Expert Advice - August 2006

The Enron Scandal and Verdict

How Have They Affected Nevada Companies?

by Julie McCollum

The recent verdict involving two of Enron’s former senior executives concludes a chapter in corporate governance that began with the demise of a large corporation and the fall of Arthur Andersen LLP. It set in motion the passage of the Sarbanes-Oxley Act, which has ushered in a new era in corporate governance for publicly traded companies. Enron’s legacy will also include the tragic impact the company had upon many of its employees and shareholders.

This scandal has served to reinforce to business owners and executives that good corporate governance is a requirement for shareholder and employee confidence and an important indicator of a well-run company.

Corporate governance begins with establishing the right tone at the top to ensure that everyone in the company understands what the company stands for and how it will conduct business. If the recent scandals have taught us anything, it’s that the right behavior starts at the top – from the board on down. Good corporate governance also needs to be integrated into all levels across the company. Failure to establish tone at the top inevitably results in poor corporate governance.

Jefferson Wells believes the emphasis on good corporate governance is here to stay and that there are a number of benefits to good corporate governance besides just staying out of the headlines and also out of jail. Studies have shown that good corporate governance has a positive impact on a firm’s reputation, credit rating and shareholder valuation.

• Institutional Shareholder Services released a study of institutional investors in 18 countries in April which found nine out of 10 investors view corporate governance as important today. More than six out of 10 said it will increasingly become even more important over the next three years.
• In September of last year, the Bureau of National Affairs did a review of studies on corporate governance and concluded that the majority showed a positive correlation between good corporate governance practices and positive financial performance and stockholder value.
• In April of 2004, Deutsche Bank released a study that found investment companies with the highest quality of governance structures and behavior had significantly outperformed those with the weakest governance. The analysis also showed the correlation between good governance and low risk ratings, as well as lower volatility of the share price of their stock.

These are just a handful of studies that show that companies that adopt good corporate governance processes tend to be valued much higher. Therefore, the biggest challenge facing Nevada companies today is how to implement good corporate governance in a way that does not consume the focus and profitability of the organization.

Jefferson Wells believes the answer lies in using a risk-based approach, rather than the controls-based approach many U.S. companies have adopted. This top down risk-based approach allows companies to be efficient in the design of their internal controls. By reducing risk, a company reduces its volatility and can improve results.

Corporate governance is also being embraced by many companies beyond those required to be compliant under the Sarbanes-Oxley Act. Some companies are implementing corporate governance processes in anticipation of becoming publicly traded or being acquired by publicly traded companies; others are recognizing the positive impact processes of this type may have on their business. Whatever the reason, it has become clear that an increased focus on corporate governance will remain a lasting legacy of the Enron scandal.

Julie McCollum
Julie McCollum is managing director of the Las Vegas office of Jefferson Wells, a global provider of professional services in internal audit, technology risk management, taxes, finance and accounting.