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Home , Enron scandal, InterNorth, Kenneth Lay

“: When People Who Commit Fraud Think It’s Fun”

A Research Paper on the

BMGT289D – Frauds, Scams, & Thefts

Professor Elizabeth Folsom

By:

Andrew Podob

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Life-long citizens, and soon-to-be immigrants alike, see the United States of America as the foremost and leading beacon for opportunity in the world. The ‘American way’, as many have termed it, is the ease with which one can start a business, pull themselves up by their own bootstraps, and live the American dream. Black or white, male or female, young or old, anyone can set out on that noble, wholeheartedly American, journey to prosperity.

With that journey in mind, the narrative of Enron Corporation begins in 1985 with the purchase of the -based company Natural Gas by the -based pipeline company InterNorth (Bryce, 2002, p. 31). Working out the details, the new company would be headquartered in Houston, Texas and fall under the leadership of HNS’s Chief Operating Officer, a man named . The new venture would be called Enron. As CEO of the new Enron, Lay had the power to bring along an inner-circle of executives he knew comfortably. From the beginning though, the new company was not on solid footing. As part of the final merger agreement, InterNorth agreed to absorb HNG’s debt—a whopping $4.3 billion worth. Furthermore, the deal failed to address the five-percent of shares a corporate-raider from Minnesota named Irwin Jacob now owned in the new Enron. He had to be bought out for $357 million—in cash (p. 33).

Even with the shaky and uncertain beginning, Enron got off its feet more quickly than most companies its size. Enron was a publicly traded company, and with the help of in the late 1980s, its shares took off by the mid-1990s. In the year 2000, Enron had over $63.4 billion in on its balance sheets and reported making $7.23 billion from its derivatives business alone (p. 5-6, 241). Everything was not rosy and shiny though. The house of cards, the rollercoaster ride the shareholders and employees would be taken on, and the financial dire straights—all examined later in this paper—took the company stock price from almost one- hundred dollars a share around the year 2000 to less than a dollar a share when it declared Chapter 11 bankruptcy in December 2001. Yes, with shock and awe, that was stated correctly. The closing price on January 25, 2001, at the end of day’s trading was $82.00 (p. 245). On December 3, 2001, eleven month later, the closing price was $0.40 (p. 339).

The aforementioned case paper is not a summary of the Enron scandal, with a long list of facts, figures, and explanations; rather, it is a critical and in-depth analysis of the case, presenting insights into the role different aspects of the fraud played, commentary on responses to the case, and suggestions for future prevention and detective measures. Ultimately, it would be near impossible to discuss, explain, highlight, and outline the entire Enron scandal from A-to-Z in one and concise paper. The two books this author is using to research the topic have more than eight hundred and thirty pages when combined. Therefore, this paper is written under the assumption the reader has at least a brief understanding of the Enron case, a brief understanding of how corporate culture works, access to both books, and a brief understanding of and finance practices at companies. Instead of spending more valuable page real estate narrating Enron’s history and giving a day-by-day account into the companies’ downfall, it is best to analyze the fraud using the many methods taught in the BMTG289D classroom. In the arduous process of analysis, the necessary facts and figures will be supplied and referenced when needed. Podob 3

An important place to examine is Enron’s leadership structure. Ken Lay, who helped found the company, was CEO and simultaneously Chairman of the Board of Directors. , one of Lay’s most important hires, was Enron President. Other executives in the company included the Chief Financial Officer , Vice-Chairman J. Clifford Baxter, Chief Accounting Officer Rick Causey, and CEOs of Enron subsidiaries and Rebecca Mark. There were numerous other characters at play in this case. In addition to the management group, as a publicly traded company, Enron had a Board of Directors with sixteen seats. Members of the management team, including the CEO, CFO, Managing Directors, and Vice Presidents were supposed to run the day-to-day operations of Enron, while reporting to the Board of Directors, whose main role is to protect shareholders and ensure the overall solvency of the company. At Enron, operations did not always flow in that manner. Although it was a publicly traded company, and therefore was not wholly owned by any one executive, Ken Lay was known to walk around as if he owned the place (McLean & Elkind, 2003, p. 90).

