Discuss how the respective organizations’ relations with stakeholders could have potentially been affected by the events that took place at Enron and how the situation could have been dealt with differently to prevent further damage?
THE FALL OF ENRON: A STAKEHOLDER FAILURE
Once upon a time, there was a gleaming headquarters
office tower in Houston, with a giant tilted "£"' in front, slowly
revolving in the Texas sun. The Enron Corporation, which once
ranked among the top Fortune 500 companies, collapsed in 2001 under
a mountain of debt that had been concealed through a complex scheme
of off-balance-sheet partnerships and investor loss of confidence.
Forced to declare bankruptcy, the energy firm laid off five
thousand employees; thousands more lost their retirement savings,
which had been invested in Enron stock. The company's shareholders
lost tens of billions of dollars after the stock price plummeted.
The scandal surrounding Enron's demise engendered a global loss of
confidence in corporate integrity that continues to plague
markets, and eventually it triggered tough new scrutiny of
financial reporting practices such as the Sarbanes-Oxley Act in
2002. To understand what went wrong, let's examine the history,
culture, and major players in the Enron scandal.
History
The Enron Corporation was created out of the merger of two major
gas pipeline companies m 1985. Through its subsidiaries and
numerous affiliates, the company provided products and services
related to natural gas, electricity, and communications for its
wholesale and retail customers. Enron transported natural gas
through pipelines to customers all over the United States. It
generated, transmitted, and distributed electricity to the
northwestern United States and marketed natural gas, electricity,
and other commodities globally. It was also involved in the
development, construction, and operation of power plants,
pipelines, and other energy-related projects all over the world,
including the delivery and management of energy to retail customers
in both the industrial and commercial business sectors.
Throughout the 1990s, Chairman Kenneth Lay, chief
executive officer (CEO) Jeffrey Skilling, and chief financial
officer (CFO) Andrew Fastow transformed Enron from an old-style
electricity and gas company into a $150 billion energy company and
Wall Street favorite that traded power contracts in the investment
markets. From 1998 to 2000 alone, Enron's revenues grew from about
$31 billion to more than $100 billion, making it the
seventh-largest company of the Fortune 500. Enron's wholesale
energy income represented about 93 percent of 2000 revenues, with
another 4 percent derived from natural gas and electricity. The
remaining 3 percent came from broadband services and exploration.
Enron-Online-the company's worldwide Internet trading platform
completed on average over five thousand transactions per day,
buying and selling over eighteen hundred separate products online
that generated over $2.5 billion in business every day.
There was every reason to believe that Enron was still financially
sound in the third quarter of 2001, even though a bankruptcy
examiner later reported a discrepancy in Enron's claimed net income
and cash flow. This was done under certain accounting assumptions
after the bankruptcy. For the third quarter of 2001, Enron's
wholesale business generated a potential $754 million of earnings
(before interest and taxes), an increase of 35 percent from the
previous year. This represented over 80 percent of Enron's
worldwide earnings. It was acknowledged by all parties that Enron's
wholesale business was highly profitable and growing at a rapid
rate. Even in the fourth quarter of 2001, Lay believed that Enron
was still a growing viable company for the long run, based on
physical volume moving through the pipelines.
ENRON'S CORPORATE CULTURE
When describing Enron's corporate culture, people like to use the
words arrogant or prideful, perhaps justifiably. The firm employed
competent, creative, and hardworking employees and recruited the
best and brightest graduates from top universities. In 2001 Fortune
magazine ranked Enron the twenty-second best company t1 work for in
America. A large banner in the lobby at corporate headquarters
proclaimed, Enron "The World's Leading Company," and Enron
executives blithely believed that competitors had no chance against
it. Skilling even went so far as to tell utility executives at a
conference that he was going to "eat their lunch." There was an
overwhelming aura of pride, carrying with it the deep-seated belief
that Enron's people could handle increasing risk without
danger.
