Enron A Company

Enron was formed in 1985 following a merger between Houston Natural Gas Co. and Omaha-
based Inter North Inc. Following the merger, Kenneth Lay, who had been the chief executive
officer (CEO) of Houston Natural Gas, became Enron's CEO and chairman, and quickly
rebranded Enron into an energy trader and supplier. Deregulation of the energy markets allowed
companies to place bets on future prices, and Enron was poised to take advantage.

The era's regulatory environment also allowed Enron to flourish. At the end of the 1990s, the
dot-com bubble was in full swing, and the Nasdaq hit 5,000. Revolutionary internet stocks were
being valued at preposterous levels and consequently, most investors and regulators simply
accepted spiking share prices as the new normal.

Enron participated by creating Enron Online (EOL), an electronic trading website that focused
on commodities in Oct. 1999. Enron was the counterparty to every transaction on EOL; it was
either the buyer or the seller. To entice participants and trading partners, Enron offered up its
reputation, credit, and expertise in the energy sector. Enron was praised for its expansions and
ambitious projects and named "America's Most Innovative Company" by Fortune for six
consecutive years between 1996 and 2001.

By mid-2000, EOL was executing nearly $350 billion in trades. At the outset of the bursting of
the dot-com bubble, Enron decided to build high-speed broadband telecom networks. Hundreds
of millions of dollars were spent on this project, but the company ended up realizing almost no
return.

When the recession began to hit in 2000, Enron had significant exposure to the most volatile
parts of the market. As a result, many trusting investors and creditors found themselves on the
losing end of a vanishing market cap.

Enron was a U.S. energy-trading and utilities company that perpetuated one of the biggest
accounting frauds in history. Enron's executives employed accounting practices that falsely
inflated the company's revenues, which, at the height of the scandal, made the firm become the
seventh-largest corporation in the United States. Once the fraud came to light, the company
quickly unraveled and filed for Chapter 11 bankruptcy on Dec. 2, 2001.

Enron shares traded as high as $90.56 before the fraud was discovered but plummeted to below
$0.30 in the sell-off after the fraud was revealed. Shareholders received company payouts as
compensation for their losses, but former company executives also settled to pay shareholders
out of their own pockets. Enron was one of the first big-name accounting scandals, but it was
soon followed by the uncovering of frauds at other companies such as WorldCom and Tyco
International. What was once a Wall Street darling has now become a symbol of modern
corporate crime.
BREAKING DOWN 'Enron'

The Enron bankruptcy, at $63 billion in assets, was the largest on record at the time. Its collapse
shook the markets and nearly crippled the energy industry. While those responsible for the
scandal were the senior executives, who concocted the accounting schemes, financial and legal
experts determined that none of it would have been possible without help. As a result of
negligent oversight by the Securities and Exchange Commission (SEC), the credit rating
agencies and the investment banks, Enron was enabled by failed oversight, manipulation, and
deceptive practices of these organizations.

Initially, much of the finger pointing was directed at the SEC, which the U.S. Senate found
complicit for its systemic and catastrophic failure of oversight. It was determined that, had the
SEC reviewed any of Enrons post-1997 annual reports, it would have seen the red flags and
possibly prevented the enormous losses suffered by employees and investors. The credit rating
agencies were found to be equally complicit in their failure to conduct proper due diligence
before issuing an investment grade rating on Enrons bonds just before its bankruptcy filing.
However, it was the investment banks, through their manipulation or outright deception, that
allowed Enron to continue to receive positive research analysis, promoting its stock and bringing
billions of dollars of investment into the company. It was a quid pro quo in which Enron paid the
investment banks millions of dollars for their services in return for their backing.

Enronomics

In light of the Enron scandal, the term "Enronomics" was coined to describe a creative and often
fraudulent accounting technique that involves a parent company making artificial paper-only
transactions with its subsidiaries to hide losses the parent company has incurred through business
activities.

Can Enron Happen Again?

As a result of the Enron catastrophe, certain protective measures have been put in place. The
Enron scandal gave us the Sarbanes-Oxley Act of 2002, which serves to enhance transparency
and criminalize financial manipulation. Further, as a result of Enron's wrongdoings, the Financial
Accounting Standards Board (FASB) standards were strengthened to curtail the use of
questionable accounting practices, and more accountability was imposed upon corporate boards
in their role as management watchdogs.