In addition, numerous conflicts of interest existed between board members and Enron. Out of sixteen, some were employees, and only three of the board members were independent of Enron. Of those three, all three were friends of Ken Lay (Bryce, 2002, p. 161). Herbert Winokur, a board member since 1985, owned a company that did business with Enron, and lots of it. According to Bryce (2002), “between 1997 ad 1999, [his] company had sold Enron more than $2.1 million worth of goods and services” (p. 164). Another board member, John Urquhart, earned a stipend for sitting on the board, but was also being paid as a so-called Senior Advisor to the Chairman. Between 1991 and 1999 he was paid over $7.4 million in consulting fees (p. 165). Another board member, Joe Foy, was a retired partner from the Houston law firm that did legal work for Enron (p. 167). Foy was not paid an advisor fee the way Urquhart was, but it is still a clear . A fourth board member, Robert Belfer, was asked to be on Enron’s board in the 1980’s after selling his oil and gas company to Enron. He also owned over 8.4 million shares of Enron stock (p. 166). So much for choosing people independent of Enron.

Perhaps the largest conflict of interest was from the only female member of the board. For five years, a woman named Wendy Gramm sat on Enron’s board (p. 166). It is doubtful many know who she is, but more likely many know of her husband—United States Senator , a Republican from Texas, who served from 1985 to 2002. Besides paying Wendy about $1 million during her tenure on Enron’s board, Enron gave over $25,000 to Phil’s political campaign (p. 84). Even more interesting, Senator Gramm chaired the Senate Banking Committee, the committee with jurisdiction over the writing of regulations for companies likes Enron. According to Bryce (2002), “when a commodities regulation bill came up in the Senate that had a direct effect on Enron’s massive derivatives trading business, Phil Gramm sponsored it” (p. 240). When a bill entitled The Commodity Futures Modernization Act of 2000, which gave Enron a so-called ‘exception’ from oil and energy regulation passed the Senate, it went through Gramm’s committee. Adding a cherry to the ice cream sundae, the chair of the federal body that implemented the exception was chaired by none other than Wendy Gramm (p. 240- 241). Things apparently really do go full circle. It’s nice knowing people in high places.

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Addressing the conflicts of interests simultaneously, even omitting some due to sheer volume, many questions are left to ponder. Possible questions include: Which values did board members rely upon to vote during meetings? Their wallets, their jobs, or the shareholders? How can the board operate in honest and fair ways, ensuring shareholders receive the best return on investments, when decisions made directly affected board member wallets, careers, and business dealings? What board member would openly vote against a company that pays their salary, does business with their company, or donates money to their spouse’s political campaign?

The Enron scandal is a unique case study because the company unraveled so quickly. Although brewing for over a decade, the fall of Enron to junk status took less than one year, from seemingly perfect solvency to Chapter 11 bankruptcy. The unraveling began in 2000 when Enron switched the majority of its operations over from a pipeline-based business that transported gas and electricity to a trading business (p. 215). Jeff Skilling and others figured: “derivatives were already common on , but no one was using them in the natural gas business” (McLean & Elkind, 2003, p. 37). Why not get involved in a business nobody else was involved in? There were boatloads of money to be made. But trading derivatives in natural gas, a 24-hour business, was much more complicated than it seemed. After taking large positions in these sophisticated markets, Enron began having cash flow problems, as they could not seem to make enough ‘actual’ money to cover high overhead, high executive compensation, and other costs.