The culture also was about a focus on how much money could be made
for man: executives, at many levels, that shared in a stock option
incentive program. For exam pie, after the Enron collapse, it was
alleged that Enron's compensation plans seemed less concerned with
generating profits for shareholders than with enriching employee
wealth. This may have been the result of the highly competent and
aggressive employee culture that was motivated by the desire to
improve their financial position. Enron's corporate culture
reportedly encouraged risky behavior, if not breaking the
rules.
Skilling appears to be the executive who created a system in which Enron's employees were rated every sue months, with those ranked in the bottom 20 percent forced out This "rank-and-yank" system helped create a fierce environment in which employees competed against rivals not only outside the company but also at the next desk. Delivering bad news could result in the "death" of the messenger, so problems in the trading operation1 for example, were covered up rather than being communicated to management.
Lay once said that he felt that one of the great
successes at Enron was the creation of a corporate culture in which
people could reach their full potential. He said that he wanted it
to be a highly moral and ethical culture and that he tried to
ensure that people did in fact honor the values of respect,
integrity, and excellence. On his desk was an Enron paperweight
with the slogan "Vision and Values." Lay maintained that he was
always concerned about ethics, and he continued to discuss the
ethical and legal ramifications of the Enron disaster even after
his conviction. The business ethics issue involved in his
indictment was that he lied about the financial condition of Enron,
but he continued to maintain that he had openly dealt with all
issues that were brought to his attention. Some of the people
inside Enron believed that nearly anything could be turned into a
financial product and, with the aid of complex statistical
modeling, traded for profit. Short on assets and heavily reliant on
intellectual capital, Enron's corporate culture rewarded innovation
and punished employees deemed weak. An important question is, how
much does a CEO know about misconduct in a corporation?
Aggressive and highly intelligent Enron employees, in many
divisions, were "pushing the limits" and bending the rules to
achieve success. This highly competitive risk culture existed in a
corporation that was trying to redefine how the energy industry did
business. Lawyers, accountants, and the board of directors approved
key decisions. As intelligent and creative as Enron's executives
were, no one person, under Enron's organizational system of checks
and balances, could orchestrate the schemes that created the
demise of a company that large. The downfall took many layers of
"pushing the envelope" and a great deal of complacency on the part
of employees who, at many levels in the organization, saw
wrongdoing and ignored it. To some extent, the Enron failure was
the result of a free-enterprise system that rewarded risk taking
and a corporate culture that pushed complex financial decisions to
the edge. In addition, the right environmental conditions evolved
in the financial markets, especially the dotcom bubble,
contributing to Enron's stock collapse. Enron was the perfect
corporate storm (or disaster) that required many failures by
multiple stakeholders.
ENRON'S ACCOUNTING PROBLEMS
Enron's bankruptcy in December 2001 was the largest in U.S.
corporate history at the time. The bankruptcy filing came after a
series of revelations that the giant energy trader had been using
partnerships, also called special-purpose entities (SPEs). These
off-balance-sheet financing approaches are the heart of losses and
write-offs that turned Enron into a disaster. In a meeting with
Enron's lawyers in August 2001, the company's then CFO, Fastow,
stated that Enron had established the SPEs to move assets and debt
off its balance sheet and to increase cash flow by showing that
funds were flowing through its books when it sold assets. Although
these practices produced a very favorable financial picture,
outside observers believed they might constitute fraudulent
financial reporting because they did not accurately represent the
company's true financial condition.
According to John C. Coffee, Columbia University law
professor, once formed by Enron, the SPEs would then borrow debt
from banks, and Enron would typically guarantee that debt. Although
such guarantees are not unusual when SPEs are used, far less common
(and indeed unique) was the fact that the principal asset of many
Enron SPEs was Enron restricted stock. Thus, if Enron's stock price
declined, the SPE's assets would be insufficient to cover the bank
debt, and Enron would have to assume it.
In reality, these SPEs were legal entities, and many investment
banks were involved as third-party investors becoming partners in
these entities. Most companies engage in third-party transactions
to move debt off the balance sheet. For example, a company builds
its own plant or office building, sells it to a group of investors,
and then leases back the property for its business purposes but
still maintains some ownership. In other words, SPEs can be an
asset that helps facilitate daily business operations.
