Question

1) Who were the key stakeholders involved in, or affected by, the collapse of Enron?

2) Identify the principles and recommendations of ASX Listing Rules that relates to the independence requirements of the auditor, the directors and the Chairman of the board.

3) Explain the key issues in the area of:

1. Related party disclosures
2. Insider trading
3. Executive remuneration
4. Role of independent auditor

4) Identify the role of senior management in the corporate governance in the Enron’s collapse.

Answer 1

#1. The key stakeholders affected by the collapse of Enron are: employees and retirees, Thousands of them lost their jobs and their investments.

The key stakeholders involved are

the executives: Kenneth Lay, Jeffrey Skilling and Andrew Fastow they sold significant blocs of company stock, have conflicts of interests; government figures, Lay had close personal tie with the Bush family, Enron’s efforts influence policy making; Regulatory authorities: Commodities Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC); their business partners: Arthur Anderson and Vison & Elkins; the competitor Dynergy; The two banks: Citi Bank and J.

The stakeholders let the collapse of the Enron through their carelessness and lack of oversight.

#2.The purpose of the principles is to enable entities listed on the ASX to achieve good governance outcomes and to assist such entities to meet their investors’ expectations .

For auditor the board of a listed entity should have an audit committee which:

• has at least three members, all of whom are non-

executive directors and a majority of whom are

independent directors; and

• is chaired by an independent director, who is not the

chair of the board,

and disclose:

• the charter of the committee;

• the relevant qualifications and experience of the

members of the committee; and

•in relation to each reporting period, the number of

times the committee met throughout the period and

the individual attendances of the members at those

meetings.

Recommendation for board of directors

Which governance practices a listed entity chooses to adopt
is fundamentally a matter for its board of directors, the body
charged with the legal responsibility for managing its business with due care and diligence and therefore ensuring that it has appropriate governance arrangements in place.

Under the Principles and Recommendations, if the board of a
listed entity considers that a Council recommendation is not
appropriate to its particular circumstances, it is entitled not to
adopt it. If it does so, however, it must explain why it has not
adopted the recommendation – the “if not, why not” approach.

#3. Related party disclosure :

Enron’s Board members signed the company’s 10–K filings with the Securities and Exchange Commission, and the Audit Committee was consulted about related party disclosure issues in both the 10–K filings and the company’s proxy statements .

The Enron Board’s decision to waive the company’s code of conduct and allow its Chief Financial Officer (CFO) Andrew Fastow to establish and operate off-the-books entities designed to transact business with Enron was also highly unusual and disturbing. This arrangement allowed inappropriate conflict of interest transactions as well as accounting and related party disclosure problems, due to the dual role of Mr. Fastow as a senior officer at Enron and an equity holder and general manager of the new entities.

Insider trading : no knowledge about this.

Executive remuneration : The Enron Board of Directors approved excessive compensation for company executives,
failed to monitor the cumulative cash drain caused by Enron’s 2000 annual bonus and performance unit plans, and failed to monitor or halt abuse by Board Chairman and Chief Executive Officer Kenneth Lay of a company-financed, multi-million dollar, personal credit line.

Role of Independent auditor . No knowledge about this.

#4. The Enron Board of Directors failed to safeguard Enron shareholders and contributed to the collapse of the seventh largest public company in the United States, by allowing Enron to engage in high risk accounting, inappropriate conflict of interest transactions, extensive undisclosed off-the-books

activities, and excessive executive compensation. The Board witnessed numerous indications of questionable practices by Enron management over several years, but chose to ignore them to the detriment of Enron shareholders, employees and business associates.