Groupe Enronfinal3 140202012343 Phpapp02

ENRON FAILURE IMPACT
Ahmad El Nesr - Ameen Hannout -

Farid Kandil
Khaled El Tahawy - Shady Hindawi -
Shady Hatem
Group E - MBA Intake# 63 March 2013
Agenda
Case Summary: History of Enron's rise and fall.
What happened
Theories: What is Corporate?
Corporate Governance
Analysis: CG institutions /mechanisms
Fail of Board, Employees, Executive and Gatekeepers
Lessons: Sarbox
Domestic :Egypt CG standards
OECD Principles of Corporate Governance.
ROSC-WORLD BANK(June 2009)
Conclusion
Reference/Research
Questions
Q1: What were the essence and causes of this corporate

scandal in the financial markets?
Q2: Where did CG institutions /mechanisms ( including the
corporate board ) fail in their duties?
Q3: How did Sarbox (2002) Act try to amend the situation ?
Q4: What are the home country CG standards /guidelines and
how do they measure up to current USA and OECD CG standards?
Q5: How could these home standards be ameliorated to
competitively attract more international investment from
abroad ?
Q1
Introduction about ENRON
What were the essence and causes of this

corporate scandal in the financial
markets?
Enron's rise and fall
1985
Enron's life began as an interstate
pipeline company throughthe
merger of Houston Natural Gas and
Omaha-based InterNorth. Kenneth
Lay, the former chief executive
officerof Houston Natural
Gas,became CEO, and the next
year wonthe post of chairman.
1985
The firm's business model evolved to focus
on two related themes:
the acquisition and operation of power plants and
electric distribution companies, and
trading operations in which Enron created markets
for trading gas and electricity and financial
securities based on those commodities.
1990
Enron hired Jeff Skilling who had helped
Enron develop its Gas Bank idea calling
for the firm to become an intermediary
between suppliers and end-users in the
natural gas market.
Later, under Skilling's leadership as CEO,
the company pioneered the use of risk
management products and long-term
contracting structures in the natural gas
industry.
1990
Enron's principal innovation in energy markets was
to combine financial contracts with contracts for
physical delivery.
This innovation was applied to the natural gas and

electric power markets and was being extended to
the markets for basic metals, broadband, and pulp
and paper at the time of the firm's collapse.
1999
By the close of the nineties it was clear that trading
operations had become Enron's primary focus and
the firm began systematically shedding its physical
assets following what it referred to as an asset
light strategy.
From this perspective, Enron's operations mimicked

those of a trading or investment banking firm.
1999
During this period Enron made several significant
advances including the launch of:
EnronOnline (EOL), the firm's energy trading business that
became the world's largest business-to-business web site.
In
Enron Broadband,
Enron NetWorks (focusing on eCommerce), and
Enron Energy Services (providing retail energy products
and services to business customers) were created and
appeared to be adding to the firm's bottom line.
2000
Growth for Enron was rapid.The company's annual
revenue reached$100 billion US. Itranked as the
seventh-largest company on the Fortune 500 and
the sixth-largest energy company in the world.
The company's stock price peaked at $90 US.
Much of this increase was attributable to the creation of

EOL and Enron's method of accounting for trading
revenues
1995 2000
On an annualized basis between 1995 and
2000:
Enron's assets grew 38%,

revenues grew more than 60%, and
earnings grew 12%.
2001
Cracks began to appear In August of that year,
Jeffrey Skilling, a driving force in Enron's revamp
and the company's CEO of six months, announced
his departure, and Lay resumed the post of CEO.
In October 2001, Enron reported a loss of $618

million its first quarterly loss in four years.
2001
Chief financial officer Andrew Fastow was
replaced, and the U.S. Securities and
Exchange commission launched an
investigation into investment partnerships led
by Fastow.
That investigation would later show that a
complex web of partnerships was
designed to hide Enron's debt. By late
November, the company's stock was down to
less than $1 US. Investors had lost billions of
dollars.
2001
On Dec. 2, 2001, Enron filed for bankruptcy
protection in the biggest case of bankruptcy in
the United States up to that point. Roughly
5,600 Enron employees subsequently lost their
jobs.
The next month, the U.S. Justice Department
opened its investigation of the company's
dealings, and Ken Lay quit as chairman and
CEO.
2002
On Feb 14, 2002, Sherron
Watkins, the Enron whistleblower,
testifies before a Congressional
panel against Skilling and Lay.
Sherron Watkins is an Enron vice
president. She wrote to Lay in the
past expressing concerns about
Enron's accounting practices.
Enron's Timeline Stock Prices vs.
Peer Index
Enron Operating Performance
1985 - 2000
So, what happened
at ENRON?
What happened at ENRON?
On October 16, 2001, Enron announced it was

