected tax payments from customers.

3 Manipulation of electricity pricing 4 Bribing foreign authorities in

has contributed to California's India, Ghana, and other nations to
energy dilemma. get contracts.
Enron is accused of the following, in addition to
questionable partnerships:

5 Declaring gains right away for long- 6 Changing account balances right before
term projects that may eventually quarterly reporting to increase apparent
lose money. earnings.

7 Changing federal energy strategy. 8 Working with analysts to create a

false picture of the company's
financial health.
What are the factors that caused them to become
irresponsible and unethical in their decision-making?

1
Abuse of Authority

2
Truth Misrepresentation

3
Executive Compensation
BEST PRACTICES

1
Ethical Leadership Conduct

2
Strict Enforcement of Guidelines

3 Independent Compensation Committee

 SAFEGUARD INTEGRITY IN
FINANCIAL REPORTING

Following this principle ensures that the company

presents its financial statements accurately and fairly in
accordance with applicable accounting principles and
standards.
 1 Executive Committee

2 Finance Committee

Five (5) Committees of

Enron Corporation Audit and Compliance
3
Committee

4 Compensation Committee

5 Nominating Committee
 Kenneth Lay Jeffrey Skilling

Enron Corporation
Executives that
Committed Fraud
Kenneth Lay - founder & Chief Executive Officer
Jeffrey Skilling - Chief Executive Officer
Andrew Fastow Andrew Fastow - Chief Financial Officer
United States Subcommittee Findings

1 4 Extensive Undisclosed Off-The-

Fiduciary Failure
Books Activity

2 5
High-Risk Accounting Excessive Compensation

3 Inappropriate Conflicts
6
Lack of Independence
of Interest
Arthur Andersen

• Served Enron Corporation as an

external auditor and consultant
for 16 years

• June 2001 - SEC issued a cease

and desist order to the Firm.

• March 2002 - Founded guilty of

obstruction of justice
 TIMELY AND BALANCED
DISCLOSURE

Disclosing all the material matters concerning

the company in a timely manner.
BEST PRACTICES

1 Enron's must swallow its pride and 3 Ensure the compliance with the
create a long term solution Financial reporting standards

2 Having a rule of law that will

require a listing disclosure
requirements
 RESPECTS TO RIGHTS OF
SHAREHOLDERS
Enron's management engaged in accounting fraud and
misleading financial reporting to hide the company's
financial problems. This ultimately led to the collapse of
the company, causing significant financial losses for
shareholders.
 What happened to
shareholders in Enron
scandal?
Shareholders lost $74 billion in many years
leading up to bankruptcy, thousands of
employees and investors lost their retirement
amounts, and many employees lost their jobs.
The settlements issue to the
shareholders
As the company's stock became virtually
worthless, eligible shareholders will receive $7.2
billion in settlements under a distribution plan
approved in federal court when the company
collapsed due to scandal. The $7.2 billion in
settlements is the largest in U.S. securities
litigation, according to the Securities Class
Action Clearinghouse at Stanford University.
BEST PRACTICES

1
Ensure that the company provides regular, clear, and
comprehensive financial and operational information to
shareholders.

2
Hold regular shareholder meetings, including annual general
meetings, where shareholders can ask questions and voice their
concerns directly to the management and board.
RECOGNIZE AND MANAGE RISK

• Poor Risk Management Practices

• Use of Special Purpose Vehicles (SPVs) or
Special Purpose Entities (SPEs)
• Deceptive Accounting Practices
 BEST PRACTICES

Involve stakeholders in every step of Establish clear risk management

the way. policies.
• Implement Risk Accountability for
every employee.
• Conduct Regular Risk
Create a strong risk culture by setting Assessments
the tone from the top. • Quantify & Prioritize Risks
• Implement Risk Treatments

Communicate effectively with all

stakeholders.
Continuously monitor risks
 CORPORATE BOARD OF DIRECTORS ISSUE
(CORPORATE GOVERNANCE ISSUES)
ENRON did not conduct a fair review and did not actively
encourage enhanced managerial effectiveness. This is why
they faced corporate fraud in terms of their own management,
as boards, whose primary responsibility is to protect the
interests of shareholders, completely failed to prevent or
identify management fraud.
BEST PRACTICES

1
Monthly performance assessments and reviews
whether it has a suitable balance of backgrounds and
competencies.

2
Every three months, a quarterly meeting is conducted.
It's a time for teams to get together and talk about their
success, goals, and issues. Where BOD will listen to the
advice of experts in accordance with the financial
reporting.
 POORLY REMUNERATION
POLICIES
PROBLEM: Enron executives got substantial
bonuses almost simultaneously, with the amount
dependent in large part on the business's earnings
POORLY REMUNERATION
POLICIES IN ENRON

1 Poorly Constructed 3 Executives received large bonuses

Compensation Agreements
at almost the same time, with the
amount based in large part on the
earnings of the company

2 Inadequate Compensation
Planning
BEST PRACTICES

1
Examine the salary rules to verify they are fair and
adhere to industry standards; take into account the
cost of living, inflation, and the company's payroll
budget.