Most of the SPEs at Enron were alleged to be entities in name only,
and Enron funded them with its own stock and maintained control
over them. This is not too different from leasing back property
that can be used for storage, transportation, or other
energy-related activities. After the crash of Enron's stock price,
any assets associated with the SPE system had to be written off.
Enron had to take a $1.2 billion reduction in equity in late 200 l
because of the SPE write-off.
After Enron restated its financial statements for fiscal 2000 and
the first nine months of 2001 its cash flow from operations dropped
from a positive $127 million in 2000 to a negative $753 million in
2001. In 2001, with its stock price falling, Enron faced a critical
cash shortage. Already shaken by questions about lack of disclosure
in Enron's financial statements and by reports that executives had
profited personally from the partnership deals, investor confidence
collapsed, taking Enron's stock price with it.
For a time, it appeared that Dynegy might save the day by providing
$1.5 billion in cash, secured by Enron's premier pipeline Northern
Natural Gas, and then purchasing Enron for about $10 billion. But
when Standard & Poor downgraded Enron's debt bellow, investment
grade on November 28, some $4 billion in off-balance-sheet debt
came due, and Enron didn't have the resources to pay. Dynegy
terminated the deal. On December 2, 2001, Enron filed for
bankruptcy. Enron faced twenty-two thousand claims totaling about
$400 billion.
Many complex accounting issues related to determining the value of
Enron. For example, sometimes accounting rules changed, and
different opinions emerged on which rules applied, such as the
accounting rules governing goodwill. Goodwill is the difference
between what a company pays for an entity and the book value of
that company's net assets. For example, changes to the accounting
rules governing goodwill required Enron to disclose impairments to
certain of its assets including interests in Wessex Water, a
business located in Bath, England. Companies such as Enron depend
on accounting firms to determine what rules apply to valuing
goodwill as well as other assets. The government alleged that
Enron’s claim of being committed to a water growth strategy as
flawed because it would require Enron to disclose impairments in
certain of its assets related to goodwill. According to Lay,
Enron's accounting firm, Arthur Andersen, communicated that the
company was in compliance with the goodwill accounting rules and
the government's claims of flawed disclosures were wrong.
THE WHISTLE-BLOWER
Assigned to work directly with Fas tow in June 2001, Enron vice
president Sherron Watkins, an eight year Enron veteran, was given
the task of finding some assets to sell off. With the high-tech
bubble bursting and Enron's stock price slipping, Watkins was
troubled to find unclear, off-the-books arrangements backed only by
Enron's deflating stock. No one could explain to her what was
going on. Knowing that she faced difficult consequences if she
confronted then-CEO Skilling, she began looking for another job,
planning to confront Skilling just as she left for a new position.
Skilling, however, suddenly quit on August 14, saying he wanted to
spend more time with his family. Chairman Lay stepped back in as
CEO and began inviting employees to express their concerns and put
them into a box for later collection. Watkins prepared an
anonymous memo and placed it into the box. When Lay held a
company-wide meeting shortly thereafter and did not mention her
memo, however, she arranged a personal meeting with him.
On August 22, Watkins handed Lay a seven-page letter that she had
prepared outlining her concerns. She told him that Enron would
"implode in a wave of accounting scandals" if nothing was done. On
the other hand, Watkins continued to perform her dunes at Enron and
participate in all business matters. Lay arranged to have Enron's
law firm, Vinson & Elkins, look into the questionable deals.
There is evidence that Lay followed up on Watkins's concerns with
appropriate action. Watkins sold $30,000 worth of stock m August
2001 and some options in late September. She claimed that she was
panicked by the 9 /11 terrorist attacks and about the company. She
sold another block and netted about $17,000. She had more
information than most people, and it is possible the government
could have charged her for insider trading if she truly believed
Enron was going to become bankrupt.
