Public outrage grows, governance credibility falls FIGURE 2.1 GOVERNANCE REFORM TIMELINE Public outrage grows, governance credibility falls Enron Bankruptcy December 2, 2001 WorldCom Restatement June 25, 2002; Bankruptcy July 21, 2002 SEC Regulations Stock Exchange Guidance Arthur Andersen Court Case Winter/Spring 2002 Sarbanes-Oxley Act Signed July 30, 2002

Enron Corp. (last price N/A) FIGURE 2.2 ENRON STOCK CHART, WEEKLY PRICES, 1997–2002 Enron Corp. (last price N/A) $ 90.00 $ 80.00 $ 70.00 $ 60.00 $ 50.00 $ 40.00 $ 30.00 $ 20.00 $ 10.00 $ 0.00 US Dollars

FIGURE 2.3 ENRON JEDI BARCLAYS BANK CHEWCO PLC Sources CHEWCO FINANCING, IN MILLIONS ENRON KOPPER & DODSON’s Company DODSON Companies $0.125 $11.4 $11.4 Loan* JEDI $132 Revolving Credit BARCLAYS BANK PLC CHEWCO $240 Loan Sources Bank $251.4 Non-cash 132.0 Investors 0.1

TABLE 2.1 ENRON’S KEY SPECIAL PURPOSE ENTITIES (SPEs) SPE SCHEME IMPACT Chewco/JEDI Syndicated investment Off balance sheet liabilities hidden ($628 million) Revenues recognized early Profits on own shares LJM Provided market for assets Artificial profits Off balance sheet liabilities hidden Equity overstated ($1.2 billion) LJM1/Rhythms Investment “hedge” Unrecognized losses ($508 million) LJM2/Raptors Unrecognized losses ($544 million)

TABLE 2.2 PAYMENTS TO FASTOW & HELPERS INVESTMENT RETURN, IN MILLIONS OTHER, IN MILLIONS A. Fastow $25,000 $ 4.5 in 2 mo. $30 + stock options M. Kopper 125,000 10.0 incl. Dodson $2 in fees B. Glisan 5,800 1.0 K. Mordaunt

TABLE 2.3 ENRON WHISTLE-BLOWERS BLEW TO ACTION SUBSEQUENTLY Cliff Baxter, Vice Chair Lay None Exercised $32 million in stock options, just agreed to testify to Congress, found shot dead in his car—an apparent suicide—on Jan. 25, 2002 McMahon, Treasurer Fastow Reassigned, later returned as CEO Kaminski, Risk Mgr. Continued Sherron Watkins Discussed with Skilling and asked Vinson & Elkins to review

TABLE 2.4 ENRON STOCK PROCEEDS, OCTOBER 1998 TO NOVEMBER 2001, OVER $30 MILLION Lou Pai Chairman, Enron Xcelerator $353.7 million Ken Lay Chairman 101.3 Rebecca Mark-Jusbasche Director 79.5 Ken Harrison Director, Portland General Electrics 75.2 Kenneth Rice Chairman, Enron Broadband 72.8 Jeffrey Skilling Director (former CEO) 66.9 Mark Frevert Vice Chairman 50.3 Stanley Horton Global Chairman 45.5 Joseph Sutton 40.1 J. Clifford Baxter 35.2 Joseph Hirco CEO, Enron Broadband Andrew Fastow Chief Financial Officer 30.5 SOURCE: © 2002 The Washington Post. Reprinted with permission.

FIGURE 2.4 ENRON’S GOVERNANCE AND CONTROL STRUCTURE WAS SHORT-CIRCUITED BOARD Outside Law Firm Ken Lay: Chair; Co-Chair ZZZ Committees: Audit and Compliance Compensation, Finance, Nominating Financial Reports SPEs Internal Audit … AA MANAGEMENT CEO: Lay, Skilling CFO: Fastow CAO: Causey CRO: Buy Others: Kopper, McMahon, Glisan Watkins, Kaminsky Whistle-blowers Company Policies Code of Conduct LEGEND Missing Guidance AUDITOR Arthur Andersen Missing Compliance Consultant: Arthur Andersen Suspended Guidance

TABLE 2.5 ENRON’S ACCOMPLICE BANKS’ LAWSUIT SETTLEMENTS $ COMMENT Merrill Lynch 80m March 2003 Fine imposed by the SEC. Four of the Bank’s executives were found guilty of fraud and conspiracy, facing sentences of up to fifteen years in prison (Daniel Bayly, Robert Furst, William Fuhs & James Brown). JPMorgan Chase 2.2bn 135m August 2005. First Enron-related US Bank settlement. The bank denied wrongdoing. August 2003. Fine imposed by the SEC. JPMorgan’s Q2/Q3 profits were $1.83bn. Citigroup 1.7bn 120m June 2005. Citigroup did not admit liability, and said money already set aside for legal costs would cover the payment. August 2003. Fine imposed by the SEC. Citigroup’s Q2/Q3 profits were $4.3bn. Canadian Imperial Bank of Commerce 2.8bn June 2005. More than annual profit yr 2005. December 2003. Fine imposed by the SEC. Two CIBC executives also will pay fines totaling $600,000. Toronto Dominion Bank 130m August 2005 Royal Bank of Canada 25m Royal Bank of Scotland 42m Sources: SEC files, newspaper articles and Enron’s website at http://www.enron.com for press releases on Megaclaims settlements.

