This document summarizes a case study on the collapse of Enron Corporation. It provides background on Enron's rapid growth and success in the late 1990s as an energy company, but also describes how much of its reported profits were fictional due to fraudulent accounting practices. The summary outlines some of the major ethical issues involved, including accounting fraud, misleading financial disclosures, excessive executive compensation tied to stock performance, lack of oversight of risky derivatives trading, and 401k retirement plans that were heavily invested in Enron stock. The downfall of Enron in 2001 as the largest corporate bankruptcy at the time had wide-ranging impacts and led to new regulations and legislation to reform corporate accounting and governance.

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Case Study on Enron’s Fall
Course No : MBA 513
Course Title : (Business Ethics)

2. Submitted to,
Muhammad Shariat Ullah, PhD
East West University
Submitted by,
Runu Sarker
ID No: 2012-2-95-073
East West University
Date: 27th
June 2014
2

3. SUMMERY OF THE CASE STUDY
Enron was famous throughout the business world and was known as an
innovator, technology powerhouse, and a corporation with no fear. The
sudden fall of Enron in the end of 2001 shattered not just the business world
but also the lives of their employees and the people who believed that their
soar to greatness was genuine. Their collapse was followed by a series of
revelations on how they manipulated their success.
Enron shocked the world from being “America’s most innovative company”
to America's biggest corporate bankruptcy at its time. At its peak, Enron was
America's seventh largest corporation. Enron gave the illusion that it was a
steady company with good revenue but that was not the case, a large part of
Enron’s profits were made of paper. This was made possible by masterfully
designed accounting and morally questionable acts by traders and
executives. Deep debt and surfacing information about hiding losses gave
the company big problems and in the late 2001 Enron declared bankruptcy
under Chapter 11 of the United States Bankruptcy Code.
The Enron scandal, revealed in October 2001, eventually led to the
bankruptcy of the Enron Corporation, an American energy company based
in Houston, Texas, and the de facto dissolution of Arthur Andersen, which
was one of the five largest audit and accountancy partnerships in the world.
In addition to being the largest bankruptcy reorganization in American history
at that time, Enron was attributed as the biggest audit failure.
Enron was formed in 1985 by Kenneth Lay after merging Houston Natural
Gas and InterNorth. Several years later, when Jeffrey Skilling was hired, he
developed a staff of executives that, by the use of accounting loopholes,
special purpose entities, and poor financial reporting, were able to hide
billions of dollars in debt from failed deals and projects. Chief Financial
Officer Andrew Fastow and other executives not only misled Enron's board
of directors and audit committee on high-risk accounting practices, but also
pressured Andersen to ignore the issues.
Enron shareholders filed a $40 billion lawsuit after the company's stock
price, which achieved a high of US$90.75 per share in mid-2000, plummeted
to less than $1 by the end of November 2001. The U.S. Securities and
Exchange Commission (SEC) began an investigation, and rival Houston
3

4. competitor Dynegy offered to purchase the company at a very low price. The
deal failed, and on December 2, 2001, Enron filed for bankruptcy under
Chapter 11 of the United States Bankruptcy Code. Enron's $63.4 billion in
assets made it the largest corporate bankruptcy in U.S. history until
WorldCom's bankruptcy the next year.
Many executives at Enron were indicted for a variety of charges and were
later sentenced to prison. Enron's auditor, Arthur Andersen, was found guilty
in a United States District Court, but by the time the ruling was overturned at
the U.S. Supreme Court, the company had lost the majority of its customers
and had closed. Employees and shareholders received limited returns in
lawsuits, despite losing billions in pensions and stock prices. As a
consequence of the scandal, new regulations and legislation were enacted
to expand the accuracy of financial reporting for public companies. One
piece of legislation, the Sarbanes-Oxley Act, increased penalties for
destroying, altering, or fabricating records in federal investigations or for
attempting to defraud shareholders. The act also increased the
accountability of auditing firms to remain unbiased and independent of their
clients.
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5. Question 1 :
What are the systemic, corporate and individual ethical
issues rise by this case?