Watkins alleges that her computer's hard drive was confiscated and she was moved from her plush executive office suite on the top floors of the Houston headquarters cower to a lower-level plain office with a metal desk. That desk was no longer filled with the high-level projects that had once taken her all over the world on Enron business. Instead, now a vice president in name only, she claimed she faced meaningless "make work" projects. In February 2002, she testified before Congress about Enron's partnerships and resigned from Enron in November. Although Watkins claims to be a whistle-blower, most of her statements were made after Enron filed for bankruptcy and was a financial disaster. In addition, there is no factual evidence that her earlier claims and concerns had any merit.
THE CHIEF FINANCIAL OFFICER
CFO Fastow was indicted in October 2002 by the U.S. Department of
Justice on ninety-eight federal counts for his alleged efforts to
inflate Enron's profits. These charges included fraud, money
laundering, conspiracy, and one count of obstruction of justice.
Fastow pied guilt} to two counts of conspiracy, admitting to
orchestrating a myriad of schemes to hide Enron debt and inflate
profits while enriching himself with mill1ons. He surrendered
nearly $30 million in cash and property and agreed to serve up to
ten years in prison once prosecutors no longer needed his
cooperation. He was a key government witness against Lay and
Skilling. His wife, Lea Fastow, former assistant treasurer, quit
Enron in 1997, first pled guilty to a felony tax crime, admitting
to helping hide ill-gotten gains from her husband's schemes from
the government. Withdrawing her plea, she then pled guilty to a
newly filed misdemeanor tax crime. In July 2005, she was released
from a yearlong prison sentence, followed by a year of supervised
release.
Federal prosecutors argued that Enron's case is not about exotic
accounting practices but fraud and theft. They contend that Fastow
was the brain behind the partnerships used to conceal some $1
billion Enron debt and that this led directly to Enron's
bankruptcy. The federal complaints allege that Fastow defrauded
Enron and its shareholders through the off-the-balance-sheet
partnerships that made Enron appear to be more profitable than it
actually was. They also allege that Fastow made about $30 million
both by using these partnerships to get kickbacks that were
disguised as gifts from family members who invested in them and by
taking income himself that should have gone to other entities. Lay
maintained that Enron found no visible flaws in Fastow's ethical
background before hiring him as CFO and was taken by surprise when
Fastow's personal gains from the off-balance-sheet partnerships
were discovered. Lay believed that Fastow's manipulations of the
off-balance-sheet partnerships were a key factor in the Enron
disaster.
Fastow alleges that he was hired to arrange the off-balance-sheet financing and that Enron's board of directors, chairman, and CEO directed and praised his work. He also claims that both lawyers and accountants reviewed his work and approved what was being done and that "at no time did he do anything he believed was a crime." Skilling, chief operating officer (COO) from 1997 to 2000 before becoming CEO, reportedly championed Fastow's rise at Enron and supported his efforts to keep up Enron's stock prices.
The case against Fastow was largely based on
information provided by the managing director, Michael Kopper, a
key player in the establishment and operation of several of the
off-the-balance-sheet partnerships. Kopper, a chief aide to Fastow,
pled guilty to money laundering and wire fraud. He agreed to serve
ten years in prison and to surrender some $12 million that he
earned from his dealings with the partnerships. Others charged in
the Enron affair were Timothy Belden, Enron's former top energy
trader, who pled guilty to one count of conspiring to commit wire
fraud and three British bankers-David Bermingham, Giles Darby, and
Gary Mulgrew-who were indicted in Houston on wire-fraud charges
related to a deal at Enron. They used secret investments to take
$7.3 million in income that belonged to their employer, according
to the Justice Department. The three, employed by the finance group
Greenwich National Westminster Bank, were arrested in 2004, faced
extradition, and pled innocent.