Skilling knew that if Enron’s moneymaking problems went public, as part of its quarterly earnings report, the stock price would tumble. A remedy approached in the name of CFO Andy Fastow. It is understood that Enron created off-the-balance-sheet special purpose entities to conceal heavy losses. By offloading its debt to shell companies that Fastow controlled, Enron did not have to place its trading losses on its own books (p. 155). Through cleaver accounting tricks and a move-around of the numbers between Enron and Fastow-owned special-purpose entities, Enron could conceal losses, essentially hiding them, and look extremely profitable. The shell companies had names like LJM1, LJM2, JEDI, , and Raptors. An example, JEDI, was a blessing for Enron. Because the special purpose entity was not a subsidiary of Enron, but because Enron did invest some money in it, Enron was allowed to book any revenues as profits on its income statement, but did not have to show any of JEDI’s debts (p. 139). Between mark- to-market accounting practices and the manipulation of income statements and balance sheets with Fastow’s special purpose entities, Enron was able to cook its books.

In addition to moneymaking problems Enron had, it also had a spending addiction. Bryce (2002) writes that in 1997, Enron’s gas and power trading group spent about $2 million on flowers alone. Between “flowers, first-class airfare, first-class hotels, limousines, new computers, new Palm Pilots, new desks—Enron employees began to expect the best of everything, all the time” (p. 133). And that was not all. Employee numbers kept rising as well: “at the end of 1996, the company had 7,500 employees. By the end of 1997, it had over 15,000…by the end of 1999, there were 17,900 employees; by the end of 2000, 20,600. And every one of them had to be paid in cash” (p. 134). Revenue at Enron was going down, and expenses were going up. Even so, Skilling and Lay did not intend to slow down spending (p. 136). Enron was hemorrhaging cash, Podob 5 and quickly. By mid-2001, the markets were getting worried, and Enron’s stock price was dropping exponentially. Stock analysts on Wall Street and credit rating agencies were uncertain about Enron (p. 312). Moody’s even wrote down Enron’s credit rating on October 16th. Between the credit write down, a story in criticizing Enron on October 19th, and the sudden departure of Jeff Skilling, Enron would need loans and other cash infusions from Wall Street banks to bail itself out (p. 313, 320). With few banks willing to lend Enron quickly needed cash, and with Enron unable to cover its losses any longer, it did the only thing Ken Lay could think to do—attempt a merger with rival company (p. 320). When the merger failed, and with no other options remaining, Enron’s board voted on December 1, 2001 to declare Chapter 11 bankruptcy (p. 339). By that point, all three major credit rating agencies—Moody’s, Fitch, and Standard & Poors—had all downgraded Enron’s credit rating to junk status (p. 338).

All in total, CFO Andy Fastow’s off-the-balance-sheet special purpose entity deals resulted in a misstatement of Enron profits by almost $600 million from 1997 to 2001. Due to Fastow and others, Enron profits were misstated by $96 million in 1997, $113 million in 1998, $250 million in 1999, and $132 million in 2000 (p. 328). Moreover, Enron’s evaluation of its assets at $62 billion at its bankruptcy filling was too high by $14 billion. About $3 billion of that was attributed to ‘accounting errors’. Overall, McLean and Elkind (2003) estimate that Enron’s business dealings resulted in a total lost of $10 billion over the life of the company (p. 412). And what about the investors who owned stock, but had no other relation to the company? They lost out too, filing numerous civil law suits against Enron and groups of executives (p. 409). Enron was not a Ponzi scheme, but it was similar to one in the sense that they had to continue to cook the books more and more to cover up their previous cooking of the books. After cooking for numerous fiscal quarters, eventually the cooking caught up to them. Similar to a Ponzi scheme, they dug deeper and deeper and deeper to cover debt after debt after debt, creating the house of cards.

The Enron case was chock-full of many different frauds, wastes, and abuses. While most rank- and-file employees lost their jobs because of the bankruptcy, some high-level traders whose trades help cause the muddle were given retention bonuses (Bryce, 2002, p. 340). Additionally, while the Enron Corp. Savings Plan that contained $2.1 billion in assets, and was 62% invested in Enron stock went belly up when the stock price imploded, bankruptcy court filing documents show that Enron awarded $310 million in cash payments to 144 top executives in 2001—the same year Enron was tanking (p. 319, 360). Executives got lined pockets while employees got savings drained. How many times can the word hypocrisy be mentioned in one paragraph?