Answer :
In the case of Slvery and the choolate industry contains sytemetic, corporate
and individual ethical issues in many different ways. Looking at the
economical repercussions, it would not be logical to do business with these
countries considering that close to half of the worlds chocolate is made from
cocoa beans that are grown in the Ivory Coast and Ghana. If we refused to
do business with these countries the ost of these goods would be un-
affordable to consumers. In a political aspect, we tend to be the leaders the
moment we stop doing business with these individuals many other countries
will follow along or vis versa; those countries who refuse to do to stop doing
business with them might then stop doing business with us. The last
systematic issue raised is legal. As stated in the article slavery on the farms
is in illegal in the Ivory Coast. Whether it is or how well the laws are enforced
is for the most part out of our control.
1. The Systematic Issues:
It is common knowledge that Enron is arguably to biggest corporate collapse
in recent history. It is not common knowledge, however, what exactly
happened within Enron that lead to its demise. Kenneth Lay founded Enron
in 1985 when he configured the merging of two natural gas companies.
Enron continued to grow by acquisition, leading to large amounts of debt.
Lay hired Jeffery Skilling in 1989 to head the company’s finance department.
The company, it was revealed, had made about a dozen "partnerships" with
companies it had created, and it used those partnerships to hide huge debts
and heavy losses on its trading businesses. At the same time, Arthur
Andersen, the company that audited Enron's books, at best neglected to
recognize the company's problems. At worst, investigators now say, the
auditor was complicit in perpetrating one of the biggest frauds in corporate
history.
Auditing Issues
Federal securities law requires that the accounting statements of publicly
traded corporations be certified by an independent auditor. Enron’s outside
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6. audits have received much attention. While external audits do not prevent
corporations from making financial mistakes, let alone bankruptcy, problems
with recent Enron audits may have contributed to both the rapid rise and the
sharp fall in its stock price. Outside investors, including financial institutions,
may have been misled about the corporation’s net income (which was
subsequently restated) and contingent liabilities (which were far larger than
generally known). The auditor, Arthur Andersen, has admitted some
mistakes. Andersen fired the partner in charge of Enron audits on January
15, 2002, and Enron dismissed Andersen on January 17. One issue is
whether Andersen’s extensive consulting work for Enron may have
compromised its judgment in determining the nature, timing, and extent of
audit procedures and in asking that revisions be made to financial
statements, which are the responsibility of Enron’s management. Questions
have also been asked about Andersen destroying documents and e-mails
related to its audits. Oversight of auditors has primarily rested with the
American Institute of Certified Public Accountants (a nongovernmental trade
group) and state boards of accountancy. On January 17, 2002, the
Chairman of the Securities and Exchange Commission (SEC) proposed a
new oversight board that would be responsible for disciplinary actions.
Accounting Issues
The Enron controversy involves several accounting issues. One concerns
the rules governing whether the financial statements of special purpose
entities (SPEs) established by a corporation should be consolidated with the
corporation’s financial statements; for certain SPE partnerships at issue,
consolidation is not required if among other things an independent third party
invests as little as 3% of the capital, a threshold some consider too low. A
second issue concerns the latitude allowed in valuing derivatives, particularly
nonexchange traded energy contracts. Third, there are calls for improved
disclosure, either in notes to financial statements or a management
discussion and analysis, especially for financial arrangements involving
contingent liabilities. Accounting standards for corporations are set by the
Financial Accounting Standards Board (FASB), a nongovernmental entity,
though there are also SEC requirements. (The SEC has statutory authority
to set accounting standards for firms that sell securities to the public.)
Pension Issues
Like many companies, Enron sponsors a retirement plan – a “401(k)” – for
its employees to which they can contribute a portion of their pay on a tax-
deferred basis. As of December 31, 2000, 62% of the assets held in the
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7. corporation’s 401(k) retirement plan consisted of Enron stock. Many
individual Enron employees held even larger percentages of Enron stock in
their 401(k) accounts. Shares of Enron, which in January 2001 traded for
more than $80/share, were worth less than 70 cents in January 2002.