THE CHIEF EXECUTIVE OFFICER
Former CEO Skilling is widely seen as Boron's mastermind. He was so
sure that he had committed no crime that he waived his right to
self-incrimination and testified before Congress that "I was not
aware of any inappropriate financial arrangements." However,
Jeffrey McMahon, who took over as Boron's president and COO in
February 2002, told a congressional subcommittee that he had
informed Skilling about the company's off-the-balance-sheet
partnerships in March 2000, when he was Enron's treasurer. McMahon
said that Skilling had told him "he would remedy the
situation."
Calling the Enron collapse a "run on the bank" and a "liquidity crisis," Skilling said that he did not understand how Enron went from where it was to bankruptcy so quickly. He also said that the off-the-balance-sheet partnerships were Fastow's creation. Skilling is also reported to have sold 39 percent of his Enron holdings before the company disclosed its financial troubles.
THE CHAIRMAN
Lay became chairman and CEO of the company that was to become Enron
in February 1986. A decade later, Lay promoted Skilling to
president and COO and then, as expected, stepped down as CEO in
February 2001, to make way for Skilling. Lay remained as chairman
of the board. When Skilling resigned in August 2001, Lay resumed
the role of CEO.
Lay, who held a doctorate in economics from the University of Houston, contended that he knew little of what was going on even though he had participated in the board meetings that allowed the off-the-balance-sheet partnerships to be created. He said he believed the transactions were legal because attorneys and accountants approved them. In the late summer of 2001, he was reassuring employees and investors that all was well at Enron, based on strong wholesale sales and physical volume being delivered through the Enron marketing channel. Although cash flow does not always follow sales, there was every reason to believe that Enron was still a company with much potential. On February 12, 2002, on the advice of his attorney, Lay told the Senate Commerce Committee that he was invoking his Fifth Amendment rights not to answer questions that could be incriminating.
Prosecutors looked into why Lay began selling about
$80 million of his own stock beginning in late 2000, even while he
encouraged employees to buy more shares of the company. It appears
that Lay drew down his $4 million Enron credit line repeatedly and
then repaid the company with Enron shares. These transactions,
unlike usual stock sales, do not have to be reported to investors.
Lay said that he sold the stock because of margin calls on loans
that he had secured with Enron stock and that he had no other
source of liquidity.
VINSON & ELKINS
Enron was Houston law firm Vinson & Elkins' t0p client,
accounting for about 7 percent of its $450 million revenue.
Enron's general counsel and a number of members of Enron's legal
department came from Vinson & Elkins. Vinson & Elkins seems
to have dismissed Watkins's allegations of accounting fraud after
making some inquiries, but this does not appear to leave it open to
civil or criminal liability. Of greater concern are allegations
that Vinson & Elkins helped structure some of Enron's special
purpose partnerships. Watkins, in her letter to CEO Lay, indicated
that the law firm had written opinion letters supporting the
legality of the deals. In fact, Enron could not have done many of
the transactions without such opinion letters. Although the law
firm denies that it has done anything wrong, legal experts say the
key question is whether or not Vinson & Elkins approved deals
that it knew were fraudulent.
Documents reviewed by Business Week indicate that their experts felt that Vinson & Elkins had concerns about the legitimacy of Enron's business practices. So far, the law firm has yet to pay any damages nor have any of its lawyers faced professional misconduct charges by the Texas bar. Enron's bankruptcy trustee is attempting to settle with Vinson & Elkins for $30 million. The Securities and Exchange Commission (SEC) continues to investigate the advice provided to Enron by the firm. In addition, there is an attempt to hold Vinson & Elkins liable for the $40 billion in investor losses resulting from the Enron collapse.
MERRILLLYNCH
The prestigious brokerage and investment banking firm of Merrill
Lynch faced scrutiny by federal prosecutors and the SEC for its
role in Enron's 1999 sale of Nigerian barges. Merrill Lynch
allegedly bought the barges for $28 million, of which Enron
financed $21 million through Fastow's oral assurance that Enron
would buy Merrill Lynch's investment out in six months with a 15
percent guaranteed rate of return. Merrill Lynch went ahead with
the deal despite an internal Merrill Lynch document that suggested
that the transaction might not be appropriate. Merrill Lynch denies
that the transaction was a sham and said that it never knowingly
helped Enron to falsify its financial reports.