Here are some other frauds, wastes, and abuses. Through the mark-to-market accounting that Jeff Skilling recommended upon his arrival at the company, and the accounting gimmicks Andy Fastow and others carried out, Enron was able to misstate its assets and liabilities on a grand scale. Through off-the- special purpose entities, Enron was able to offload debt, hide liabilities, misjudge assets, and mislead the public. Therefore, Enron and its executives engaged in misappropriation, forgery, bank fraud, , and . Enron employees who knew about the suspicious and disreputable tactics used their knowledge Podob 6 to sell off extensive amounts of Enron stock. They knew the house of cards would fall soon, and they were going to cash out before it got there. Between October 1998 and November 2001, twenty-nine of Enron’s top executives and board members sold 20.7 million of their Enron shares, for a gross proceed of $1.1 billion (p. vx). No misprint intended. Doing simple math, that averages out to a gross proceed of about $41 million for each of the twenty-nine people. Not a skimpy payout for three years of company service—and salaries and bonuses had not even been factored in yet. Also, Enron and its executives were giving money to campaigns of politicians supposedly creating laws to protect consumers. According to McLean and Elkind (2003), “between 1989 and 2001 Enron and its executives contributed nearly $6 million to political parties and candidates…over that same period Ken and Linda Lay individually contributed over $880,000” (p. 87). Enron was ‘paid up’ with the right people.

An important way to analyze the fraud, waste, and abuse that occurred at Enron is through the fraud triangle. The three parts of the fraud triangle are opportunity, motivation, and rationalization. For Ken Lay, he had the opportunity as founder, CEO, and Chairman of Enron to run the company to his desires. He was very friendly with board members, and even friendlier with politicians. Many of both owed him a great deal of gratitude for their successes. If Lay wanted X, Y, or Z to occur, there would be many willing people out there to help him make it happen. Also, deregulation in Texas under Governor George W. Bush and deregulation in America under President George W. Bush, a family friend of Ken and Linda Lay, gave Lay more power to steer the company in any direction. As for motivation, Ken Lay wanted to be a power player in both business and politics circles. He also wanted to provide ‘all the finer things in life’ to himself and his family (p. 34-36). He also needed friends in government to help with deals, laws, and regulations that would be favorable to Enron (McLean & Elkind, 2003, p. 88). As for rationalization, Lay believed that what Enron was doing was part of the deregulation process. He also blamed all fraud, waste, and abuse at Enron on other people—especially Andy Fastow. How ironic that Lay did not place any blame on himself, although he was CEO and Chairman? His choice of blame placement is clear rationalization on his part. Lay also took part in spreading the unofficial company doctrine that all is okay as long as Enron is making money. He famously quipped to one Enron executive accused of improprieties in the 1990s, “Keep making us millions!”

The fraud triangle can also be used to analyze the behavior and actions of Jeff Skilling too. Skilling had ample opportunity to help with asset misappropriation and securities fraud as President of Enron and the face of the company. He also was the spearhead behind the mark-to- market accounting strategy and opened Enron up to huge expenditures on new employees and other extravagances (Bryce, 2002, p. 134). Skilling also had a tense rivalry with Rebecca Mark. He was afraid she would be appointed Ken Lay’s successor, and this motived him to work even harder. If the company seemed extra profitable under his watchful eye, Lay would have more respect for him, and be more likely to consider him over Rebecca Mark. Skilling also rationalized his behavior by saying he did nothing illegal. He told people: “Show me one fucking transaction that the accountants and the attorneys didn’t sign off on” (McLean & Elkind, 2003, p. 414). Like Lay, he too blamed all improprieties on others. How convenient?

