The Impact of the Crooked “E”

T h e I mp ac t o f th e C r o o k e d “ E ”
T h e E n r o n F r au d an d S c an d al An d W h atI t
M e an s to Bu s in e s s T o d ay
EdFerrara
MIS5208– Project1– ExamplesofCorporateFraud
[email protected]
Ag e n d a
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FactsAboutEnron– CompanyHistory
ThePlayers– TheExecutives
Enron– SoManyDimensionsofFraud
AChronologyofEnron’sCollapse
TheAftermath
WhatItMeans
References
AppendixA– Otherperpetrators
T h e E n r o n Play e r s – T h e E x e c u tiv e s
KenLay– Enron Chairman andCEO
DavidDuncan – Andersen Partner – Enron
JeffreySkilling– Enron CEO
Sherron Watkins– Enron VP Internal Audit
Convictedon29criminalcountsincluding
conspiracy,securitiesandwirefraud.Diesin
AspenColoradoonJuly52006whileawaiting
sentencingforhisconvictions.1
Convictedforfraud,conspiracy,insidertradingand
lyingtoauditorsinthelargestcorporatefraudin
history.Morethan4,000Enronemployeeslost
theirjobs,manylosttheirlifesavings,whenEnron
declaredbankruptcyin2001.Investorslostbillions
ofdollars.2
PartnerresponsibleforEnron.Firedforfailureto
exercise“dueprofessionalcareandthenecessary
skepticism”.Pledguiltytoobstructionofjustice–
laterrescindedplea,andstruckdealwithSEC.4
Watkins,whohasneverbeenchargedwithinsider
trading,soldalmost$50,000instockafterher
August2001meetingwithLay— andbeforeEnron
sharesbecameworthlessmonthslater.“No,”she
toldprosecutorJohnHuestonwhenheaskedherif
herstocksaleswereproper.“Ihadmore
informationthanthemarketplacedid.” 5
Andrew Fastow
Chargedwith78countsoffraudduetohisrolein
usingoff-balancesheetentitiesthatdidbusiness
withEnron.Disguisedthecompany’sfinancial
condition,pledguiltytotwocounts,forfeited$30
million,andagreedtotestifyasagovernment
witness.3
Theft
(Misappropriation)
Deceptive
Statements
AcompletelistofexecutivesinvolvedinthefraudpleaseseeAppendix A.
Corruption
E n r o n – S o M an y Dime n s io n s o f F r au d 1
EnergyPrice
Manipulation
StockPrice
Manipulation
WireFraud
Enron’s
Multidimensional
fraud
Financial
Statement
Fraud
Securities
Fraud
A C h r o n o lo g y o f E n r o n ’ s C o llap s e 1
Feb 5
Feb 12
May
Aug 15
Andersen discusses
dropping Enron as a
client.
Jeffrey Skilling
becomes CEO
Vice Chair Clifford
Baxter complains about
the “appropriateness” of
Enron’s partnerships
Lay receives a warning
letter from Sherron
Watkins indicating
improper accounting
Aug 20, 21
Lay sells 93000 shares –
earns $2M, Urges
employees to buy more
stock
Oct 16
Enron reveals $1.2B
loss of shareholder
value
Oct 23
Andersen accelerates
the shredding of Enron
related documents
Nov 8
Andersen receives SEC
subpoena, Enron admits
inflating income by $600M
since 1997
Dec 2
Jan 15
Enron files for
bankruptcy
Enron suspended
from NYSE
T h e Af te r math
“I didn’t set out to commit a crime. I
certainly didn’t set out to hurt anyone. When
I was working at Enron, you know, I was
kind of a hero, because I helped the company
make its numbers every quarter. And I
thought I was doing a good thing. I thought I
was smart. But I wasn’t.” – Andrew Fastow 1
“in my opinion, the problem today is 10
times worse than when Enron had its
implosion … The things that Enron did, and
that I did, are being done today, and in many
cases they’re being done in such a manner
that makes me blush — and I was the CFO
of Enron.” He cited the continuing
widespread use of off-balance-sheet vehicles,
as well as inflated financial assumptions
embedded in corporate pension plans. –
Andrew Fastow 2
W h at I t M e an s
Integrity?
TheEnron caseisaclassicexampleofthefraud
triangleatwork.
Companiestodayneedtobeexceptionally
vigilant.Itistooeasy(seemingly)forcorporate
officerstocommit fraud.
Fraudoccursatalllevelsofanorganization.In
Enron’s caseitoccurred atthehighestlevelsof
thecompany.Eventhoseentrusted toprotect
thecompanyfrommalfeasance(Sherron
Watkins)werenotimmunetomeans,motive
(pressure) andopportunity.
Sarbanes-Oxleysignedintolawin2002was
passedbytheUSCongress indirect responseto
scandalssuchasEnron.Theactrequires1 :
a. CEOandCFOmustreviewallfinancial
reports.
b. Financialreport doesnotcontainany
misrepresentations.
c. Information inthefinancial report is"fairly
presented".
d. CEOandCFOareresponsible fortheinternal
accounting controls.
e. CEOandCFOmustreport anydeficiencies in
internal accounting controls, oranyfraud
involvingthemanagementoftheaudit
committee.
f. CEOandCFOmustindicate anymaterial
changesininternal accounting controls.