reducing its after-tax net income by $544 million
and its shareholders equity by $1.2 billion.
On November 8, 2001, Enron announced that,

because of accounting errors, it was restating its
previously reported net income for the years
19972000.
These restatements reduced previously reported net

income as follows:
1997, $28 million (27% of previously reported $105 million);
2000, $99 million (10% of previously reported $979 million).
These changes reduced its stockholders equity by

$508 million. Thus, within a month, Enrons
stockholders equity was lower by $1.7 billion (18% of
previously reported $9.6 billion at September 30, 2001).
On December 2, 2001, Enron filed for bankruptcy under

Chapter 11 of the United States Bankruptcy Code. With assets
of $63.4 billion, it is the largest US corporate bankruptcy.
The price of Enrons stock, which had increased spectacularly
over the 1990s from a low of about $7 to a high of $90 a
share in mid-2000, declined to under $1 by year-end 2001.
Many Enron employees who had invested their tax deferred
retirement plans in Enron stock saw their assets go from
hundreds of thousands and even millions of dollars to almost
nothing.
The following four accounting and auditing issues are of primary

importance, since they were used extensively by Enron to manipulate
its reported figures:
1. The accounting policy of not consolidating SPEs that appear to
have permitted Enron to hide losses and debt from investors.
2. The accounting treatment of sales of Enrons merchant
investments to unconsolidated SPEs as if these were arms length
transactions.
3. Enrons income recognition practice of recording as current
income fees for services rendered in future periods and
recording revenue from sales of forward contracts, which were, in
effect, disguised loans.
4. Fair-value accounting resulting in restatements of merchant
investments that were not based on trustworthy numbers.
1. Accounting for investments in subsidiaries
and special-purpose entities (SPEs):
A corporation can use Special-Purpose Entities (SPEs) to

finance a large project without putting the entire firm at risk.
Problem is, due to accounting loopholes, these entities
became a way for CFOs to hide debt. Essentially, it looks like
the company doesn't have a liability when they really do.
Enron sponsored hundreds of SPEs with which it did
business:
Many of these were used to shelter foreign-derived income from
US taxes.
Some were sponsored to conduct business with Enron domestically.
This is the source that Enron understated and hid its real debt
from investors
Under GAAP rules at that time, Enron was not

required to consolidate these SPEs with its
financial statements
As is usual with SPEs, Enron guaranteed their

bank debt BUT the SPEs principal asset was
restricted Enron stock. When the market price of
Enrons stock declined, the SPEs assets were
insufficient to cover its debt. As a result, Enron
had to assume the debt.
Enrons not consolidating these SPEs increased its reported

earnings as shown below ($millions). Thus, at a very considerable
cost to shareholders, Enrons managers temporarily were able to
hide substantial losses
2. Sales of merchant investments to
unconsolidated SPEs:
Enron had entered into forward contracts with an

investment bank to purchase Enrons stock at a fixed
price.
In June 1999 the strike price was considerably below
the market.
Under GAAP, the increase in value cannot be recorded
as income, because the gain was due to an increase in
value of Enrons own stock.
Enron used the gain on these contracts to fund its
investment in several of the SPEs it sponsored.
3. Recording as current income fees for
services rendered in future periods:
Several of the SPEs paid Enron fees for guarantees on

loans made by the SPEs.
In accordance with the matching concept of income
determination, the revenue should have been
recognized over the period of the guarantees.
Example:
Enron recorded as income in December 1997 a $10 million up-
front payment from Chewco (an SPE) for a guarantee that was
outstanding for the next 12 months.
4. Fair value restatements of merchant
investments that were not based on reliable
numbers:
Mark-to-market or fair value accounting refers to

accounting for the "fair value" of an asset or liability
based on the current market price, or for similar assets
and liabilities, or based on another objectively assessed
"fair" value.
Mark-to-market accounting can change values on the
balance sheet as market conditions change.
In contrast, historical cost accounting, based on the
past transactions, is simpler, more stable, and easier to
perform, but does not represent current market value.
4. Fair value restatements of merchant
investments that were not based on reliable
numbers:
In Jan. 30, 1992 - SEC approves mark-to-market