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The third person the fraud triangle can be used to analyze the behavior and actions of is Andy Fastow. As Enron’s CFO and as the controller of the off-the-book special purpose entities, he had the opportunity to ‘cook the books’ and make Enron’s balance sheets look as though Enron was not in debt. To rationalize this behavior, Fastow believed that Enron’s board had approved these transactions. Although the board did approve transactions involving LJM1 and LJM2, even waiving some of Enron’s ethics policies and internal controls, they were limited in scope (Bryce, 2002, p. 162-163). As for motivation, the ability to make money is a strong motivator. In 2001, Fastow earned $3 in bonuses from Enron, $440,698 in salary from Enron, money from his dealings with LJM2 and LJM2, and more money from cashing in Enron stock because his dealings with LJM1 and LJM2 were making Enron seem profitable and raising the stock price (p. 319). Fastow also wanted to feel like a part of the Enron ‘boys club’ and needed to feed his sizeable self-esteem and ego (McLean & Elkind, 2003, p. 134-135, 138).

The final way to use the fraud triangle for analysis is on the Enron Board of Directors. Although the board is not one person, and was not comprised of the same individuals throughout Enron’s lifetime, it did act, of-sorts, like one person. The board had clear opportunity to allow waste and fraud to occur. It was the people, with power, at the helm of the ship. The board was also heavily compensated and not without conflicts of interest, as discussed earlier in the paper. A U.S. Senator’s wife even sat on it for five years. As for motivation, board members were paid around $87,000 a year for board service, at the minimum (Bryce, 2002, p. 162). Many also owned stock in Enron. It was in their best interests to instigate the fraud and abuse, and they are partially responsible for cultivating the poor ethical and working culture at Enron. Fish rot from the head. The more abuse, the more money board members seemed to make. As for rationalization, the board can claim that they were not make aware of all Enron financial dealings, and they were not made aware of all auditor recommendations (p. 164). The board can also heed notice to Enron’s strong “Vision and Values” statement of ethics they were so bogusly proud of (McLean & Elkind, 2003, p. 90). The board even violated internal controls when it granted Fastow’s requests to go through with LJM1 and LJM2 (Bryce, 2002, p. 162-163).

An important question to ask about the Enron scandal is how much was actual fraud, how much of it was simply waste and abuse, and how much of it was just unethical business practice, but not illegal. The mark-to-market accounting Enron used was not illegal, and although unethical, the fudging of the future profit numbers were just really bad over-estimates. Much of the behavior was widely unethical, and therefore should be frowned upon, but was not illegal. McLean and Elkind (2003) write that on Wall Street in the 1990s “anything that wasn’t blatantly illegal was therefore okay—no matter how deceptive the practice might be. Creative accountants found clever ways around accounting rules and were rewarded for doing so” (p. 133). It was not uncommon for companies to move debt off of their books and onto the balance sheets of special purpose entities (p. 132). It does become illegal though, when a company purposely misstates assets and receivables, and misleads investors. An argument can be made that Enron’s executives did just that. They knew the company was in dire straights and they ordered Andy Fastow to clean up their quarterly statements in an effort to deny it. But, on the contrary, the use of mark- to-market accounting implied the use of imperfect numbers for calculations. Enron executives Podob 8 can argue that the numbers were indeed wrong, but that the mistake was in their estimation not in a targeted plot to mislead the public.

The case of Enron is peculiar because it brings about a discussion of what I have termed: fraud in society vs. legal fraud. If a student at the University of Maryland lies to the Registrar or Bursar’s office about their academic record, it is fraud because the person is knowingly lying. But it is a societal fraud because the person will not be charged by the police and sent to prison. The same idea can translate to the Enron scandal. Although the insider trading executives did to sell off millions of shares, when they secretly knew Enron was in trouble, and outside investors did not, was a fraud in a legal sense, the overly high executive compensation, reckless corporate spending, and Board of Director conflicts of interest were only societal frauds. While the asset misappropriation and misidentification of debts is where the illegality lies, it seems the reckless train of spending that helping finally bring Enron down was not fraud, but colossal waste and abuse. The fraud helped prop Enron up, while its wasteful spending helped bring it down—two counteraction forces occurring at the exact same time.

