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CORPORATE GOVERNANCE

(THE ENRON CASE)

Submitted by:

Gregson L. Gabarda

Submitted to:

Prof. Cecile Garcia

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THE ENRON CASE AND

CORPORATE GOVERNANCE

The Enron scandal in October 2001, which eventually led to the bankruptcy of theEnron Corporation and the dissolution of Arthur Andersen, is the largest bankruptcyreorganization in American history at that time and Enron undoubtedly is the biggestaudit failure.

For me, the fall of Enron was a direct result of failed corporate governance. Thelack of truthfulness by management about the health of the company is the primary

reason for the demise of Enron Corporation. The senior executives believed Enron hadto be the best at everything it did and that they had to protect their reputations andtheir compensation. Also, conflicts of interest and a lack of independent oversight ofmanagement by Enron's board contributed to the firm's collapse. The conflict of interestis between the two roles played by Arthur Andersen, not only as auditor but also asconsultant to Enron. The Board inappropriately permitted conflicts of interest withEnron partnerships and then did not guarantee suitable oversight of those relationships.There was an essential absence of communication and direction from the Board as towho should be going over the related-party dealings and the point of such review. The

Board was also uninformed of other clashes of interests with other transactions. TheBoard did not effectively communicate with its auditors from Arthur Andersen.

As corporate acts originate in the choices and actions of human individuals, it isEnron management who must be seen as the primary bearers of moral duties and moralresponsibility. The chairman of the board, Kenneth Lay, and CEO, Jeffrey Skilling,allowed the CFO, Andrew Fastow, to build private cooperate institution secretly andthen transferred the property illegally. The CFO, Andrew Fastow, violated hisprofessional ethics and took the crime of malfeasance (wrongdoing or misconductespecially by a public official).

The collapse of Enron is an intricate case linking a mesh of poor decision-makingand oversight over a long period of time. The connection between the corporategovernance mechanisms meant that everybody involves at Enron was relying onsomeone else to perform the governance oversight, oversight that was not properly

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performed. Enron has identified the need for higher moral and ethical standards amongcorporations.

Continuation Corporate Governance: The Enron Case

RECOMMENDATION:

As the principal reason for the bankruptcy of Enron Corporation is its failure toeffectively observe appropriate corporate governance, I recommend the following tothe companies at present to avoid the same mistake as Enron did in the past.

1. Boards of Directors must have Audit Committees whose members areindependent of company senior management.

2. Code of business conduct and corporate governance guidelines must be strictlyadopted and implemented.

3. Focus must be on long term profit performance rather than short term profits

4. Each corporation must have its own corporate governance, audit, andcompensation committees.

5. The Audit Committee must have sufficient expertise in accounting and financialmanagement