Enron Bankruptcy

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Enron Bankruptcy
Philip B. Livingston, President and CEO Financial
Executives International
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Enron - Front Line Failure

• Failure rests 75 with the mgt team, 15 with the
  Board and 10 with the auditor
• These events happen on the financial management
  front line
• Failed management teams that dont have the
  backbone to do the right thing
• Starts with small compromises and becomes a
  culture of aggressive accounting, then illegal
  coverup
• The local audit partner doesnt have the backbone
  to stand up to the client or walk away

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Enron - What Happened?

• Bad investments in new economy ventures
• Off-balance-sheet entities created to eliminate
  losses from the ventures
• Rather than face the write-offs, they tried to
  hide them with accounting
• Many off-balance-sheet loans collateralized by
  Enron stock
• Opaque reporting encouraged short sellers
• Form over substance in reporting

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Enron - What Happened?

• Self dealing as CFO trading with the company in
  troubled assets
• Corporate ego overwhelmed control systems
• Restatements, corrections and new disclosures
• Collapse of confidence in reporting and integrity
  of management
• Run on the bank

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Apparent Failures in Retrospect

• Arrogant corporate culture
• Finance and accounting staff largely recruited
  from Andersen independence compromised
• Opaque reporting posture with investors
• Special investigation by main legal counsel not
  independent counsel
• Andersen apparently consciously decided not to
  resign last year. They should have.

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Enron FalloutLots of Questions

• Opaque disclosure
• How could the CFO be at the center of conflict of
  interest concerns ?
• Was management conduct unethical?
• Where were the outside auditors?
• Where was the audit committee?

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Enron FalloutAudit Committees

• Strengthening the requirements for financial
  experts on audit committees (we strongly support
  this)
• Need financial expertise to understand
  increasingly complex issues
• Need to be proactive and engaged
• Need to challenge management and the auditors

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Enron FalloutPossible Changes?

• FASB Reform
• Time for a new body?
• Time for new leaders?
• Too slow
• Not responsive to constituents and issues

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Enron FalloutNew FASB Standards?

• Need for new Standards
• Consolidation of Special Purpose Entities
• control-based standard regarding SPEs
• Determining fair value of forward contracts
• Rules for determining value where contracts are
  not traded or thinly traded.

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Enron FalloutAudit Profession

• New body, not the AICPA, as industry regulator
• Prohibit revolving door for audit partners not
  employable w/ clients
• Mandatory rotation of auditors?
• Major increase in the level of audit firm PEER
  review work
• Eliminating the ability of the auditors to do
  consulting for their clients

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Other Possible Changes?

• Affirmative disclosure requirements
• Possible high-risk companies targeted for
  increased review
• Forensic audits
• FEI implement true disciplinary procedure?
• Analyst and rating agency reform

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Changes I Recommend

• Real prosecution needed for culprits
• Audit committees must have real financial experts
• Audit committees should adopt policy prohibiting
  hiring of auditor personnel 3-5yrs
• Auditors must restore SKEPTICISM as the
  foundation of their fieldwork. No more business
  partnering mentality
• Audit industry regulation must change to maintain
  confidence
• High risk situations need more audit work
• A majority of Board members must be independent

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FEIs Mission

• To be the preeminent association forfinancial
  executives and to
• Alert members to emerging issues
• Develop the professional and management skills of
  members
• Provide forums for peer networking
• Advocate the views of financial executives
• Promote ethical conduct

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