Enron’s external auditor Arthur Anderson had no role in uncovering the fraud or abuse, but rather in the perpetration of it. The full reach of the fraud was not known until months after Enron declared bankruptcy, and after congressional hearings, SEC investigations, trials of executives, and eye-opening books from investigative reporters. When Enron declared bankruptcy no one even knew for certain any fraud had occurred. This was not the first rodeo for Arthur Anderson though. In 1998 the company was caught inflating the earnings for Waste Management Inc. by the SEC and was fined (p. 234). In the Enron case, Anderson signed off on financial documents that were not valid. The authors of both books used in this paper asked how that could have happened. The answers were simple: many Arthur Anderson alumni worked at Enron, and both the auditors at Enron and Anderson were very friendly (p. 237). It is hard to disagree with fellow auditors and accountants when you are friends and you often work together. This violates a separation-of-duties and division of tasks principle. In addition, Fastow and other Enron employees pressured accountants at Arthur Anderson. Ultimately, Arthur Anderson had trouble saying no to Enron, although they did have numerous concerns and questions, because they had similar business mindsets and did not want to anger their biggest client (McLean & Elkind, 2003, p. 143).

The government response to the Enron scandal was muted. The SEC did not begin an investigation until The Wall Street Journal story about Enron, and even at that point it was an informal investigation. It was the first review of Enron’s financial filings since 1997 (p. 371- 372). And although Enron employee Sharron Watkins had asked questions and tried to blow the whistle at Enron with an anonymous letter to Ken Lay, the letter did not reach far outside of Enron. It was to remain between Enron, Arthur Anderson, and Enron’s attorneys (p. 354-356). Watkins’ mistake was in sending the letter to Ken Lay, not the SEC or any federal congressional oversight panel. Overall, the government response was not immediately sufficient, as the under- staffed and under-budgeted SEC did not catch the fraud as it occurred. The wheels of government were also slow, although the Sarbanes-Oxley Act helped to remedy the loose board Podob 9 of director standards and alleviate the conflicts of interests between companies and their auditors. I believe it was too little too late though. Maybe if the deregulation and relaxation of standards had not occurred in the 1980s and 1990s, Enron-type scandals at Tyco, Adelphia, and WorldCom may not have happened.

Robert Bryce’s book, the main piece of literature I used for this research paper, presents seven lessons to prevent an Enron-type fraud in the future. The first, which should seem readily apparent, is the need for large corporations to have independent boards of directors. If board members are independent of the company whose board they are seated on, it is easier for them to avoid making questionable decisions. It alleviates conflicts of interest, and holds them more accountable to shareholders—not the CEO or other company executives. It also makes them more objective reviewers of how the company operates, a must-have to detect and deter potential frauds and abuses. In addition, board members should not be financially involved with other companies that do business with the company whose board they are seated on, period.

The second recommendation is for Wall Street banks to be more closely regulated. Although Enron itself was not a bank, and was not headquartered on Wall Street or even in New York City, it received vital assistance from Wall Street banks. Particularly J.P. Morgan Chase, which acted as “an advisor, a lender, an investor, and a source of completely unbiased, objective stock research” (Bryce, 2002, p. 354). J.P. Morgan Chase had its hand in every pot of Enron’s business. Ironically, a piece of legislation that repealed Glass-Steagall and allowed for numerous conflicts of interest between Enron and J.P. Morgan Chase was co-authored and named after Republican Senator Phil Gramm of Texas. (Full title: Financial Services Modernization Act of 1999. Short title: Gramm-Leach-Bliley Act). Gramm is now a lobbyist for UBS. Furthermore, derivatives should also be more closely regulated, and that is Bryce’s third recommendation. Enron’s trading of derivatives is ultimately what helped get it into a colossal and financially costly mess (p. 6). If derivatives had been more closely regulated, among other factors, the Enron scandal may not have occurred. Federal regulators need to have access to, and be able to examine, the financial wherewithal of companies like Enron who stake massive financial positions in complex derivatives markets (p. 356).