Consequently, the company’s bankruptcy has substantially reduced the
value of its employees’ retirement accounts. The losses suffered by
participants in the Enron Corporation’s 401(k) plan have prompted questions
about the laws and regulations that govern these plans. Should there be a
limit on the amount of employer stock that a 401(k) plan can hold? Should
companies be allowed to restrict the sale of stock that they contribute to the
plans? Should the guarantees that the Pension Benefit Guarantee
Corporation extends to traditional “defined benefit” plans also apply to
401(k)’s?
Securities Analyst Issues
Securities analysts employed by investment banks provide research and
make “buy,” “sell,” or “hold” recommendations for the use of their sales staffs
and their investor clients. These recommendations are widely circulated and
are relied upon by many investors throughout the markets. Analyst support
was crucial to Enron because it required constant infusions of funding from
the financial markets. On November 29, 2001, after Enron’s stock had fallen
99% from its high, and after rating agencies had downgraded its debt to
“junk bond”status, only two of 11 major firm analysts rated its stock a “sell.”
This performance added to concerns that were raised in 2000 in the wake of
the “dot.com” stock crash. Is analyst objectivity compromised by pressure to
avoid alienating lucrative investment banking clients? Are regulations
needed to require disclosure of analysts’ personal holdings or their
employers’ dealings with the firms they cover, or to prohibit the linking of
analyst pay to investment banking profits? Should analysts’ performance
and qualifications be monitored by the SEC or by a self-regulatory
organization such as the National Association of Securities Dealers (NASD)?
Derivatives Issues
The core of Enron’s business appears to have been dealing in derivative
contracts based on the prices of oil, gas, electricity and other variables. For
example, Enron sold long-term contracts to sell energy at fixed prices. These
contracts allow the buyers to avoid, or hedge, the risks that increases (or
drops) in energy prices posed to their businesses. Since the markets in
which Enron traded are largely unregulated, with no reporting requirements,
little information is available about the extent or profitability of Enron’s
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8. derivatives activities. Did Enron earn money from dealer commissions and
spreads, or was it actively speculating on future price trends? Speculative
losses in derivatives, perhaps masked by “creative” accounting, could have
contributed to the firm’s downfall. On the other hand, the trading operations
may have been profitable and troublefree, and Enron’s financial difficulties
the result of other unrelated operations. Enron’s collapse raises the issue of
supervision of unregulated derivatives markets. Would it be useful if
regulators had more information about the portfolios and risk exposures of
major dealers in derivatives? Although Enron’s bankruptcy appears to have
had little impact on energy supplies and prices, a similar dealer failure in the
future might damage the dealer’s trading partners and its lenders, and might
set off widespread disruptions in financial and/or real commodity markets.
2. The Corporate Issues :
Healy and Palepu write that a well-functioning capital market "creates
appropriate linkages of information, incentives, and governance between
managers and investors. This process is supposed to be carried out through
a network of intermediaries that include assurance professionals such as
external auditors; and internal governance agents such as corporate
boards." On paper, Enron had a model board of directors comprising
predominantly of outsiders with significant ownership stakes and a talented
audit committee. In its 2000 review of best corporate boards, Chief
Executive included Enron among its five best boards. Even with its complex
corporate governance and network of intermediaries, Enron was still able to
"attract large sums of capital to fund a questionable business model, conceal
its true performance through a series of accounting and financing
maneuvers, and hype its stock to unsustainable levels."
Executive compensation
Although Enron's compensation and performance management system was
designed to retain and reward its most valuable employees, the system
contributed to a dysfunctional corporate culture that became obsessed with
short-term earnings to maximize bonuses. Employees constantly tried to
start deals, often disregarding the quality of cash flow or profits, in order to
get a better rating for their performance review. Additionally, accounting
results were recorded as soon as possible to keep up with the company's
stock price. This practice helped ensure deal-makers and executives
received large cash bonuses and stock options.
8

9. Risk management
Before its scandal, Enron was lauded for its sophisticated financial risk
management tools. Risk management was crucial to Enron not only because
of its regulatory environment, but also because of its business plan. Enron
established long-term fixed commitments which needed to be hedged to
prepare for the invariable fluctuation of future energy prices. Enron's
bankruptcy downfall was attributed to its reckless use of derivatives and
special purpose entities. By hedging its risks with special purpose entities
which it owned, Enron retained the risks associated with the transactions.