2
Make certain that the compensation rules fit the
needs of both employees and shareholders.
 QUESTIONABLE ACCOUNTING
PRACTICES AND OTHER DECISIONS

1 Problematic Footnotes

2 Dubious Accounting Practices

3 Enforcing Statute
BEST PRACTICES

1 Establish a cooperative atmosphere between the SEC and

other firms so that internal auditors and regulators may
readily disseminate new policies or apply laws and
regulations.

2
Hiring new accounting specialists, as well as internal and
external auditors with vast experience, who can deal with a
company's weak or unclear financial state.
ICE BREAKER
NAME IT TO WIN IT
ANSWER IS....

ACCOUNTING
NAME IT TO WIN IT
ANSWER IS....

CORPORATE
NAME IT TO WIN IT
ANSWER IS....

DISCLOSURE
NAME IT TO WIN IT
ANSWER IS....

DECISION
NAME IT TO WIN IT
ANSWER IS....

MANAGEMENT
NAME IT TO WIN IT
ANSWER IS....

CORRUPTION
 SARBANES-OXLEY (SOX)
ACT OF 2002
Responding to corporate failures and fraud that resulted in
substantial financial losses to institutional and individual
investors, Congress passed the Sarbanes Oxley Act in 2002.

The Act contains provisions affecting corporate governance, risk

management, auditing, and financial reporting of public
companies, including provisions intended to deter and punish
corporate accounting fraud and corruption.
AUDIT COMMITTEE ( SECTION 301)

1 Hires, compensate, oversees the 3 Must be independent member of

work of the independent auditor the board of directors

Handles anonymous reports of Note: Comprises at least three fully

2 employee about accounting and independent members, one must be a
auditing practices financial expert.
PUBLIC COMPANY ACCOUNTING
OVERSIGHT BOARD

1
Oversees The Audits Of Public
Companies

• “AUDIT” ACCOUNTING FIRMS

• Issues Auditing Standards For Public Companies
• Enforces Compliance With Its Rules, Professional
Standards, Sox, And Relevant Securities Laws
PUBLIC COMPANY ACCOUNTING
OVERSIGHT BOARD

2 CPA firms that audit issuer

4 Tax service may be allowed
register with PCAOB
if pre approved by the audit
committee

3 Prohibits non-audit
service.
REPORTING

1
CEO and CFO Certification: Must certify
Annual and Quarterly filing with the SEC

• Reviewed the report

• The FS are free from misstatements at the best of their
knowledge (cannot plea ignorance)
• Explicitly take responsibility for the system of internal
control and have evaluated its effectiveness
MANAGEMENT ASSESSMENT OF
I/C (SECTION 404)

Requires that management and auditors establish

internal controls and reporting methods to ensure
the adequacy of those controls.
RECORD KEEPING (SECTION 802)

1
The first deals with destruction and falsification of
records.

2 The second strictly defines the retention period for

storing records.

3 The third rule outlines the specific business records

that companies need to store, which includes electronic
communications.
Steven B. Harris, PCAOB Member, in a presentation with title "Remarks on
The Sarbanes-Oxley Act of 2002: Ten Years Later"

1 It restored investor 3 It dealt with the conflicts of

interest in the accounting
confidence
profession by prohibiting
accounting firms from
performing certain auditing
and consulting services for
2 It established the PCAOB,
the same company the firm
ending more than 100 years of
self-regulation by the was auditing.
accounting profession.
Steven B. Harris, PCAOB Member, in a presentation with title "Remarks on
The Sarbanes-Oxley Act of 2002: Ten Years Later"

1 It mandated independent audit committees and required issuers

to disclose whether a "financial expert" is on the audit
committee.

It increased corporate accountability and dealt with tone at the top

2
by requiring CEOs and CFOs to personally certify their
companies' financial statements.
 Ensures that the management of a company
1 considers the best interests of everyone;

Helps companies deliver long-term corporate

2 success and economic growth

IMPORTANCE OF GOOD CORPORATE Maintains the confidence of investors and as

GOVERNANCE 3 consequence companies raise capital efficiently
and effectively;

Has a positive impact on the price of shares as it

4 improves the trust in the market;

Improves control over management and

5
information systems (such as security or risk
management)
 Gives guidance to the owners and managers
6 about what are the goals strategy of the
company;

Minimizes wastages, corruption, risks, and

7 mismanagement;
IMPORTANCE OF GOOD CORPORATE
GOVERNANCE
8 Helps to create a strong brand reputation;

Most importantly –
9
it makes companies more resilient.
 RESEARCHERS

DAEL, JOHNEDEL VILLAR, CARLOS MIGUEL BALLETA, ABIGAIL GUNSAY, PATRISHA MAE DOMINGO, BEATRICE ELLA

GROUP 2 | IV-AMA
 EDITORS

RAMOS, ANNE COLLEENE ARGOTA, CYBELLE KIM VILLANUEVA, CLOVEN KAYE

GROUP 2 | IV-AMA
 RESEARCHERS

CORITANA, CARLO MARCO DE OCAMPO, JUSTINE OCCIDENTAL, GAIL MAHAIT, CLEO MANALASTAS, KATE ALLYSON

GROUP 2 | IV-AMA