The Enron Fallout Implications for Canada

1. The Enron Fallout Implications for Canada Submission to AcSOC, May 3, 2002 Financial Executives International Canada Presented by Michael Murphy, Vice President and CFO .

2. Enron - Front Line Failure • Simultaneous failure of management, Board and audit safeguards: • Senior managers who were greedy, unscrupulous and unethical • Board that was unwilling or unable to reign in the senior management team • External auditors who were not prepared to stand up to the client or walk away

3. Enron - What Actually Happened? • Bad investments in “new economy” ventures • Off-balance-sheet entities created to hide losses and conceal extent of indebtedness • Many off-balance-sheet loans collateralized by Enron stock • “Form over substance” reporting

4. Enron - What Actually Happened? (continued) • Self –dealing by CFO and members of finance team • Corporate ego overwhelmed inadequate and ineffective control systems • Restatements, corrections and new disclosures • Ultimately a collapse of confidence in financial reports and integrity of management

5. Obvious Problems (in Retrospect) • Arrogant corporate culture • Docile almost somnambulant Board • Finance and accounting staff largely recruited from Andersen – independence compromised • Deceptive reporting posture with analysts, opaque reporting posture with investors

6. Enron Fallout:Lots of Questions • Are existing disclosure rules adequate? • How was the ethical conduct of an entire senior management team so totally compromised • Where were the inside and outside auditors? • Where was the Board and the audit committee?

7. Enron Fallout:Some Potential Answers • Ethical conduct • Effective Board oversight • Greater financial expertise on audit committee • Enhanced auditor independence and quality control

8. Enron Fallout:Some Potential Answers (continued) • More transparent and informative financial reporting • Emphasis on substance over form when applying accounting standards • A more nationally integrated securities regulation regime in Canada

9. FEI Canada’s Major Recommendations • Strengthen financial management and commitment to ethical conduct • Restore confidence in financial reporting and effectiveness of auditing process • Improve corporate governance and effectiveness of Board and Audit Committee • Validate Canadian process of financial reporting and standard setting

10. #1 Financial Management and Ethics • Adherence to code of ethical conduct • Promotion of ethical standards and effective “whistle blower” procedures • Monitoring of these initiatives should reside at Board level

11. #2 Financial Reporting and Audit Process • Create independent oversight body for auditing firms • Audit Committee to monitor auditor independence by vetting all non-audit service contracting • Minimum 2 year blackout on firm recruiting from its auditor

12. #3 Corporate Governance • Support implementation of recommendations of the Joint Committee (November 2001) • Continuing professional education for Board and Audit Committee

13. #4 Standard Setting and Monitoring Initiatives • Review efficacy and timeliness of standard setting process • Slippery slope of standardization • Closer integration of security regulation across Canada

14. Other Possible Changes • Possible high-risk companies targeted for increased review • Forensic audits • Closer integration among Canadian securities commissions • Analyst and rating agency reform

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