The barge deal was not among the financial blunders
that pushed Enron into bankruptcy in 2001. However, prosecutors
claimed that it showed Enron was willing to employ suspect
financial practices to meet lofty earnings targets. Four former
Merrill Lynch executives and two former mid-level Enron executives
were charged with conspiracy and fraud related to the transaction.
The defense attorneys disputed the government's claims. Enforcement
Director Stephen Cutler said,
Even if you don't have direct responsibility for a company's
financial statements, you cannot turn a blind eye when you have
reason to know what you are doing will help make those statements
false and misleading. At the end of 1999, Merrill Lynch and the
executives we are suing today did exactly that: They helped Enron
defraud its investors through two deals that were created with one
purpose in mind-to make Enron's financial statements look better
than they actually were.
ARTHUR ANDERSEN LLP
In its role as Enron's auditor, Arthur Andersen was responsible for
ensuring the accuracy of Enron's financial statements and internal
bookkeeping. Andersen's reports were used by potential investors to
judge Enron's financial soundness and future potential before they
decided whether to invest and by current investors to decide if
their funds should remain invested there. These investors would
expect that Andersen's certifications of accuracy and application
of proper accounting procedures were independent and without any
conflict of interest. If Andersen's reports were in error,
investors could be seriously misled. However, Andersen's
independence has been called into question. The accounting firm was
a major business partner of Enron, with more than one hundred
employees dedicated to its account, and it sold about $50 million a
year in consulting services to Enron. Some Andersen executives
even accepted jobs with the energy trader.
Andersen was found guilty obstruction of justice in March 2002 for destroying Enron related auditing documents during an SEC investigation of Enron. As a result, Andersen has gone out of business. The U.S. Supreme Court overturned the obstruction-of-justice decision, but Andersen had closed its doors.
It is still not clear why Andersen auditors failed to
ask Enron to better explain its complex partnerships before
certifying Enron's financial statements. Some observers believe
that the large consulting fees received from Enron unduly
influenced Andersen. However, an Andersen spokesperson said that
the firm had looked hard at all available information from Enron at
the time. But shortly after she spoke to Enron CEO Lay, Watkins had
taken her concerns to an Andersen audit partner, who reportedly
conveyed her questions to senior Andersen management responsible
for the Enron account. It is not clear what action, if any,
Andersen took.
THE BREAKUP OF ENRON'S ASSETS
Enron's demise caused tens of billions of dollars of investor
losses, triggered a collapse of electricity-trading markets, and
ushered in an era of accounting scandals that precipitated a
global loss of confidence in corporate integrity. Now companies
must defend legitimate but complicated financing arrangements, even
legitimate financing tools tainted by association with Enron. On a
more personal level, thousands of former Enron employees struggle
to find jobs, while many retirees have been forced to return to
work in a bleak job market because their Enron-heavy retirement
portfolios were wiped out. One senior Enron executive committed
suicide.
In July 2003, Enron announced its intention to
restructure and a plan to pay off its creditors. Pending creditor
and court approval of the plan, most creditors would receive
between 14.4 cents and 18.3 cents for each dollar they were
owed-more than most expected. Under the plan, creditors would
receive about two-thirds of the amount in cash and the rest in
equity in three new companies, none of which would carry the
tainted Enron name. The three companies were CrossCountry Energy
Corporation, Prisma Energy International Inc., and Portland General
Electric.
CrossCountry Energy would retain Enron's interests in three North
American natural gas pipelines. CrossCounrry Energy, formed from
Enron's domestic gas pipeline assets, was immediately placed on the
market for creditor compensation. On September 1, 2004, Enron
announced an agreement to sell CrossCountry Energy to CCE Holdings
LLC (a joint venture between Southern Union Company and a unit of
General Electric) for $2.45 billion. The money would be used for
debt repayment and represented a substantial increase over the
previous offer made by Nu Coastal LLC earlier in 2004.