This arrangement had Enron implementing hedges with itself.
Ethical and political analyses
Commentators attributed the mismanagement behind Enron’s fall to a
variety of ethical and political-economic causes. Ethical explanations
centered on executive greed and hubris, a lack of corporate social
responsibility, situation ethics, and get-it-done business pragmatism.
Political-economic explanations cited post-1970s deregulation, and
inadequate staff and funding for regulatory oversight. A more libertarian
analysis maintained that Enron’s collapse resulted from the company’s
reliance on political lobbying, rent-seeking, and the gaming of regulations.
3. The Individual Issues :
On the surface, the motives and attitudes behind decisions and events
leading to Enron’s eventual downfall appear simple enough: individual and
collective greed born in an atmosphere of market euphoria and corporate
arrogance.
Arthur Andersen
Arthur Andersen was charged with and found guilty of obstruction of justice
for shredding the thousands of documents and deleting e-mails and
company files that tied the firm to its audit of Enron. Although only a small
number of Arthur Andersen's employees were involved with the scandal, the
firm was effectively put out of business; the SEC is not allowed to accept
audits from convicted felons. The company surrendered its CPA license on
August 31, 2002, and 85,000 employees lost their jobs. The conviction was
later overturned by the U.S. Supreme Court due to the jury not being
properly instructed on the charge against Andersen.[150]
The Supreme Court
9

10. ruling theoretically left Andersen free to resume operations. However, the
damage to the Andersen name has been so great that it has not returned as
a viable business even on a limited scale.
Employees and shareholders
Enron's headquarters in Downtown Houston was leased from a consortium
of banks who had bought the property for $285 million in the 1990s. It was
sold for $55.5 million, just before Enron moved out in 2004. Enron's
shareholders lost $74 billion in the four years before the company's
bankruptcy ($40 to $45 billion was attributed to fraud). As Enron had nearly
$67 billion that it owed creditors, employees and shareholders received
limited, if any, assistance aside from severance from Enron. To pay its
creditors, Enron held auctions to sell assets including art, photographs, logo
signs, and its pipelines.
Capitalism at Work
In the latter part of the 1990s, companies such as Dynegy, Duke Energy, El
Paso and Williams began following Enron’s lead. Enron’s competitive
advantage, as well as its huge profit margins, had begun to erode by the end
of 2000. Each new market entrant’s successes squeezed Enron’s profit
margins further. It ran with increasing leverage, thus becoming more like a
hedge fund than a trading company. Meanwhile, energy prices began to fall
in the first quarter of 2001 and the world economy headed into a recession,
thus dampening energy market volatility and reducing the opportunity for the
large, rapid trading gains that had formerly made Enron so profitable. Deals,
especially in the finance division, were done at a rapid pace without much
regard to whether they aligned with the strategic goals of the company or
whether they complied with the company’s risk management policies. As
one knowledgeable Enron employee put it: “Good deal vs. bad deal? Didn’t
matter. If it had a positive net present value (NPV) it could get done.
Sometimes positive NPV didn’t even matter in the name of strategic
significance.” Enron’s foundations were developing cracks and Skilling’s
house of paper built on the stilts of trust had begun to crumble.
Related Parties & Complex Special Purpose Entities
In order to satisfy Moody’s and Standard & Poor’s credit rating agencies,
Enron had to make sure the company’s leverage ratios were within
acceptable ranges. Fastow continually lobbied the ratings agencies to raise
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11. Enron’s credit rating, apparently to no avail. That notwithstanding, there
were other ways to lower the company’s debt ratio. Reducing hard assets
while earning increasing paper profits served to increase Enron’s return on
assets (ROA) and reduce its debt-to-total-assets ratio, making the company
more attractive to credit rating agencies and investors.