Prudential Regulations By State Bank Of Pakistan

Prudential regulation is an appropriate legal framework for financial operations which is
a significant contributor to preventing or minimizing financial sector problems.
Evidence shows that the absence of prudential regulations in some key areas can lead to
bank failures and systemic instability, while establishing sound, clear and easily
monitored rules for financial activities both encourages managers to run their institutions
better and facilitate the work of supervisors. Some countries have one single general
banking law, which tries to assemble all regulations, but in many countries, however, the
operational issues are left to statutory notes, circulars or even simply the routine decisions
of the supervisory institution.

Prudential Regulations in Pakistan

In order to promote good governance in the banking system, the State Bank of Pakistan
announced a set of Prudential Regulations on August 29, 1991. These regulations were
made effective from 1st of July, 1992. Non-Bank Financial Institution (NBFIs) have also
been placed under regulatory regime of SBP.
In other words, to safeguard the interest of depositors and to ensure the safety and
soundness of the banks, the State Bank of Pakistan has issued Prudential Regulations.
These Prudential Regulations present a prudent operating framework for the
banks/Development Financial The State Bank of Pakistan has devised separate Prudential
Regulations for different areas including:
Prudential Regulations for Corporate and Commercial Banking
The prudential regulations for corporate and commercial Banking govern operations of
the financial institutions in respect of their dealing with the corporate entities. These
regulations focus on:
Credit Risk Management
Corporate Governance
Anti-Money Laundering and Operations
The regulations on Credit Risk cover per party exposure limits of the banks and DFIs for
fund based and non-fund based facilities, limit for clean advances, investment in
shares/Term Finance Certificate (TFCs), provisioning requirements for stuck-up assets,
exposure to NBFC and Margin requirements etc.
The regulations for Corporate Governance put in place exhaustive criteria for
management and the Board of Directors (BOD) to ensure excellent governance in all
respective areas.
Similarly, the regulations on Anti-Money Laundering and Operations cover eliminating
criminal use of banking channels for the purpose of money-laundering, and restricting
window-dressing and wrong use of suspense account respectively.

Prudential Regulations for Consume Banking

Regulations for consumer financing have been devised to encourage the banks to
diversify their loan portfolio through creation of new products and to ensure that banks
undertake consumer banking in a prudent manner. Consumer banking covers any
financing allowed to individuals for meeting their personal, family or household needs
and include Credit Cards, Auto Loans, Housing Finance and other consumer financing
etc.
The regulations require strengthening of Risk Management Processes of the banks and
DFIs through establishing comprehensive Credit Risk Management Systems appropriate
to their type, scope, sophistication and scale of operations. The BOD of the banks and
DFIs has been required to establish policies, procedures and practices to define risk,
stipulate responsibilities, specify security requirements, design internal controls and then
ensure strict compliance with them. They also cover different consumer products through
separate rules so that each product is dealt with keeping in view their specific nature.

Prudential Regulations for SME Financing

The prudential regulations for Small and Medium Enterprises (SMEs) facilitate and
encourage the flow of banks credit to SME sector, keeping in view their importance in
the economic development of the country. Its features are; Shift from collateral based
lending to cash flow based lending. Maximum limit of clean financing against
personal guarantees increased to Rs. 3 million for SMEs. This is greater than that for
consumer as well as the corporate clean financing. The requirement for the banks and
DFIs to obtain copy of accounts has been relaxed for exposures of up to Rs. 10 million.
Through the prudential regulations for SMEs, the State Bank of Pakistan has provided
guidelines to the banks and DFIs for effective reach out to the SME sector. Presently
most of the SMEs in Pakistan lack sophistication to have reliable and sufficient data and
financial information, thus the banks and DFIs have been advised to come up with the
minimum information requirements and standardized formats to facilitate SMEs. Close
coordination of the officials of the banks/DFIs and SMEs has been stressed in the
regulations. The regulations are aimed to develop new financing techniques and
innovative products to meet the needs of the SMEs and develop effective risk and
resource management systems.

Prudential Regulations for Micro Finance Banks

The SBP has also issued regulations for Microfinance Banks and Institutions, which are
licensed by it. Some to the main points of these regulations are given below;
No Microfinance Bank/Institutions (MFBs/MFIs) shall commence business
unless it has a minimum paid-up capital as prescribed in MFIs Ordinance 2001. It
shall also maintain equity equivalent to at least 15% of its risk-weighted assets.
In addition to cash reserve it shall also maintain liquidity equivalent to at least
10% of its time and demand liabilities in form of liquid assets i.e. cash, gold and
unencumbered approved securities.
The MFB/MFI shall not extend loans exceeding Rs. 100,000/- to a single
borrower.
 The outstanding principal of the loans and advances, payments against which are
overdue for 30 days or more shall be classified as Non-Performing Loans
(NPLs).