Enron Scandal: A Security Professional\'s

¶ … Enron Scandal: A Security Professional's Analysis

The Enron Corporation's behavior was both unethical and illegal. In some instances, the company had members of Congress as well as members of its own board of directors helping to politically influence the U.S. regulatory laws and landscape in order to create an Enron-run commodities market. The failure to both see and expose Enron's misdeeds was systemic, and each level of responsibility and oversight was violated in a different manner. The company itself lacked the internal ethical structure to prevent such dealings and the culture of corruption that existed at Enron was so pervasive that employees helped aid and abet the very individuals who eventually brought the company to its knees. Enron contributed hundreds of thousands of dollars to political campaigns in Texas in order to secure the votes and politicians necessary to carry out its actions with little to no scrutiny from regulators.

The U.S. government was involved in the Enron scandal, namely then Texas Senator Graham and his wife as well as Vice President Dick Cheney. Former Texas Senator Phil Graham served while Enron began its rise to power in the 1990's and early 2000's (NewsMax, 2002). Graham actually voted to help allow Enron to operate as a relatively unregulated commodities broker. This laid the groundwork for Enron's ability to corner the energy market while failing to report the losses of hundreds of millions of dollars from other means (What Really Happened, 2002). Graham's wife, Wendy, served on the Enron board of directors, in what could be viewed as a severe conflict of interest. In a way, Enron's influence in Congress was powerful enough to alter the regulatory and political landscapes in their favor.

Beyond the specific involvement of Mr. And Mrs. Graham, the U.S. Government was unable to detect the unethical and, in many cases, illegal actions of Enron through the commodities market it had control over. The California power shortage as well as other examples of Enron exerting monopolistic control over certain markets and commodities should have tipped the SEC and other regulatory groups off to what was going on behind closed doors at Enron.

The impact on the United States and its citizens was profound. Without a doubt, the fall of Enron sparked new interest in matters of corporate and political corruption as well as outrage in many of the markets that Enron was manipulating and fleecing. After the Enron scandal, the U.S. regulations relative to corporate and fiscal oversight changed. The Sarbannes-Oxley Act was passed as an answer to the problems and issues posed by the Enron debacle (UC College Law, 2004). The act itself is a point by point solution to the problems with the regulatory system that were first exposed through the unethical actions of the company and its senior officers.

Beyond the regulatory impact, U.S. citizens became weary of the potentially toxic mixture of politics and regulatory framework, in the presence of large sums of money. This is to say that the American public was weary of Congressional oversight; given the fact that Phil Graham had fought for Enron's ability to corner the energy commodities market in many states.

Part 2

In order to fully understand the Enron scandal, it is necessary to more closely examine the timeline of events as it occurred, and how a security professional might intervene.

In 1985, Enron's senior officer, Kenneth Lay gained control of the companies that would later form Enron and their commodities trading network. One of Enron's CEO's of finance, Jeff Skilling, joins the company in 1990 after leaving a failed bank, which interestingly enough was dissolved by the FDIC for insolvency (What Really Happened, 2002). As a security professional, it is necessary to investigate the past dealings of all future employees in order to ascertain whether or not these individuals meet the ethical standards of the company. If Skilling had been adequately investigated, perhaps he would not have been brought on to Enron.

Skilling later hires Andrew Fastow to work under him and Lay. This is prior to Enron's first electricity trade in the commodities market, which occurred in 1994. In 1996, Fastow makes up many off-book companies and entities which Enron uses to make business deals with. These companies absorb Enron's debt and losses, and since they are off-book, Enron is able to report profits to its shareholders the security professionals overseeing Fastow's operations in these matters should have been privy to the dealings of these shell companies. Certainly Fastow was not the only person in the company with information relative to why these shell entities were in existence.

Later in 1996, Skilling becomes Enron's COO and President. In 1997, Fastow makes a mistake in creating Chewco, a company that is designed to absorb Enron losses. However, unlike the other shell companies that Fastow created previously, Chewco does not meet the regulatory requirements to keep it off of the official Enron books and balance sheet. This is the beginning of the end for Enron, and a serious misstep for Fastow, who had created dozens of shell companies in order to hide Enron's debt. Since Chewco did not meet the regulatory requirements, it should have been readily apparent to the security officers as well as the regulatory agencies to see that Fastow, as well as the entire company, were engaging in less than ethical business behavior. However, going after Fastow at this juncture could have proven quite difficult, given the fact that Fastow was hired by Skilling.

Another egregious error that was perpetrated by the Enron board of directors, including Phil Graham's wife, was overlooking and waiving the internal moratorium on Fastow being able to work for both Enron and the companies he was creating to absorb Enron's debt. Fastow creates LJM Incorporated, which is a clearinghouse for buying Enron's debt (What Really Happened, 2002). As a security specialist, the board of director's decision to allow Fastow to continually violate both internal ethics regulations as well as federal financial regulations represents an excellent opportunity to arrest the downward spiral that Enron was beginning to follow. A security professional should have internally investigated this board of director's decision as well as the implications that the decision had on Enron's operations. This represents a serious conflict of interest. The same year, 1999, Enron announces its internet-based trading platform that gives traders the ability to buy and sell energy commodities online (NewsMax, 2002). Enron makes millions from this platform all the while manipulating the markets.