accounting for Enron.
Such procedures allow managers who want to

manipulate net income the opportunity to make
reasonable assumptions that would give them the
gains they want to record. Such appears to have been
what Enron did.
To summarize: Enrons accounting for its

non-consolidated special-purpose entities
(SPEs), sales of its own stock and other
assets to the SPEs, and mark-ups of
investments to fair value substantially
inflated its reported revenue, net income,
and stockholders equity, and possibly
understated its liabilities.
Enrons bankruptcy is of particular interest to

accountants, because its longtime auditor,
Arthur Andersen, was one of the Big 5 CPA
firms.
Arthur Andersen has been charged with gross
dereliction of duty and even fraud by the press
and members of the US Congress (amongst
others), and is being sued in many lawsuits for
very substantial damages.
In 2000, Andersen was paid $25 million in audit fees

and $27 million for non-audit consulting.
This observation has given new impetus to demands
that CPAs be prohibited from offering non-audit services
(other than tax preparation and advice), on the
assertion that these fees corrupt the independence of
CPAs.
In response to this criticism, all of the Big 5 CPA firms
announced that they would no longer offer certain
consulting services to their auditing clients.
The Chairman of the Securities and Exchange

Commission (SEC), Harvey Pitt, has called for the
creation of a new oversight body to regulate and
discipline CPAs.
The SEC, the Financial Accounting Standards Board
(FASB), and the American Institute of CPAs (AICPA) have
been severely criticized for not having clarified the
GAAP rules relating to special-purpose entities (SPEs),
the vehicle associated with Enrons accounting
restatements of its financial statements.
Q2
Theories: What is Corporate?
Analysis: CG institutions /mechanisms: Fail

of Board, Employees, Executive and
Gatekeepers
What is a Corporate ?
The most common form of business organization,

and one which is chartered by a state and given
many legal rights as an entity separate from its
owners. This form of business is characterized by
the limited liability of its owners, The process of
becoming a corporation, call incorporation, gives
the company separate legal standing from its
owners and protects those owners from being
personally liable in the event that the company is
sued (a condition known as limited liability).
A Corporate:
Shareholders
&Board
Environment Credit
al Groups Supplier
Customers Corporation Employees
Local
Management Government
Community
Corporate Governance:
What is Corporate Governance?
The corporate governance is a set of

systems , structures ,processes and
mechanisms by which a corporate entity is
led, directed and controlled in the best
interests of shareholders and other
stakeholders.
Corporate governance rules are primarily

applied on listed joint stock companies and
other financial institutions taking the form
of joint stock companies.
Corporate governance principles 1/2
The rights of shareholders.

Effective Corporate Governance
The corporate The corporate

The corporate
governance governance
framework should governance
The equitable treatment of

framework should framework should
protect and facilitate
promote the exercise of ensure the
transparent and shareholders rights. equitable
efficient markets, Which are briefed as treatment of all
be consistent with follows: the right to shareholders,
the rule of law and receive income
including minority
clearly articulate The right to vote
shareholders.
The right to appoint and foreign
the division of
Framework.
an authorized shareholders. All

responsibilities representative) on shareholders
among different their behalf should have the
supervisory, They possess legal opportunity to
regulatory and rights to challenge obtain effective
enforcement the order of the
redress for
authorities. company's
management in the violation of their
court of law rights.
Corporate governance principles 2/2
The responsibilities of the board

The role of stakeholders in corporate
Disclosure and transparency

The corporate The corporate The corporate
governance governance governance
framework should
framework should framework should
recognize the rights
ensure that timely ensure the strategic
of stakeholders
established by law or
and accurate guidance of the
through mutual disclosure is made company, the
agreements and on all material effective monitoring
encourage active matters regarding of management by
between corporations the corporation, the board, and the
governance
and stakeholders in including the boards

creating wealth ,jobs, financial situation, accountability to
and the co-operation performance, the company and
sustainability of ownership, and the shareholders
financially sound governance of the
enterprises. company.
Corporate mechanisms and controls
Corporate governance mechanisms and

controls are designed to reduce the
inefficiencies that arise frommoral
hazardandadverse selection
Internal External
corporate corporate
governance governance
controls controls
Corporate mechanisms and controls:
1. Internal corporate governance controls
Internal corporate governance controls monitor activities and

then take corrective action to accomplish organizational goals
Monitoring by the board of directors