Enron, like many other companies, used “special purpose entities” (SPEs) to
access capital or hedge risk. By using SPEs such as limited partnerships
with outside parties, a company is permitted to increase leverage and ROA
without having to report debt on its balance sheet. The company contributes
hard assets and related debt to an SPE in exchange for an interest. The
SPE then borrows large sums of money from a financial institution to
purchase assets or conduct other business without the debt or assets
showing up on the company’s financial statements. The company can also
sell leveraged assets to the SPE and book a profit. To avoid classification of
the SPE as a subsidiary (thereby forcing the entity to include the SPE’s
financial position and results of operations in its financial statements), FASB
guidelines require that only 3% of the SPE be owned by an outside investor.
The Human Factor
The Enron story has produced many victims, the most tragic of which is a
former vice-chairman of the company who committed suicide, apparently in
connection with his role in the scandal. Another 4,500 individuals have seen
their careers ended abruptly by the reckless acts of a few. Enron’s core
values of respect, integrity, communication and excellence stand in satirical
contrast to allegations now being made public. Personally, I had referred
several of our best and brightest accounting, finance and MBA graduates to
Enron, hoping they could gain valuable experience from seeing things done
right. These included a very bright training consultant who had lost her job in
2000 with a Houston consulting firm as a result of a reduction in force. She
has lost her second job in 18 months through no fault of her own. Other
former students still hanging on at Enron face an uncertain future as the
company fights for survival.
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12. Question 2
If the value of Enron’s stock had not fallen, the special
purpose entities perhaps could have continued to operate
indefinitely. Suppose that Enron’s stock did not fall, and
suppose that its accounting adhered to the letter, if not the
spirit, of GAAP rules. In that case, in your view, was there
anything wrong with what Enron did?
Answer :
Enron's complex financial statements were confusing to shareholders and
analysts. In addition, its complex business model and unethical practices
required that the company use accounting limitations to misrepresent
earnings and modify the balance sheet to indicate favorable performance.
The combination of these issues later resulted in the bankruptcy of the
company, and the majority of them were perpetuated by the indirect
knowledge or direct actions of Lay, Jeffrey Skilling, Andrew Fastow, and
other executives. Lay served as the chairman of the company in its last few
years, and approved of the actions of Skilling and Fastow although he did
not always inquire about the details. Skilling constantly focused on meeting
Wall Street expectations, advocated the use of mark-to-market accounting
(accounting based on market value, which was then inflated) and pressured
Enron executives to find new ways to hide its debt. Fastow and other
executives "...created off-balance-sheet vehicles, complex financing
structures, and deals so bewildering that few people could understand
them."
Revenue recognition
Enron and other energy suppliers earned profits by providing services such
as wholesale trading and risk management in addition to building and
maintaining electric power plants, natural gas pipelines, storage, and
processing facilities. When accepting the risk of buying and selling products,
merchants are allowed to report the selling price as revenues and the
products' costs as cost of goods sold. In contrast, an "agent" provides a
service to the customer, but does not take the same risks as merchants for
buying and selling. Service providers, when classified as agents, are able to
report trading and brokerage fees as revenue, although not for the full value
of the transaction.
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13. Although trading companies such as Goldman Sachs and Merrill Lynch used
the conventional "agent model" for reporting revenue (where only the trading
or brokerage fee would be reported as revenue), Enron instead elected to
report the entire value of each of its trades as revenue. This "merchant
model" was considered much more aggressive in the accounting
interpretation than the agent model. Enron's method of reporting inflated
trading revenue was later adopted by other companies in the energy trading
industry in an attempt to stay competitive with the company's large increase
in revenue. Other energy companies such as Duke Energy, Reliant Energy,
and Dynegy joined Enron in the wealthiest 50 of the Fortune 500 mainly due
to their adoption of the same trading revenue accounting as Enron.
