This paper examines the Enron debacle, which resulted in the largest bankruptcy in American history at the time. It traces the web of fraudulent practices concealed through off-balance-sheet partnerships, the roles of key executives such as Kenneth Lay, Jeffrey Skilling, and Andrew Fastow, and the complicity of auditing firm Arthur Andersen. The paper also investigates the political dimensions of the scandal, including the Bush administration's ties to the energy industry and Dick Cheney's secret energy policy meetings. The author concludes that existing regulatory and accounting standards are inadequate and calls for sweeping reforms reaching from corporate boardrooms to the highest levels of elected government.
When the mighty giant Enron fell, it fell hard, resulting in the largest bankruptcy in American history at the time. Worldwide attention then turned to all who might offer answers for this event. Intense scrutiny fell first upon Enron's executives, and then, as the event evolved into what appears to be one of the most massive cases of corporate corruption ever known, others were drawn into the spotlight.
House Energy and Commerce Chairman W.J. "Billy" Tauzin (R-La.) summarized the situation in a bluntly worded statement given to the Washington Post: "Not only were there corrupt practices, not only was there a hiding of the fact that debt was being put off the balance sheets and profits were reported that didn't exist, but we found more than that. I think we're finding what may clearly be securities fraud — attempts not to hedge or put debt out of the company, which many companies do — but literally fraudulent, phony attempts to do so."
According to a statement published on the Andersen website, the primary corporate auditors of Enron, the organization was founded in 1913, when "Arthur Andersen recruited the brightest students into his classes. Then, he turned them into 'thoroughly trained accountants' who were able to go beyond the obvious in their work by using unique methodologies to improve financial performance." It is, perhaps, those "unique methodologies" that took an unexpected turn at some point in the company's long and previously respected history, and then emerged as something uniquely ungoverned, unprincipled, and unconscionable. After the Securities and Exchange Commission began its in-depth investigation of Enron, focus also fell upon Andersen.
In a January 17, 2002 press release, Kenneth Lay acknowledged that Andersen was reportedly destroying documents after the SEC announced its investigation. Two members of the Enron executive board — Jeffrey McMahon, president and chief operating officer, and Richard A. Causey, executive vice president and chief accounting officer — both began their careers with Arthur Andersen & Co. in Houston. Both individuals would therefore have had firsthand knowledge of the "unique methodologies to improve financial performance" taught at Andersen. Sherron Watkins, the whistle-blower, was also a former Arthur Andersen accountant.
Although Kenneth Lay, who resigned as Chairman of Enron on January 23, 2002, claims to have had no knowledge of the fraudulent practices and secret partnerships used to conceal Enron's debts, he was clearly warned of impending disaster in a written memo from Enron executive Sherron Watkins on August 15, 2001. "We will implode in a wave of accounting scandals," she warned, unless the company changed its ways (Associated Press).
Despite his denial of knowledge about the questionable practices, records — including board meeting minutes — indicate that Lay was present when some of the partnerships were approved. At one meeting, a waiver of Enron's conflict of interest policy was discussed in order to allow former chief financial officer Andrew Fastow to run the partnerships.
As the partnerships began attracting the attention of various regulators, Lay defended them. At roughly the same time that he received Watkins's "implosion" warning, Lay gave the following statement to Business Week: "There are no accounting issues, no trading issues, no reserve issues, no previously unknown problem issues. The company is probably in the strongest and best shape that it has ever been in" (Guardian Unlimited).
On August 24, 2001, Business Week posed the following question to former CEO Jeffrey K. Skilling, who had abruptly resigned from Enron without stated reason after only six months as CEO: "What about reports that there was some unhappiness on your part about Chairman Ken Lay being too involved in the business again?" It remains a clear possibility, therefore, that Kenneth Lay — who had been out of day-to-day management for years — had indeed been unaware until the eleventh hour of various practices due to his relaxed management style. Pleading ignorance, however, is not a viable option for the person ultimately responsible for a company's operations. He can still be held corporately responsible for the actions of those working under him.
It is not yet clear how many others may have been participating in the fraud or had knowledge of it. What is clear is that the interconnections between Enron's executives and Arthur Andersen created an environment in which fraudulent accounting practices could take root and spread largely unchecked.
As the focus of the scandal spread, the spotlight inevitably fell upon the Bush administration, primarily because of the Bush team's extensive ties to the energy industries and personal friendships with some of the key players involved. According to a report in U.S. News & World Report dated January 21, 2002, coming under particularly heavy fire was Vice President Dick Cheney, who reportedly formulated a pro-development energy policy during secret meetings with business executives and lobbyists (20). Cheney subsequently cited "executive privilege" to avoid disclosing what took place during those meetings.
The governing instruments first established during the 1930s are still determining the standards for trading in this country. The Generally Accepted Accounting Principles are no longer working as intended. Top elected government figures feel they no longer need to answer for secret actions that impact the country.
It is clear that a new set of standards is in order. Such standards should extend not only to private corporations and the very base of the pyramid of economic structure in this country, but also to the top of that pyramid — to the highest elected officials who feel they can invoke "executive privilege" to hide corruption that has left many families devastated, destroyed public trust, and shaken confidence nationally and possibly worldwide.
Andersen. "An 88-Year History of Looking Ahead." 2002. Accessed 5 Feb. 2002.
Associated Press. Hays, Kristen. "Former Enron Exec. Found Dead." 25 Jan. 2002. Washington Post. Accessed 5 Feb. 2002. http://www.washingtonpost.com/wp-dyn/articles/A37789-2002Jan25.html
"Bush administration ties and Cheney's secrecy"
"Call for sweeping regulatory reform"
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