Prisma Energy International would take over Enron's
nineteen international power and pipeline holdings. Prism a Energy
International, formed out of Enron's remaining overseas assets,
emerged from bankruptcy as a main-line descendant of Enron through
a stock offering to Enron creditors. Currently, many of Prisma's
assets remain under direct Enron ownership with Prisma operating in
a management capacity.
The third company, Portland General Electric (PGE), was founded in
1889 and ranks as Oregon's largest utility. PGE was acquired by
Enron during the 1990s and emerged from bankruptcy as an
independent company through a private stock offering to Enron
creditors.
All remaining assets not related to CrossCountry, Prisma, or PGE
were liquidated. As of 2006, CrossCountry was under CCE Holdings
ownership, while the PGE and Prisma deals remained to be
consummated. Enron emerged from Chapter 11 bankruptcy protection
in November 2004 but will likely be wound down once the recovery
plan is carried out. Enron's remaining assets are grouped under two
main subsidiary companies: Prisma Energy International and PGE,
both of which will likely be spun off.
On November 14, 2004, all of Enron's outstanding common stock and
preferred stock was canceled. Each person who was the record holder
of Enron Corporation stock on that day was allocated an
uncertificated, nontransferable interest in one of two trusts that
held new shares of Enron Corporation. In the very unlikely event
that the value of Enron's assets exceeds the amount of its allowed
claims, distributions would be made to the holders of these trust
interests in the same order of priority of the stock that they
previously held.
According to the Enron website in 2006, it was in the midst of
liquidating its remaining operations and distributing its assets
to its creditors. Even with the conviction of Enron executives, the
justice system will not reform the way that corporate America runs
businesses. Many businesspeople see this as an event outside their
lives and businesses, very much like passing the traffic accident
and thinking it can never happen to them. To prevent future Enron
type failures, the corporate culture, corporate governance, and
reward systems will have to change in many organizations. In most
cases, a CEO acting alone cannot "sink the ship," and many of the
structural, cultural, and corporate governance conditions that
caused the collapse of Enron haven't been removed from corporate
America.
THE LAY AND SKILLING TRIAL
On May 25, 2006, a Houston jury found Kenneth Lay and Jeffrey
Skilling guilty on all counts of conspiring to hide the company's
financial condition in 2000 and 2001. During the case, the judge
dealt a blow to the two defendants when he told the jury that they
could find the defendants guilty of consciously avoiding knowing
about wrongdoing at the company. Many former Enron employees
refused to testify because they were not guaranteed that their
testimony would not be used against them at future trials
convicting them. Many questions about the accounting fraud remained
after the trial. The verdict was a total victory for federal
prosecutors who had spent four years building a criminal case
against the two men who had played a key role in building Enron as
a role model for the energy industry. Sean M. Berkowitz, director
of the Justice Department's Enron Task Force, said "You can't lie
to shareholders, you can't put yourself in front of your employees'
interests, and no matter how rich and powerful you arc you have to
play by the rules." The verdict was a blow to Lay and Skilling who
testified that "Enron was a fundamentally sound company brought low
in a market panic spurred by short sellers and negative media
reports." On the other hand, the government maintained that Enron
used deceptive accounting and bogus claims of the growth potential
of new business units.
The jury found Lay, 64 years old, guilty of six counts of
conspiracy and fraud. Skilling, 52 years old, was convicted on
eighteen counts of conspiracy and securities fraud but acquitted on
nine out of ten counts of illegal insider trading. On the way out
of the courtroom, Lay said he was "shocked" by the verdict. "I
firmly believe I am innocent of the charges against me as I've
said from day one." Then juror Wendy Vaughan said, "I felt it was
their duty to know what was going on." Outside the courthouse,
prosecutors said the trial should send a message to executives who
manipulate their companies' earnings.
Many people don't foci much sympathy for Skilling and Lay because
so many people lost a lot of money, but there is an alternative
viewpoint. A number of law professors and lawyers have concerns
about the Enron Task Force's prosecution of Lay and Skilling,
accusing the government of "criminalizing corporate agency costs."
