Released July 16th 2008
Released July 16th 2008
THE JOINT DISCIPLINARY SCHEME
PRESS NOTICE
THE ENRON CORPORATION
· Executive Counsel reports his decision to take no action against Lord Wakeham, a former non-executive director of Enron.
Attached hereto is a Background Note containing further information; in order to access the Executive Counsel’s Report, please click onto “Report”.
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BACKGROUND NOTE
Introduction
The attached Report by the Executive Counsel to the Joint Disciplinary Scheme (“JDS”) was published on 16 July 2008. The Report deals with the investigation into complaints from members of the public about Lord Wakeham, a former non-executive director of Enron, and the Executive Counsel’s decision to take no further action against him.
There follow some questions and answers which you may find of assistance.
In a nutshell, what happened at Enron?
Enron was a Delaware Corporation with its business headquarters in Houston, Texas.
During the 1990s, Enron changed from being a business which produced and delivered energy, to a business which traded energy contracts as if they were commodities, an activity which avoided most regulatory controls.
At the time of its collapse in December 2001, it was listed as the seventh largest company in the United States with over $100 billion in gross revenues.
Trading energy contracts in this way meant that Enron needed to have access to significant lines of credit. This new business led to large earning fluctuations from quarter to quarter, and this in turn affected Enron’s credit rating and its ability to obtain low cost financing and attract investment.
In order to ensure an investment grade credit rating, Enron took a number of steps to smooth its earnings, and to maximise their growth, including:
(a) designing hedges to reduce the risk inherent in long term energy contracts. The accounting was complex, but what Enron was actually doing was financing both sides of these hedging contracts;
(b) securitising pools of energy contracts and selling them to investors – a harbinger of the continuing quality problems that are dominating capital markets today; and
(c) seeking to move capital intensive assets such as power stations off its balance sheet by selling interests in them to investors and recording the proceeds received as earnings. However, because it was difficult to find third parties willing to invest in these assets or to share the significant risks involved, Enron sold billions of dollars of such assets to entities which it had incorporated in offshore jurisdictions such as the Cayman Islands. Normally these entities belonged “formally” to an Enron executive director (such as the Chief Financial Officer Mr Andrew Fastow), whereas in fact the finance for the transactions came principally from Enron itself. Notwithstanding the source of the finance, some of the executive directors made enormous personal profits from these entities. So significant was this policy that by the year 2000, of Enron’s $60 billion of assets, $27 billion were in fact held by offshore entities.
Provided these transactions could be kept off Enron’s balance sheet, so that an accounting curtain shielded what was actually happening, the visible structure could survive and retain the confidence of investors and lenders, at least in the short term. But when Arthur Andersen LLP (“Andersen”), Enron’s auditors, came to the conclusion that the offshore entities were not sufficiently separate from Enron, and thus needed to be consolidated with Enron’s accounts, the curtain was ripped asunder, and the whole edifice collapsed.
What damage did the collapse of Enron do to others?
This was the second largest corporate bankruptcy in American history. Prosecutors calculated shareholder losses (and many pension funds were amongst the shareholders) at $44 billion. Most of the 21,000 employees worldwide lost their jobs, including 1000 in the United Kingdom. There were also heavy job losses in entities which traded or otherwise dealt with Enron, including Andersen which effectively ceased to exist.
What was the rôle of Lord Wakeham?
As well as being a non-executive director, Lord Wakeham was also a member of the Audit Committee, a key part of the corporate governance arrangements. He was the only professional accountant on the Committee. As such, it might well be thought he carried a responsibility to understand the transactions coming before the Board and the Audit Committee for approval. It does not appear that Lord Wakeham had a sufficient understanding of these transactions. In the Wiggins case in 2005, the Joint Disciplinary Tribunal (“JDT”) considered that the rôle of a non-executive director with the professional qualification of a chartered accountant was “to bring his special professional knowledge and experience to bear upon the accounts. If there was a danger that they might be misleading it was his duty to raise this with the other directors and with the auditors. His further duty would then depend upon the responses which were provided. It was not his duty to second guess the professional advice of auditors but it was his job to be alert to and inquisitive about matters which ought to have occurred to a competent chartered accountant not specialising in audit work and with no special experience in that field.”
Have any other investigations been carried out?
Yes. There have been extensive investigations in the United States by the Securities and Exchange Commission (“SEC”) and the Department of Justice (“DoJ”). The Permanent Sub-Committee on Investigations of the Committee on Governmental Affairs of the United States Senate has also published a Report.
Has action been taken against any other accountants at Enron?
Yes. Mr Fastow, the Chief Financial Officer, was sentenced to 6 years imprisonment and fined $24 million. This was the result of a plea bargain which he made with the authorities in return for his co-operation.
Has action been taken against anyone other than accountants at Enron?
Yes. The Chief Executive Officer, Mr Skilling, has been sentenced to 24 years imprisonment. Mr Lay, the former Chairman of the Enron Board of Directors was convicted of 10 separate offences, but died before he could be sentenced. However no criminal or regulatory action has been taken in the United States against any non-executive director.
Has action been taken against Andersen?
Andersen was indicted in Texas for obstructing justice, specifically for destroying documents. In June 2002, it was convicted by a jury, fined $500,000 (the maximum) and put on probation for 5 years (by then the firm had effectively ceased to exist). In May 2005 the conviction was quashed by the US Supreme Court on the ground of misdirection by the trial judge.
Has any civil action been taken against the directors?
Yes. Enron shareholders brought a large class action law suit against a number of persons and bodies, including the directors of Enron (and thus Lord Wakeham). In January 2005, the directors settled the claim against them for $168 million.
Why has no action been taken against Lord Wakeham?
The case has been very extensively investigated in the United States but neither the SEC nor the DoJ has seen fit to bring any proceedings, either criminal or regulatory, against any non-executive director. To investigate the matter further against Lord Wakeham would entail finding, almost certainly in the United States, evidence which has not been discovered by the authorities there. The Executive Counsel considers that it is not practicable to undertake such a search, and is conscious that he has no power to compel any witness in the United States to co-operate with him. He does not believe, therefore, that it is in the public interest for him to enquire further into the matter.
Can anything be done to improve the situation in the future?
The Executive Committee considers that there is a great need to clarify the duties and responsibilities of chartered accountants who act as non-executive directors. To this end the Secretary to the Committee has written to the Presidents of the ICAEW and the Institute of Chartered Accountants of Scotland (“ICAS”) suggesting that written guidance be issued to all Members.
What is the JDS?
The rôle of the JDS is to promote the highest possible standards of professional and business conduct, efficiency and competence by chartered accountants.
The JDS conducts independent investigations into complaints about the work and conduct of chartered accountants where this has given rise to public concern. The sponsors of the Scheme are the ICAEW and ICAS.
Cases are investigated by the Executive Counsel, a barrister employed by the Scheme. Where he is of the opinion that there are grounds upon which a JDT could make an adverse finding about professional work or conduct, he lays Complaints before a JDT headed by a QC or a retired judge. It is for the JDT to decide, on the basis of the evidence presented, whether the Complaints have been substantiated; and if so, what penalty should be imposed. Members and Member Firms have a right of appeal to an Appeal Tribunal, normally headed by a retired judge. Appointments to JDTs and Appeal Tribunals are made by the Executive Committee, the governing body of the JDS, acting independently of the Executive Counsel.
Where he decides not to bring disciplinary proceedings, the Executive Counsel is required to report in writing to the Executive Committee.