The board of directors, with its legal authority to hire, fire and
compensate top management, safeguards invested capital.
Regular board meetings allow potential problems to be
identified, discussed and avoided
Internal control procedures and internal
auditorscontrol procedures are policies implemented by an
Internal
entity's board of directors, audit committee, management,
and other personnel to provide reasonable assurance of the
entity achieving its objectives related to reliable financial
reporting, operating efficiency, and compliance with laws and
regulations
Balance of power
The simplest balance of power is very common; require that
the President be a different person from the Treasurer. This
application of separation of power is further developed in
companies where separate divisions check and balance each
other's actions
Remuneration
Performance-based remuneration is designed to relate some
proportion of salary to individual performance. It may be in
the form of cash or non-cash payments,superannuationor
other benefits
Monitoring by large shareholders
Given their large investment in the firm, these stakeholders
have the incentives, combined with the right degree of control
and power, to monitor the management
External corporate governance controls

encompass the controls external stakeholders
exercise over the organization
Examples include:
competition
debt covenants
demand for and assessment of performance
information (especiallyfinancial statements)
government regulations
managerial labor market
media pressure
takeovers
Where did CG institutions /mechanisms( including
the corporate board ) fail in their duties?
Responsibility for recent corporate

misconduct must be allocated to the failure
of several components of business and
governance system:
1. corporate managers;
2. corporate boards;
3. gatekeepers;
4. shareholders,
5. and especially institutional investors.
Where did CG institutions /mechanisms
( including the corporate board ) fail in their duties?
Board of Directors (BOD)

Audit Committee of the Board should have
been more critical of the auditors and their
work.
Stock price and earnings rising, they were
perhaps lulled into a false sense of security
about ENRONs internal accounting
The Board members enjoyed their status at
ENRON
Shareholders (or
stakeholders?)
-Too much trust,
Incompetence
- Lack awareness and/or BOARD
understanding of role ,
-No control & reporting
systems,
- Lack of motivation,
Conflicts of interest
( including the corporate board ) fail in
their duties?
ENRON executives were further aided and supported by

the Arthur Andersen auditors and scores of outside legal
firms working for the company.
A.A collected over $50 million in revenues in year 2000.
Remaining in good standing with the executive team at

ENRON
Executives probably do not look favorably on outside firms

who give contrary advice to that which the executives
desire.
Shareholders (or
stakeholders?)
-Too much trust,
Incompetence
-No control & reporting Major players
systems,
- Lack of motivation, Dishones
Conflicts of interest MANAGEMENT t&
Conflicts
of
Interest
EMPLOYEES
ENRON had an inside legal staff of over 100 lawyers,
and an accounting staff of several hundred trained
accountants
All seemed to be operating in a way that supported
the executive management team
As employees were being paid good salaries
Until Sherron Watkins finally tried to raise
awareness of potential problems
Shareholders (or
stakeholders?)
-Too much trust,
Incompetence
-No control & reporting Major players
systems,
- Lack of motivation, Dishones
Conflicts of interest MANAGEMENT t&
Conflicts
of
Interest
Productivity & Ethics and social
Competitiveness Corporation responsibility
Direction Viability and legitimacy
Focus
GATEKEEPERS
External auditors, analysts, and credit rating agencies to detect and expose
the questionable financial and accounting decisions that led to the collapse
of Enron
An argument can be made that during the 1990's the deterrent effect of
legal liability for gatekeepers declined as well, further reducing market
discipline
Thus, to make gatekeepers more effective ways must be found both

To reduce their conflicts of interest and
To increase the threat of market discipline if they fail to adequately
represent the interests of investors and creditors.
The Fraud Triangle
Opportunities
Weak Board of Directors
Weak Internal Controls
Incentives/Pressures Attitudes/Rationalizations
Tight Debt Agreement Lack of a Code of Conduct
Unrealistic Expectations Disregard for Financial
Reporting
Q3
Introduction to SOX
How did Sarbox (2002) Act try to

amend the situation ?
Introduction to SOX
SarbOx stands for SarbanesOxley
Paul Sarbanes is a United States

Senator who represented the state of
Maryland. Sarbanes
Michael G. Oxley is an American

politician of the Republican party
who served as a U.S. representative
from the 4th congressional district of
Ohio.
Introduction to SOX (cont.)
1. Public Company Accounting Oversight Board