Mark-to-market accounting
In Enron's natural gas business, the accounting had been fairly
straightforward: in each time period, the company listed actual costs of
supplying the gas and actual revenues received from selling it. However,
when Skilling joined the company, he demanded that the trading business
adopt mark-to-market accounting, citing that it would represent "... true
economic value." Enron became the first non-financial company to use the
method to account for its complex long-term contracts. Mark-to-market
accounting requires that once a long-term contract was signed, income is
estimated as the present value of net future cash flow. Often, the viability of
these contracts and their related costs were difficult to estimate. Due to the
large discrepancies of attempting to match profits and cash, investors were
typically given false or misleading reports. While using the method, income
from projects could be recorded, although they might not have ever received
the money, and in turn increasing financial earnings on the books. However,
in future years, the profits could not be included, so new and additional
income had to be included from more projects to develop additional growth
to appease investors. As one Enron competitor stated, "If you accelerate
your income, then you have to keep doing more and more deals to show the
same or rising income." Despite potential pitfalls, the U.S. Securities and
Exchange Commission (SEC) approved the accounting method for Enron in
its trading of natural gas futures contracts on January 30, 1992. However,
Enron later expanded its use to other areas in the company to help it meet
Wall Street projections.
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14. Off-the-Balance-Sheet Financing
Enron had a great array of foreign assets such as powerplants and pipelines
that were not doing as well financially as the company hoped and counted
on in its accounting. Enron set up a subsidiary in 1997 called Whitewing.
Whitewing was created to purchase the underperforming Enron assets.
Whitewing was then to sell off the underperforming assets. As a subsidiary
the financial state of Whitewing would show up in the accounts for its parent
company Enron. In 1999 Enron sold off slightly more than half of Whitewing
so it would not be treated as a subsidiary in the accounts of Enron.
Whitewing was created to buy the underperforming assets from Enron at a
generous price, a price higher than it could sell those assets for. So
Whitewing was destined to take losses on its assets acquired from Enron. In
order for Enron to find buyers for the half share in Whitewing it had to agree
to compensate Whitewing for any losses on its sale of the underperforming
assets with shares of Enron stock. A group of investment bankers was found
to acquire the half share of Whitewing.
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15. Question 3
Whi, in your judgment, was morally responsible for the
collapse of Enron?
Answer :
This qestion investigates the weaknesses of Enron’s corporate governance
structures, weaknesses that lead to the collapse of the company.
Overall, poor corporate governance and a dishonest culture that
nurtured serious conflicts of interests and unethical behaviour in Enron
are identified as significant findings in this paper. Enron’s ethics code
was based on respect, integrity, communication, and excellence.
These values were described as follows:
Respect. We treat others as we would like to be treated ourselves.
We do not tolerate abusive or disrespectful treatment. Ruthlessness,
callousness and arrogance don’t belong here.
Integrity. We work with customers and prospects openly, honestly
and sincerely. When we say we will do something, we will do it; when
we say we cannot or will not do something, then we won’t do it.
Communication. We have an obligation to communicate. Here we
take the time to talk with one another . . . and to listen. We believe
that information is meant to move and that information moves people.
Excellence. We are satisfied with nothing less than the very best in
everything we do. We will continue to raise the bar for everyone. The
great fun here will be for all of us to discover just how good we can
really be.
Given this code of conduct and Ken Lay’s professed commitment to
business ethics, how could Enron have collapsed so dramatically, going
from reported revenues of $101 billion in 2000 and approximately $140
billion during the first three quarters of 2001 to declaring bankruptcy in
December 2001? The answer to this question seems to be rooted in a
combination of the failure of top leadership, a corporate culture that
supported unethical behavior, and the complicity of the investment banking
community.
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16. Many factors affected Enron's surge to the top and its sudden fall. In this
report we will discuss and present what we think were the main reasons of
their rise and fall.
Accounting Problems
The conventional wisdom is that it was "innovative" accounting practices and
their consequences that started the tide of losses that brought the energy
giant down. Enron collapsed not so much because it had gotten too big, but
because it was perceived to be much bigger than it really was in the first
place. By decentralizing its operations into numerous subsidiaries and shell
corporations, Enron was able to hide huge derivative losses that would have
halted its growth much sooner if widely understood. Publicly traded
corporations are required to make their financial statements public, but
Enron's finances were an impenetrable maze of carefully crafted imaginary
transactions between itself and its subsidiaries that masked its true financial
state. In other words, losses were held off the book by subsidiary
companies, while assets were stated.
