Chapter 39 ACCOUNTING SCANDALS AND IMPLICATIONS FOR DIRECTORS: LESSONS FROM ENRON PEARL TAN. Abstract We analyze the Enron case to identify the risk factors that potentially led to its collapse and specific issues relating to its aggressive accounting and highlight the lessons for independent directors. | Chapter 39 ACCOUNTING SCANDALS AND IMPLICATIONS FOR DIRECTORS LESSONS FROM ENRON PEARL TAN Nanyang Technological University Singapore GILLIAN YEO Nanyang Technological University Singapore Abstract We analyze the Enron case to identify the risk factors that potentially led to its collapse and specific issues relating to its aggressive accounting and highlight the lessons for independent directors. In Enron the interactions between external stimuli strategies corporate culture and risk exposures possibly created an explosive situation that eventually led to its demise. Much of the post-Enron reforms have been directed towards regulating the roles and responsibilities of executive directors and auditors. However the role of independent directors has received relatively lesser attention. Independent directors should analyze the risks of their companies and understand the pressures that arise from market conditions and firm-specific policies and incentive structures. They also need to close the information gap between executive directors and themselves. A post-Enron era also requires independent directors to change their focus. Traditionally independent directors have to strike a difficult balance between maximizing returns and minimizing risks. Independent directors may now have to focus on the management of risks the design and functioning of an effective corporate governance infrastructure and the moderation of the power bases of dominant executives. Practically they may also have to reduce the number of independent director appointments to enable them to focus more effectively on a fewer companies. Keywords corporate governance independent directors risks incentives accounting scandals special purpose entity hedging volatility Sarbanes-Oxley Act audit committee . Introduction The recent spate of accounting scandals raises serious concerns about the opportunistic use of accounting procedures and policies to camouflage fundamental problems in companies. The .