(PCAOB)
The PCAOB is a nonprofit corporation established by Congress to oversee
the audits of public companies in order to protect the interests of investors
2. Auditor Independence
Establishes standards for external auditor independence, to limit conflicts
of interest.
3. Corporate Responsibility
Senior executives take individual responsibility for the accuracy and
completeness of corporate financial reports
4. Enhanced Financial Disclosures
It describes enhanced reporting requirements for financial
transactions, including off-balance-sheet transactions, pro-forma
figures and stock transactions of corporate officers.
5. Analyst Conflicts of Interest

It defines the codes of conduct for securities analysts and requires
disclosure of knowable conflicts of interest.
6. Commission Resources and Authority

It defines practices to restore investor confidence in securities
analysts.
7. Studies and Reports
It requires the Comptroller General and the SEC to perform various studies
and report their findings. Studies and reports include the effects of
consolidation of public accounting firms, the role of credit rating agencies in
the operation of securities markets.
8. Corporate and Criminal Fraud Accountability

It describes specific criminal penalties for manipulation, destruction or
alteration of financial records or other interference with investigations, while
providing certain protections for whistle-blowers.
9. White Collar Crime Penalty Enhancement

This section increases the criminal penalties associated with white-collar
crimes and conspiracies.
10. Corporate Tax Returns
It states that the Chief Executive Officer should sign the
company tax return.
11. Corporate Fraud Accountability

It identifies corporate fraud and records tampering as criminal
offenses and joins those offenses to specific penalties.
How did Sarbox (2002) Act try to amend the
situation ?
The Enron scandal was certainly enough to show

the American public and its representatives in
Congress that new compliance standards for public
accounting and auditing had to be put into place.
Enron was one of the biggest and, it was thought,

one of the most financially sound companies in the
U.S. Enron was perhaps the catalyst for the
Sarbanes-Oxley legislation.
situation ?
Sarbanes-Oxley provides for increased corporate

governance and corporate accountability.
Therefore, SOX is in place to be sure that fraud on
the scale of Enron never takes place again.
If a publicly-traded company is not in compliance

with the SOX law, the penalties are stiff. Multi-
million dollar fines can result and imprisonment of
the CEO or CFO. Penalties are based on the section
of SOX that the company is not in compliance with.
situation ?
In summary, the Sarbanes-Oxley Act of 2002

is probably the best piece of legislation to
protect investors in modern times. It is a
shame that it took debacles like Enron and
others to shake up Congress into writing this
legislation as many innocent people,
investors and employees, literally lost their
life savings. Perhaps SOX will make sure that
doesn't happen again.
Q4
What are the home country CG
standards /guidelines and how do
they measure up to current USA and
OECD CG standards?
What are the home country CG standards /guidelines
and how do they measure up to current USA and OECD
CG standards?
Egypt Code of Corporate Governance

Guidelines and Standards (October 2005)
This guide was prepared by the Chairman of the General Authority

of Investment and Free Zones, Dr. Zeyad Bahaa El Din, together
with the Chairman of the Cairo and Alexandria Stock Exchange, Mr.
Maged Shawqi. It is based on a questionnaire compiled by CIPE and
consultations with a number of accounting and business experts in
Egypt. The guide is prepared in accordance with the corporate
governance principles issued by the OECD and a number of
countries including South Africa, Malaysia and the Philippines.
CG standards?
Criteria of the code:

1.General Assembly
2.Board of Directors (BOD)
3.Internal Audit Department
4.External Auditor
5.Audit Committee
6.Disclosure of Social Policies
7.Avoiding Conflict of Interest
8.Corporate Governance Rules for Other Corporations
CG standards?
1. General Assembly
Shareholders should be encouraged to attend GAs.
Agenda items should be explained clearly
GA Should be managed to allow shareholders to express their opinions.
Voting on general assembly motions should be recorded accurately.
2. Board of Directors
Should meet at least once every 3 months
Non executive members may meet directors for consultation.
Review internal regulations & procedures for their appropriateness & efficiency
An internal audit committee formed from a number of non-executive members
should be assigned to check internal controls & the company's working practices.
Responsible for risk management in accordance with the company's activities,
size, & market
board should submit an annual report to shareholders including tasks assigned by
law
CG standards?
3. The Internal Audit Department

Should maintain a tight internal control system established by the board
members & directors
Report directly to the CEO
Direct consultation with the board director
Submit a quarterly report to the board and the supervisory committee
Design systems to evaluate risk management approaches, plans, procedures
and the company's proper implementation of CG
4. External Auditor
Independent from the company and the board
Abides with Egyptian accounting principles and rules
Should hold neutral opinions
The auditors work is immunized against interference from the board
CG standards?
6. The Audit Committee