Fallout From Fraud
Taken at its word, this rosy scenario made the company the darling of Wall
Street, and it was able to borrow almost endlessly and expand into e-
commerce and other questionable ventures. Its stock literally soared, which
made employee compensation and pensions in the form of stock options
seem very attractive. But what were already considered accounting practices
on the edge of acceptable standards were eventually revealed to be outright
fraudulent. The disgrace drove so much business away from and created
such liability for accounting firm Arthur Anderson that it was itself forced out
of business. By this time, though, the true value of the company had been
revealed and the stock price collapsed, leaving employees with worthless
options and pension packages. Of course, executives that understood the
real picture sold their shares in advance of the collapsed and waltzed away
with billions.
Management Culture
Of course, the Enron fiasco did not happen by accident. It was facilitated by
a corporate culture that encouraged greed and fraud, as exemplified by the
energy traders who extorted California energy consumers. Rather than focus
on creating real value, management's only goal was in maintaining the
appearance of value, and therefore a rising stock price. This was
16

17. exacerbated by a fiercely competitive corporate culture that rewarded results
at any cost. Some divisions of Enron replaced as much as 15 percent of its
work force annually, leaving employees to scramble for any advantage they
could find to justify their continued employment.
Preferential Treatment
While the internal integrity of the company remained thusly challenged, the
facade was the exact opposite. The company leveraged political connections
in both the Clinton and Bush administrations, as well as on Wall Street, for
preferential treatment and the air of legitimacy that allowed it to perpetrate its
frauds. In this context, the accounting practices widely considered the cause
of the Enron collapse can be seen as just a symptom of a larger
management culture that exemplified the dark side of American capitalism.
Complicity of the Investment Banking Community
According to investigative reporters McLean and Elkind, “One of the most
sordid aspects of the Enron scandal is the complicity of so many highly
regarded Wall Street firms” in enabling Enron’s fraud as well as being
partners to it. Included among these firms were J.P. Morgan, Citigroup, and
Merrill Lynch. This complicity occurred through the use of prepays, which
were basically loans that Enron booked as operating cash flow. Enron
secured new prepays to pay off existing ones and to support rapidly
expanding investments in new businesses.
Epilogue
The Enron Code of Ethics and its foundational values of respect, integrity,
communication, and excellence obviously did little to help create an ethical
environment at the company. The full extent and explanation of Enron’s
ethical collapse is yet to be determined as legal proceedings continue.
Fourteen other Enron employees—many high level—have pled guilty to
various charges; 12 of these are awaiting sentencing, while the other two,
one of whom is Andrew Fastow’s spouse, have received prison sentences of
at least one year. Juries have convicted five individuals of fraud, as well as
Arthur Andersen, the accounting firm hired by Enron that shared
responsibility for the company’s fraudulent accounting statements.
Enron’s Top Leadership
In the aftermath of Enron’s bankruptcy filing, numerous Enron executives
were charged with criminal acts, including fraud, money laundering, and
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18. insider trading. For example, Ben Glisan, Enron’s former treasurer, was
charged with two-dozen counts of money laundering, fraud, and conspiracy.
Glisan pled guilty to one count of conspiracy to commit fraud and received a
prison term, three years of post-prison supervision, and financial penalties of
more than $1 million. During the plea negotiations, Glisan described Enron
as a “house of cards.”
Andrew Fastow, Jeff Skilling, and Ken Lay are among the most notable top-
level executives implicated in the collapse of Enron’s “house of cards.”
Andrew Fastow, former Enron chief financial officer (CFO), faced 98 counts
of money laundering, fraud, and conspiracy in connection with the improper
partnerships he ran, which included a Brazilian power plant project and a
Nigerian power plant project that was aided by Merrill Lynch, an investment
banking firm. Fastow pled guilty to one charge of conspiracy to commit wire
fraud and one charge of conspiracy to commit wire and securities fraud. He
agreed to a prison term of 10 years and the forfeiture of $29.8 million. Jeff
Skilling was indicted on 35 counts of wire fraud, securities fraud, conspiracy,
making false statements on financial reports, and insider trading. Ken Lay
was indicted on 11 criminal counts of fraud and making misleading
statements. Both Skilling and Lay pled not guilty and are awaiting trial.
18