In other words, the government is accused of misusing criminal laws
to punish questionable business transactions and bad management
decisions. In a civilized society, do we imprison people for the
rest of their lives because they may have made some bad business
decisions?
No doubt, this was a very complex case, and even the most hard-core
antibusiness types are queasy with the conclusion of this tragedy.
There was not conclusive evidence that there was intent to defraud
investors, although investor losses were massive. The important
question is, was there complacency at all managerial levels about
rule bending among some employees or was there massive corruption
at all levels? One of the key prosecution elements was complacent
negligence, that Skilling and Lay just turned a blind eye.
The truth is that the jury would have had to understand the entire
corporate culture as well as many systemic embedded business
decisions at Enron to know for sure that Lay and Skilling were
guilty of their charges. Bad business decisions were made, but
there is uncertainty as to the true involvement and intent of many
of the CEO's decisions. Society and the courts tend to simplify
events and blame all that goes wrong on just a few individuals. At
this stage of understanding, there are few people who understand
how an organizational culture can evolve with complacency and
constant reinforcement from coworkers driving bad decisions. In
our society, we are taught that the opinion of trusted
professionals such as accountants and lawyers can be followed in
business decisions. In this case, the accounting firm Arthur
Andersen, internal and external attorneys, as well as the board of
directors approved the key decisions at Enron.
Lay said he never intended to harm anyone; in fact, he came back as
CEO after Skilling stepped down and at the insistence of the Enron
board of directors to provide leadership and attempt to save the
company. A decision that he and his wife both regretted. As CEO,
Lay was responsible for thirty thousand employees operating in
thirty countries. He managed an exceptional group of employees, as
eluded to in the film Enron: The Smartest Men in the Room. Great
leaders are often given accolades for their accomplishments, and
Lay was no exception in the "heyday" of Enron. But most will
acknowledge that the heart of their success, or in this case,
ultimate failure, is the people with whom they surround themselves
and place in positions of authority. The people who Lay trusted,
such as Fas tow (convicted former CFO), were key operatives in the
day-to-day decision making at Enron. It was a complex maze of
events that caused the failure of Enron.
On July 5, 2006, Ken Lay died of a heart attack in Aspen, Colorado.
He was awaiting sentencing and still maintaining his innocence. Lay
had endured a five-month trial but was working hard to develop an
appeal of his conviction. He did not feel that it was possible to
get a fair trial in Houston and indicated that the jury had not
even read his indictment. He thought he was convicted because as
CEO he was charged with responsibility for what happened at Enron,
even if he was unaware of wrongdoing. The heart of the case against
Lay was that he allegedly lied about the financial condition at
Enron. Federal courts, including the Fifth Court of Appeals, hold
that a defendant's death erases a conviction. Lay stated that he
wanted to be of use to society and would continue to do that in any
way possible. In the five weeks before his death, he read several
drafts of this case and tried to provide insights about what
happened at Enron. He wanted to share his knowledge and perspective
about Enron with future business leaders.
The company has touched the sky with its working and had managed to earn a lot of profits through its business. But it was actually what it was presented in front of the stakeholders. there were a number of frauds beneath the working of the company and the people who were seated at the top management. They were all included in one or the other frauds which represented a false status of the company keeping the stakeholders in the dark. A misrepresented balance sheet of the company made people invest their hard-earned money in the shares of the company which was totally lost as the company collapsed. The investors had invested on the basis of the performance of the company which a mere illusion that was presented in front of the stakeholders. The stakeholders were cheated through this event and they have to face a huge loss due to bankruptcy of the company.
The situation could be dealt with like capitalizing all the money which was earned by the top management. They must repay the money which they have earned by doing fraud in the company. Their properties must be auctioned so that the stakeholders can get some money that they have lost in the fraud if not all the money could be realized. This will also set example for others and the stakeholders losses can be minimized.
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