Comprises of a minimum of three non-executive members.
One member should be a finance & accounting expert
Assess the efficiency of the financial manager & other financial staff
review the financial statements before being presented to the board and give
opinions and recommendations
review the internal/external auditors plan and make suggestions.
The committee should meet periodically, at least once every three months, with a
specified agenda
7. Disclosure of social policies
At least once a year the company should disclose environmental, social, safety &
health policies to shareholders, customers and employees.
The policies disclosed should be clear & unambiguous, including the company's
strategies for employee recruitment & training & social welfare programs within or
outside the company. Relationships
CG standards?
8. Avoiding conflict of interests

Each company should have clear and recognized regulations
for the directors & staff regarding the prevention of conflict of
interests
Board members, directors and staff may not trade company
stocks before the disclosure of the company's financial
statements
Draw up rules of professional code of conduct
Impose an internal system for supervising the implementation
of the code of conduct
CG standards?
9. Corporate Governance for other corporations

These principles primarily target companies listed in the
stock market and financial institutions and corporations
financed by banks.
Nevertheless, corporate governance may be
implemented in all companies, achieving a balance of
interests and a new management culture.
Therefore, the greater the number of companies abiding
by these principles, the higher is the probability of
promoting the interests of society, shareholders and
stakeholders.
OECD Principles of Corporate Governance.
The Organization for Economic Cooperation and Development (OECD)

issued its CG principles in 1999 that were later revised in 2003 after
extensive and open consultations. The OECD CG Principles were
further revised in 2004 by the 30-OECD member governments
together with the WB, IMF, Bank for International Settlements (BIS),
Financial Stability Forum (FSF), International Organization for
Securities Commissioners (IOSCO), Basle Committee and many other
parties in developing and emerging economies.
Section I: The Rights of Shareholders ( 6 )
Section II: The Equitable Treatment of Shareholders (3 )
Section III: Role of Stakeholders in Corporate Governance ( 4 )
Section IV: Disclosure and Transparency ( 4 )
Section V: The Responsibility of the Board ( 6 )
Q5
How could these home standards be
ameliorated to competitively attract
more international investment from
abroad ?
Report on the Observance of Standards and
Codes (ROSC)-WORLD BANK(June 2009)
The Ministry of Investment (MoI) founded the Egyptian Institute

of Directors (EIoD), the region's first, and launched codes of
corporate governance for private and state-owned companies.
The Capital Markets Authority (CMA) created a special
Corporate Governance Department and the Egyptian Stock
Exchange (EGX) began to consistently enforce its listing rules,
leading to an impressive wave of de-listings from a high of
1,148 in early 2002 to 333 by mid 2009. The Egyptian
authorities have implemented many of the key
recommendations of the 2001 and 2004 Corporate Governance
ROSCs.
Actual corporate governance practices of EGX listed companies

continue to lag behind the law on the books, in particular for
companies outside the EGX-30. For example:
A number of boards do not guide or supervise management by
helping them develop and holding them accountable to a set of
key performance indicators. Key policies on risk management,
internal control and audit processes, and succession planning
are often absent. Board nomination processes largely remain
opaque and are frequently dominated by majority owners.
Financial reporting has improved in terms of the timeliness and

quality of disclosure; however, non-financial disclosure remains
underdeveloped. Few companies publicly disclose their
ownership and governance structures or foreseeable risk
factors online or in their annual reports.
The laws and regulations that establish shareholder rights have
improved markedly, though a few remaining weaknesses exist.
Extraordinary transactions do not for example generally require
shareholder approval, against good practice, unless the
transaction constitutes a merger or an acquisition, or the
transaction of a fixed asset, in which case EGM approval is
required. In absence of an effective court system, shareholders
are in practice unable to hold directors and officers
accountable for a breach of their duties.
Egypt can take a major step forward in closing these gaps

