Professor Mathew Miko
February 02, 2011
???Our corporate society depends upon a system of checks and balances to keep corporate greed from running amuck. These checks and balances involve a multitude of participants, many of whom act as gatekeepers who have the responsibility of protecting corporate shareholders, corporate creditors, and investors. If the gatekeepers act properly, the shareholders, creditors, and investors can be protected???(David S. Ruder).
1. How could Enron have been structured differently to avoid such activities
Enron could have avoided their difficulties by eliminating ???conflict of interest???.
1. The firm of Arthur Anderson provided consulting services and then turned around and provided the report of the financial outcome of those same consulting services.
2. Enron hired and paid their own auditors creating a conflict of interest as the auditor had an inducement not to issue an adverse report on the company that is paying the bills.
The Sarbanes-Oxley Act of 2002 addresses corporate governance by requiring the SEC(Securities Exchange Commission) to cause the stock exchanges and Nasdaq to prohibit the listing of any security of an issuer that is not in compliance with standards for audit committees set forth in the Act. The Act requires the SEC, by rule, to prohibit the listing of securities of any company not in compliance with standards established in the legislation, including the following:
* The audit committee is given direct responsibility for appointment, compensation and oversight of the work of any accounting firm employed by the issuer.
* Each member of the audit committee must be independent, and in order to be independent may not accept any consulting, advisory, or other compensatory fees from the issuer and may not be an affiliate of the issuer.
* Each audit committee must establish procedures for receiving complaints about accounting and auditing matters and must keep those complaints confidential.
* The audit committee must have the authority to ???engage independent counsel and other advisers.???
* The issuer must provide funding, as determined by the audit committee, for the audit firm and the advisers employed by the audit committee.
Prior to Enron, the New York Stock Exchange Listed Company Manual required each listed company to have an audit committee consisting of at least three independent, financially literate directors and required each audit committee to have a charter setting forth its responsibilities and a plan for meeting them.
The Oxley-Sarbanes Act is a major improvement to corporate Governance, particularly since it gives control over the hiring, firing, and oversight of the outside auditors to the audit committee and because it specifically gives the audit committee the right to hire its own independent counsel and other advisers.
???The managers and executives, of course, have a fiduciary duty to act in the best interest of the company and its shareholders, but the law leaves considerable discretion to managers and executives to exercise their own business judgment about what is in the best interests of the company???(What Really Went Wrong With Enron A Culture of Evil).
Corporate managers must subject themselves to greatly increased monitoring of their conduct in all areas and perhaps lose some of their autonomy. Independent directors must work harder, their committees must be better staffed, and they must take positions that at times will challenge management. Corporate counsel must play key roles as advisers to both management and the board, and must be willing to be strong advocates for proper conduct by managers when necessary to protect the corporation and its shareholders.
Many large companies like Enron managed their employee pension plans creating conflict of interest produced by the ability to manipulate funds in ways that may benefit the company although not necessarily the employees.
???President George Bush ordered a review of US pension regulations, after Enron employees lost billions of dollars because their pension??™s scheme was heavily invested in Enrons own stock (BBC News).???
1. Did Enron??™s officers act within the scope of their authority
I do not see Enron??™s officers as acting within the scope of their authority because when Enron??™s directors and officers acted dishonestly and unethically to benefit over its shareholders and members, they were no longer acting in the scope of their authority. ?
2. What was the corporate culture at Enron
The corporate culture at Enron was basically ???do it if you can get away with it.??? Anything that was going to net a profit was a going proposition, just don??™t get caught. Once people were hired, it was an up-or-out culture. Those who survived began to think they were gods. And Jeffrey Skilling used to pit them against each other. He knew that as long as he could keep them scared of one another and competing, he would have control. When you create an environment in which, if you want to be among the best and the brightest, youve got to play the game the way the boss has set it up, thats not a culture where people are going to challenge top management. Skilling instituted the performance review committee (PRC), which became known as the harshest employee-ranking system in the country. It was known as the ???360-degree review??? based on the values of Enron??”respect, integrity, communication and excellence (RICE). However, associates came to feel that the only real performance measure was the amount of profits they could produce. ???Fierce internal competition prevailed and immediate gratification was prized above long-term potential. Paranoia flourished and trading contracts began to contain highly restrictive confidentiality clauses. Secrecy became the order of the day for many of the company??™s trading contracts, as well as its disclosures (Thomas, C. W.).???
3. What are two alleged irregularities in the actions between sellers of securities and Enron
Two irregularities I see are mark-to-market accounting and special purpose entities. In the former, the entire value of a contract is posted the day the contract is signed instead of as cash is received resulting in a huge difference between reported profits and actual cash flow. As for the latter, these were sham companies used to hide debt, invent profits, and concoct capital (Constance E. Bagley, Diane Savage).
Reducing hard assets while earning increasing paper profits served to increase Enron??™s return on assets (ROA) and reduce its debt-to-total-assets ratio, making the company more attractive to credit rating agencies and investors. By using SPEs such as limited partnerships with outside parties, a company is permitted to increase leverage and ROA without having to report debt on its balance sheet. (Thomas, C. W.).???
4. Was Enron liable for the actions of its agents and employees
On the surface, the motives and attitudes behind decisions and events leading to Enron??™s eventual downfall appear simple enough: individual and collective greed born in an atmosphere of market euphoria and corporate arrogance.
In a Howard Rice Alert in February, 2005 it was reported that in a confidential agreement, ten former directors of Enron Corp. agreed to personally pay $13 million of a $168 million settlement to resolve claims against them for their alleged role in Enron??™s fraudulent accounting practices that resulted in the second largest bankruptcy in U.S. history.
I believe Enron to be liable for the actions of its agents and employees when directors and/or officers actions are in breach of the duty of loyalty to the corporation or its shareholders; not in good faith or, which involve a knowing violation of law; or result in the director or officer??™s receipt of an improper personal benefit (Felton, W. Raymond).
BBC News. (2002, August 22). BBC NEWS | Business | Enron scandal at-a-glance. BBC News – Home. Retrieved February 3, 2011, from http://news.bbc.co.uk/2/hi/business/1780075.stm
Bagley, C. E., & Savage, D. (2010). Ethics and the Law. Managers and the Legal Environment (p. 52). Mason, Ohio: Cengage Learning. (Original work published 2009)
Felton, W. R. (n.d.). Exhibit A Newsletter: Director and Officer Exculpation Statutes in a Post-Enron World. Greenbaum Rowe Smith & Davis LLP: . Retrieved February 3, 2011, from http://www.greenbaumlawnews.com/Newsletter/Article.aspArticleCode=403N25L3I33&EditionCode=20I23K29I56
Ruder, D. (2002, October 10). Lessons from Enron:Director and Lawyer Monitoring Responsibilities. Northwestern University. Retrieved February 2, 2011, from http://www.law.northwestern.edu/professionaled/documents/Ruder_Lessons_Enron.pdf
Thomas, C. W. (n.d.). The Rise and Fall of Enron. Journal of Accountancy. Retrieved February 3, 2011, from http://www.journalofaccountancy.com/Issues/2002/Apr/TheRiseAndFallOfEnron.htm
What Really Went Wrong With Enron A Culture of Evil. (n.d.). Santa Clara University – Welcome. Retrieved February 3, 2011, from http://www.scu.edu/ethics/publications/ethicalperspectives/enronpanel.html