TABLE 2.6 ENRON KEY EXECUTIVE INDICTMENTS INDICTED BY FOR PLEA/ COOPERATE  RESULT Ken Lay, Chair, Chair and CEO Jul 2004, 2 trials: 1 jury, 1 judge Conspiracy, fraud & false statements Not guilty Guilty in both trials, but died before sentencing, so verdicts vacated Jeffrey Skilling, CEO Feb 2004 Conspiracy, fraud, false statements, insider trading 24 yr, 4 month sentence Restitution $45 million Andrew Fastow, CFO Jan 2004 Securities fraud Plea agreement (guilty)  10 yr sentence, later reduced to 6 yrs, forfeit $23.8 mil Lea Fastow, Assistant Treasurer May 2004 Tax fraud 1yr sentence Richard Causey, CAO Dec 2005 7yr sentence Forfeit $1.25 million Michael Kopper Aug 2002 Fraud and money laundering 37 month sentence Forfeit $12 million Mark Koenig Investor Relations Aug 2004 Plea agreement (guilty)  18 month sentence Forfeit $1.49 million Ben Glisan, Treasurer Dec 2002 Sep 2003 Fraud Fraud Denied wrongdoing, later  5yr sentence,  later brought favors, forfeit $625,000. Kenneth Rice, CEO Broadband Services Apr 2005 Plea agreement (guilty) 10yr sentence Forfeit $29.4 million Kevin Hannon Sep 2005 Guilty 5yr sentence Forfeit $250,000 Timothy Despain Assistant Treasurer Apr 2004 5yr sentence, released on $100,000 bail Enron Board of Directors (18 members) Jan 2005 Breach of Fiduciary Duty Settlement $168 million; $155 million covered by insurance Source: SEC Files, newspaper articles, see also http://www.chron.com/news/specials/enron/ = Cooperates with prosecutors

TABLE 2.7 SELECTED ENRON FINANCIAL STATEMENT DETAILS 2000 1999 1998 Summary Income Statement (millions) Revenues $101,789 $40,112 $31,260 Operating income 1,953 802 1,378 IBIT 2,482 1,995 1,582 Net Income before Cumulative Accounting Changes 979 1,024 703 Net Income 893 EPS (in dollars) - basic 1.22 1.17 1.07 - diluted 1.12 1.10 1.01 Detail of IBIT (millions) Transport & distribution Trans. Services $391 $380 $351 Portland General 341 305 286 Wholesale Services 2,260 1,317 968 Retail Energy Services 165 (68) (119) Broadband Services (60) Exploration & prod. - 65 128 Corporate and other (615) (4) (32) Summary Balance Sheet (billions) Current assets $30.4 $7.3 Investments, other 23.4 15.4 Property, plant, equip, net 11.7 10.7 Total Assets 65.5 33.4 Current liabilities 28.4 6.8 Long-term Debt 8.6 7.2 Deferred credits and other 13.8 6.5 Shareholders’ Equity 11.5 9.6 Total Liabilities & Shareholders’ Equity

TABLE 2.8 KEY CHANGES IN GOVERNANCE GUIDELINES AND REGULATIONS ANNOUNCED SOURCE OF CHANGE 1994 The Dey Report, “Where were the Directors?,” Toronto Stock Exchange To review corporate governance and make recommendations for best practice. 1999 Five Years to the Dey Report on Corporate Governance, Toronto Stock Exchange and The Institute of Corporate Directors To survey and analyze governance procedures at TSE companies. May 2000 The Combined Code: Principles of Good Governance and Principles of Best Practice Based on the Hempel (1998), the Cadbury (1992) and Greenbury Reports (1995), used by companies listed on the London Stock Exchange. 2000 Guidance for Directors on the Combined Code, The Turnbull Report. See Combined Code purpose. Nov. 21, 2001 The Saucier Report, “Beyond Compliance: Building a Governance Culture,” Joint Committee on Corporate Governance, CICA/TSE To review the current state of corporate governance in Canada, compare Canadian and international best practices, and make recommendations for changes that will ensure Canadian corporate governance is among the best in the world. Apr. 26, 2002 Toronto Stock Exchange (TSX) Guidelines Amended Revisions effective Dec.31, 2002 to adopt some Saucier Report recommendations. Apr. 4, 2002 SEC Blue Ribbon Committee Discussions 2002 Various Business Roundtable—various statements June 6, 2002 NYSE Corporate Governance Listing Requirements, Effective Aug. 2002, after SEC approval A review at the request of Harvey Pitt, SEC Chairman, to enhance the accountability, integrity, and transparency of companies listed on the NYSE. June 28, 2002 SEC Order effective Aug, 14, 2002 CEO and CFO to certify 8-K, quarterly and annual financial reports. July 9, 2002 President George Bush’s Proposals Speech Visit the text’s website for links to the organizations’ websites

TABLE 2.9 ORGANIZATION OF THE SARBANES-OXLEY ACT of 2002 SECTIONS TITLE 1, 2, 3 Short Title, Definitions, Table of Contents 101–109 I Public Company Oversight Board 201–209 II Auditor Independence 301–308 301 III Corporate Responsibility Public Company Audit Committees (including whistle-blower encouragement) Corporate Responsibility for Financial Statements (including CEO and CFO certification) 401–409 404 406 IV Enhanced Financial Disclosures Management Assessment of Internal Controls Code of Ethics for Senior Financial Officers 501 V Analyst Conflicts of Interest 601–604 VI Commission Resources and Authority 701–705 VII Studies and Reports 801–807 VIII Corporate Criminal Fraud Accountability 901–906 IX White Collar Crime Penalty Enhancements 1001 X Corporate Tax Returns 1001–1007 XI Corporate Fraud and Accountability