vis--vis the OECD Principles by:
Requiring companies to implement the Egyptian Corporate
Governance Code (ECGC) on a 'comply-or-explain' basis, and
amending the ECGC to better meet good practice.
Reinvigorating the company law reform process to combine the
multitude of overlapping laws and regulations into one
consistent framework that incorporates recent trends and
developments in corporate governance.
Further strengthening enforcement capacity and supporting the
EIoD to roll-out its director training program, focusing on family-
owned businesses outside the EGX-30.
Absence of engaged institutional investors leaves decision-making in the hands of
majority owners & insiders, with underdeveloped market discipline.
family ownership brings a unique set of governance issues.
Overlapping provisions and inconsistencies causes some legal uncertainty.
The institutional framework has been strengthened and enforcement capacity has
improved markedly, yet important enforcement gaps in, for example, non-financial
disclosure, continue.
Extraordinary
transactions
are not
generally
subject to GMS
approval.
Institutional
investors do
not typically
vote or engage
with their
investee
companies.
Egypt has broadly implemented Chapter III of the OECD Principles of
however, minority shareholders are not able to effectively hold the board
accountable through a functioning court system.
Employees are allowed to participate in the management of the company through
employee committees.
Share reward and option programs for employees and managers are beginning to
take root.
Creditor rights are underdeveloped and specialized bankruptcy courts inefficient.
CSR and stakeholder governance is not properly understood as a potential risk or
opportunity by boards.
Egyptian companies
must now follow EAS
that are based on IFRS
(with the previously
mentioned four
exceptions to IFRS);
auditors must follow
ESA, which similarly,
are largely (but not
exclusively) based on
ISAs.
Non-financial reporting
has improved
somewhat, however,
overall remains
underdeveloped; e.g.,
only 16 percent of EGX-
30 companies disclosed
their governance
structures and three
percent their internal
control and audit
policies.
The ability of boards to
adhere to good corporate
governance practices
remains the main challenge
in terms of implementing the
OECD Principles. More
specifically:
The line between board
oversight and day-to-day
management is often
blurred.
The majority shareholder
and not the board plays
the lead role in selecting,
monitoring, and replacing
executives.
Executive remuneration is
not linked to long term
company performance.
Companies do not have
robust risk, internal
control, and audit policies
in place.
After the Fall
Crime and Punishment
Ken Lay, former Chairman of the board, convicted on six accounts

(Dies at age 64)
Jeffrey Skilling, former CFO convicted and sentenced for 24 years
and 4 months in federal prison and has to pay back $26M from his
own money.
Paula Rieber, former managing director of investor relations pled
guilty
Richard Causey, former Chief Acccounting Office, pled guilty and
testifies against Lay and Skiling
Andrew Fastow, former Chief Financial Officer, accepted plea deal
and will serve a 10 year sentence
And many more went to jail.
Societal and Legal Impact
New law was passed U.S Sarbanes Oxley

Act on July 30, 2002
Reformed the stock market
Deemed on the more important scandals of
our lifetime
Change the face of U.S business
Lawsuits
Thousands of ENRON Employees and investors lost their
savings, children college funds and pensions
Shareholders filed lawsuit
Employees filed lawsuit
Creditors filed a lawsuit
(Reuters) - A U.S. judge sentenced two former Enron energy
traders involved in the scheme to manipulate California
energy prices to two years' probation and a $10,000 (5,100
pounds) fine each on Wednesday after they co-operated
with authorities in the case
Etc
Conclusio
n
Conclusion
The ENRON failure has not been the result of

just questionable activities by ENRONs
executive management team. The cast of
contributors to the failure and bankruptcy are
both inside and outside the company. Its the
total system that resulted in failure that needs
to be further understood and investigated.
Conclusion
Multiple corporate governance mechanisms, both internal and

external, failed to constrain the actions of Enron's management
team:
In particular, Enron's board failed to oversee management and apparently
did not understand the risks inherent in the firm's business strategy.
It also appears that several board members and the external auditor faced
potential conflicts of interest that attenuated their role as monitors.
Further, the board, analysts (credit and equity), external auditors, and
federal agencies failed to identify problems at Enron or did not respond to
obvious signs that there were problems at the firm.
Finally, Enron's role as a dominant player in nascent and inefficient
markets, afforded the firm's management the opportunity to manipulate
prices, asset values, and thus the firm's financial position
Conclusion
US GAAP, as structured and administered by the SEC, the