The fourth recommendation is for corporations to change the way in which they allot stock options. Bryce (2002) says to “make companies charge the cost of any stock grants against the company’s revenues in the year they are granted” (p. 355). At Enron, lax government regulations and cleaver accounting allowed awarded stock options to remain off the balance sheets, while bonuses were reported as expenses on profit-and-loss statements (p. 211). Even more worthy of note, accounting rules allowed Enron to deduct the cost of options as an expense from its tax liability. Ultimately, Enron was receiving corporate tax breaks for granting certain stock options to executives. In the year 2000, Enron was able to turn a $112 million federal income tax bill into a $278 million refund (p. 211-212). How’s that for government rules and clever accounting!

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The fifth and sixth recommendations relate to Enron’s dealings with Arthur Anderson and accounting. With mark-to-market accounting, Enron could book profits they thought they would receive in the future, and at the prices they decided. By using mark-to-market accounting, which federal regulators did indeed allow Enron to do, Enron did not have to report financial statements using accrual (cost) accounting as well (p. 67-68). If Enron had to do both, it would be easy to compare and “investors and analysts [would] be able to discern how aggressively the firm [was] pricing various assets and liabilities” (p. 357). As well, auditors should not be able to provide consulting services to companies they . Bryce (2002) writes: “In 1999, Arthur Anderson billed Enron $46.8 million for its auditing, consulting, and tax work. In 2000, that figure rose to $52 million” (p. 237). Noticeably so, Arthur Anderson would be stupid to lose Enron as a client. But how can they objectively audit Enron while providing services at the same time?

The final recommendation is to increase the funding budget of the Securities and Exchange Commission, the federal regulatory body tasked with investigating and enforcing securities regulations. Although it would admittedly be impossible to give the SEC unlimited funding, the SEC’s job is to investigate when red flags present themselves, and when corporate management controls have failed to prevent fraud and abuse.

In summary, the Enron scandal occurred because of fraud, waste, abuse, and conflicts of interest at Enron, Arthur Anderson, and in the halls of government. With astronomically high amounts of executive compensation, and lavish spending on corporate jets, artwork, and luxuries rank-and- file employees selfishly expected, the entire company became spoiled children. A corporate culture in which ethics violations occurred from the top-down, and in which morals and lack of ethics encouraged making money for Enron at any-and-all costs, it comes as no wild surprise that Enron became a house of cards (p. 12). Government cannot respond to a vile corporate culture, especially the one at Enron. If Enron itself did not choose to enforce monitoring activities, if it knowingly nurtured a lackluster control environment, and if it ignored risk assessments by auditors and a few righteous employees, what can government do? The internal controls at Enron failed by no fault of the SEC, but by the fault of Enron’s board and Enron executives who lost sight of goodness while at the same time engaging in risky deals. The failure of these deals is what led Enron to fudge numbers and misstate assets. Almost no one in the executive suite noticed the red flags of fraud, waste, and abuse at Enron because they were the ones leaving the red flags. Tone-at-the-top matters. Enron is the story of greed, of passion, and of fun. The executives at Enron had a field day. Jeff Skilling was on vacation when Enron finally collapsed.

Ultimately, the question to ask is if the Enron scandal was a typical corporate greed story; or, was its causes christened in the fabric of American business elite, and in the corporate culture at the heart of the American drive to success? The Enron case is the most important case study of the 21st century because it is not just about Enron. It is about what happens when people, greed, money, power, and politics are mashed together under one roof. The Enron scandal has been termed the “most egregious example of executive piracy in American history. A handful of executives made unbelievable fortunes—tens, even hundreds of millions of dollars—at the same time that Enron was being driven into the ground” (p. 7). But isn’t it so much more than that?

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References

Bryce, R. (2002). Pipe dreams: Greed, ego, and the death of Enron. New York: PublicAffairs.

Gibney, A., Kliot, J., Motamed, S., Wagner, T., Cuban, M., Vicente, J., Coyote, P., ... Magnolia

Home Entertainment (Film). (2005). Enron: The Smartest guys in the room. Los Angeles,

Calif: Magnolia Home Entertainment.

McLean, B., & Elkind, P. (2003). The smartest guys in the room: The amazing rise and

scandalous fall of Enron. New York: Portfolio.