In early 2000, after much of the damage had been done to Enron's books, Skilling and Lay both try to cover up their losses as well as the existence of the fraudulent shell companies created by Fastow by filing fraudulent tax returns as well as submitting fraudulent letters to Arthur Andersen, Enron's accounting firm (Open Secrets, 2002). In this same year, Enron releases a 64-page code of ethics, which is later identified as a way to help insulate the culture of corruption by training its employees to overlook certain red flags. As a security specialist, it would be impossible to not see that Enron's issuing of a highly-suspect, 64-page ethics booklet as an indicator of other fraudulent dealings by the company (What Really Happened, 2002). The security and ethics team should not have caved to the upper level management's desire to create this culture, and should have been privy to the fact that these same executives were looking to cover up their tax and accounting information. After all of this fraudulent activity, Enron begins selling shares to the public in this same year, helping to raise more money to cover the company's losses and placing the onus of the losses into the public sector. Enron begins to monopolize the energy markets, specifically in California. This draws the attention of California Governor Gray Davis as well as unwanted media attention.

In early 2001, Enron engineers a rolling blackout in California, further jacking up energy demand and prices. It is not discovered until later that this blackout was artificially engineered by Enron to help increase their profits, since the California energy market had been firmly cornered by Enron in the years prior. In the same year, Skilling lies to shareholders by understating the amount of debt that Enron has built up. As a security professional, it would be prudent to make sure that the public relations department as well as executives like Skilling is honest in their dealings with the public. This dishonesty is a symptom of the corporate culture of corruption at Enron. Arthur Andersen, with the approval of Skilling and other Enron executives, lies to the public about the huge debt and accounting errors that Enron has on its book (NewsMax, 2002). This further exacerbates the share holders' issues and claims later down the road. Again, as a security specialist, it is necessary to make sure that the company's public relations team and messages are congruent with the facts, as they were not in the case of Enron.

In 2000, Skilling and Lay met with Vice President Dick Cheney and the Energy Task Force. Later in the year, this same task force, including Cheney, recommended Enron as a company that was upstanding and endorses its many proposals. This further complicated the Enron image giving it further clout to conduct business in an unethical manner. By the end of this year, many of Enron's top executives, including Skilling, begin selling off their shares of company stock. This occurs before it is revealed to shareholders that Enron had a $618 million dollar loss in the fiscal year. This behavior, to a senior security specialist, represents severely unethical and corrupt decision making and helps to show prior knowledge of the Enron scandal involving Fastow's shell companies and the manipulation of the energy markets in their favor.

Within the company itself, it would have been rather clear to the security professional working there that the senior management knew things were amiss. A security professional could have been tipped off by Arthur Anderson's request to destroy all audit material, which represents a severe violation of a company's internal controls for dealing with audits as well as the chain of command (Open Secrets, 2002). Even if senior management ordered the destruction of such records, it would have been a huge red flag for anyone involved with the company who was concerned about the potential for further unethical behavior. Also, by destroying the audit materials, the company was alluding to the fact that there was something to hide within these materials (NewsMax, 2002). This is to say that if Arthur Anderson felt it necessary to destroy these materials, certainly there was something even greater to be hidden than the unethical destruction of records in this manner.

A Possible Course of Action

As senior security professional at Enron, it would have been very difficult to know exactly who to notify and when. If information was presented that the company was engaging in illegal and unethical business behavior, the first group of people that should be notified are the authorities. This would include the SEC as well as the Attorney General. Since Enron was such a large company, with ties to so many industries and wielded such a huge economic footprint, it would be impossible to separate the company's actions from the effects they had on the energy markets as well as the derivatives that the company had been brokering to help cover their losses. A recommendation would be made to freeze the assets of top executives in order for a full investigation to be conducted into the company and its dealings as well as its compensation plans for these individuals. This would be part of the federal law enforcement action as well. Local law enforcement would also need to be notified in the event that turning Enron in to the SEC and Attorney General caused company employees, executives, or shareholders to become unruly or to flee the situation (Ortmeier, P.J., 2005). The local law enforcement entities would need to be present in this scenario.

Immediately after notifying the proper authorities, it would be important to brief the company's executives on exactly what had been said and the recommended actions they should take in order to be prepared for a federal inquiry. At this point, a security professional could expect to lose their position, given the fact that the senior management at Enron contributed to the culture of corruption. As a senior security professional, the ethical conduct of a company comes before any individual within that company or any other interest.

Shareholders

Even acting as the senior security professional at Enron, it would have likely been difficult to be the initial whistleblower given the fact that the company was worth so much money and the future and fortunes of so many stock holders, senior executives, and employees were at stake (Ortmeier, P.J., 2005). The path of least resistance is often taken in these circumstances not because it is the right thing to do, but because the person that "rocks the boat" so to speak is often punished. The culture of corruption that permeated Enron, specifically at the highest levels of management and security would have created a very harsh environment for anyone, even with credible information, to turn the company in to the SEC or invite any scrutiny relative to the unethical practices that Enron was involved in. This type of situation is witnessed relatively often, as those with the most to lose from a whistle blower acting on their own feelings or ethical concerns, typically insulate themselves rather well from the potential for any such fallout or exposure.