FASB, and the AICPA, are also responsible for the Enron
counting debacle.
Enron and its outside counsel and auditor felt comfortable
in following the specified accounting requirements for
consolidation of SPEs.
The SEC had the responsibility and opportunity to change
these rules to reflect the known fact that corporations were
using this vehicle to keep liabilities off their balance sheets,
although the sponsoring corporations were substantially
(often almost entirely) liable for the SPEs obligations
References
http://bizfinance.about.com/od/smallbusinessfinancefaqs/a/sarbanes-oxley-act-and-enron-scandal.htm
http://insanadfindingthepony.blogspot.com/2010/04/enron-scandal-and-people-of-wal-mart-by.html
http://business.nmsu.edu/~dboje/enron/chronology.htm
Chronological history of Enron http://usatoday30.usatoday.com/money/industries/energy/2006-01-23-
enron-chronology_x.htm
http://en.wikipedia.org/wiki/Special_purpose_entity
http://en.wikipedia.org/wiki/Timeline_of_the_Enron_scandal
http://www.applet-magic.com/enron.htm
http://blj.ucdavis.edu/archives/vol-6-no-2/Corporate-Governance-and-Sarbanes-Oxley-Post-Post-
Enron.html
http://www0.gsb.columbia.edu/faculty/fedwards/papers/U.S.%2520Corporate%2520Governance
%252010-05.pdf
http://www.hawkama.net/files/toolkit/content/cgprogramspartners/Egyptian_Code_of_Corporate_Gover
nance_Guidelines_and_Standards_October_2005__Egypt_English.pdf
http://apps.chron.com/news/specials/enron/background.html
http://online.wsj.com/article/SB113898435336064528.html
http://www.hawkama.net/files/toolkit/content/cgprogramspartners/Egyptian_Code_of_Corporate_Gover
nance_Guidelines_and_Standards_October_2005__Egypt_English.pdf
References
http://www.cbc.ca/news/business/story/2006/05/25/enron-bkgd.html
ELSEVIER - Journal of Accounting and Public Policy 21 (2002) 105127 -
Enron: what happened and what we can learn from it - George J.
Benston, Al L. Hartgraves - Goizueta Business School, Emory
University, 1300 Clifton Road, Atlanta, GA 30322-2710, USA
ELSEVIER Journal of Corporate Finance 13 (2007) 929-958 -
Corporate governance post-Enron: Effective reforms, or closing the
stable door? Stuart L. Gillan a,John D. Martin b
a Finance Department, Rawls College of Business, Box 42101, Texas
Tech University, Lubbock, TX 79409-2101, United States
b Department of Finance, Hankamer School of Business, Baylor
University, Waco, TX 76798, United States
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ENRON FAILURE IMPACT

Ahmad El Nesr - Ameen Hannout -

Q1: What were the essence and causes of this corporate

What were the essence and causes of this

This innovation was applied to the natural gas and

From this perspective, Enron's operations mimicked

Much of this increase was attributable to the creation of

Enron's assets grew 38%,

In October 2001, Enron reported a loss of $618

On October 16, 2001, Enron announced it was

On November 8, 2001, Enron announced that,

These restatements reduced previously reported net

These changes reduced its stockholders equity by

On December 2, 2001, Enron filed for bankruptcy under

The following four accounting and auditing issues are of primary

A corporation can use Special-Purpose Entities (SPEs) to

Under GAAP rules at that time, Enron was not

As is usual with SPEs, Enron guaranteed their

Enrons not consolidating these SPEs increased its reported

Enron had entered into forward contracts with an

Several of the SPEs paid Enron fees for guarantees on

Mark-to-market or fair value accounting refers to

In Jan. 30, 1992 - SEC approves mark-to-market

Such procedures allow managers who want to

To summarize: Enrons accounting for its

Enrons bankruptcy is of particular interest to

In 2000, Andersen was paid $25 million in audit fees

The Chairman of the Securities and Exchange

Analysis: CG institutions /mechanisms: Fail

The most common form of business organization,

Customers Corporation Employees

The corporate governance is a set of

Corporate governance rules are primarily

The rights of shareholders.

The corporate The corporate

The equitable treatment of

an authorized shareholders. All

The responsibilities of the board

Disclosure and transparency

and stakeholders in including the boards

Corporate governance mechanisms and

Internal corporate governance controls monitor activities and

Monitoring by the board of directors

External corporate governance controls

Responsibility for recent corporate

Board of Directors (BOD)

ENRON executives were further aided and supported by

Remaining in good standing with the executive team at

Executives probably do not look favorably on outside firms

Thus, to make gatekeepers more effective ways must be found both

How did Sarbox (2002) Act try to

Paul Sarbanes is a United States

Michael G. Oxley is an American

1. Public Company Accounting Oversight Board

5. Analyst Conflicts of Interest

6. Commission Resources and Authority

8. Corporate and Criminal Fraud Accountability

9. White Collar Crime Penalty Enhancement

11. Corporate Fraud Accountability

The Enron scandal was certainly enough to show

Enron was one of the biggest and, it was thought,

Sarbanes-Oxley provides for increased corporate

If a publicly-traded company is not in compliance