Opportunity
Access:
• Physical
• System
• Process
Means
WeakInternal
Process
&SystemControls
WeakExternal
Process&System
Controls
Motive
(Pressure)
ClassicCriminal&FraudulentActivity2
Personal
Gain
T h an k y o u
E n d n o te s
Slide3
1 Suddath,C.(2010).Hey,Hey,Hey,Goodbye-
KennethLay- Enron.Time.Retrievedfrom
http://content.time.com/time/specials/packages/article/0,28804,2009445_2009447_2009502,00.html
2 Smith,A.(2013).EnronconvictSkillingtogetoutofjailearly.CNNMoney.Retrievedfrom
http://money.cnn.com/2013/05/08/news/companies/skilling-enron/index.html
3 Elkind,P.(2013).TheconfessionsofAndyFastow.Fortune.Retrievedfromhttp://fortune.com/2013/07/01/the-confessions-of-andy-fastow/
4 Reuters(2008).AccountantandS.E.C.ReachDealinEnronCase.TheNewYorkTimes.Retrievedfrom
http://www.nytimes.com/2008/01/29/business/29enron.html?_r=0
5 AssociatedPress.(2006).Enronwhistleblowertellsof‘crookedcompany’- Formermanager,accountantLay,Skillingignoredtheirwarnings.
NBCNews.com.Retrievedfromhttp://www.nbcnews.com/id/11839694/ns/business-corporate_scandals/t/enron-whistleblower-tells-crookedcompany/#.VOoEUPnF_18
Slide4
1
Elkind,P.;Gibney,Alex;McLean,Bethany.(2005).Enron:TheSmartestGuysInTheRoom.
Slide5
1
TimeMagazine.(2005).Enron’sCollapse.Time.Retrievedfromhttp://content.time.com/time/interactive/0,31813,2013797,00.html
Slide6
1
2
Elkind,P.(2013).TheconfessionsofAndyFastow.Fortune.Retrievedfromhttp://fortune.com/2013/07/01/the-confessions-of-andy-fastow/
Ibid.
Slide7
SarbanesOxley101.(2015).Sarbanes-OxleyActSummaryofMajorSections.Retrievedfromhttp://sarbanes-oxley-101.com/sarbanes-oxleycompliance.htm
2 Coderre,D.G.(2009).ComputerAidedFraudPreventionandDetection:AStepbyStepGuide.JohnWiley&Sons,Inc.
1
Appendix A
AssociatedPress.(2005).AlookatthoseinvolvedintheEnronscandal.USAToday.Retrievedfrom
http://usatoday30.usatoday.com/money/industries/energy/2005-12-28-enron-participants_x.htm
1
Ap p e n d ix A
OtherEnronGuiltyPleas
December 2005:FormerEnronchiefaccountingofficerRichardCausey.Originally
indictedinJanuary2004,CauseywaspartofaunifieddefenseteamwithSkillingandLay
fornearly twoyearsuntilhedecidedtopleadguilty tosecuritiesfraud.
July2005:ChristopherCalger,aformerexecutive inEnron'stradingbusiness,pleaded
guiltytoparticipatinginanassetsalescheme torecognizeearningsprematurely and
improperly.
October2004:TimothyDeSpain,formerassistanttreasurer,pleadedguiltyto
conspiracy,andadmittedlyingorwithholdingpertinentinformationfromcreditrating
agencies attherequestofmultiplesuperiorssotheenergygiant'sfinancialpicture
appeared healthier thanit was.
August2004:KevinHannon,formerchiefoperatingofficerforthebroadbandunit,
pleaded guiltytoconspiracyforschemingwithRiceandotherstotoutEnron's
broadbandnetworkashavingcapabilitiesitdidn'thavetoimpressanalystsandinflate
companystock.
January/May 2004:LeaFastow,formerassistanttreasurerandwifeofformerfinance
chiefAndrew Fastow,whoquitEnronin1997.Pleadedguiltyfirsttoafelonytaxcrime,
admitting tohelpinghideill-gottengainsfromherhusband'sschemesfromthe
government. Withdrew plea, thenpleadedguilty inMaytoanewly filedmisdemeanor
taxcrime. Released inJuly2005fromyear-longprisonsentence.
October2003:DavidDelainey,formerheadofEnron'stradingandmoney-losingretail
energy units.Pleadedguilty toinsidertrading.
September 2003:BenGlisanJr.,formerEnrontreasurer,pleadedguiltytoconspiracy.
Admitted tohelpingdesignfinancialdealsthatenrichedhimandillegally kept
investment lossesofformanipulatedEnron'sbooks.Wentstraighttoprisonforafiveyear term. Began cooperatingwithinvestigatorsinearly 2004.
February 2003:JeffreyRichter,formerEnrontrader.Pleaded guiltytowire fraud,
admitting tomanipulatingtheCaliforniapowermarket.
August2004:MarkKoenig,formerheadofinvestorrelations,pleadedguiltytoaiding
andabettingsecuritiesfraud.
November 2002:LarryLawyer,pleaded guiltytofilingfalsetaxreturnsthatdidn't
identifymore than$79,000inincomeoverfouryearshereceivedas"gifts"fromKopper
forhisworkinoneofFastow'sschemes.
August2004:JohnForney,formerenergytrader,pleaded guiltytowire fraudfor
manipulatingenergy marketsduringCalifornia'spowercrisisof2000-2001
October2002:TimothyBelden,formertopEnrontrader.Pleaded guiltytowire fraudfor
participatingintradingschemestomanipulate Californiapowermarkets.
July2004:KennethRice,formerbroadbandunitCEO,pleadedguiltytosecuritiesfraud.
Admitted toconspiringwithotherstodescribeEnron'snetworkcontrolsoftwareas
revolutionary andthenetworkasupandrunningwhenneitherwastruesoEnronstock
wouldriseandhecouldprofitfromsalesofinflatedshares.
August2002:MichaelKopper,formertopFastowaide.FirstEnroninsidertoplead
guilty; pleadedguilty totwocountsofconspiracy.AdmittedtohelpingFastowcarryout
schemestohelpEnronmanipulateitsbookswhileskimmingmillionsforhimself,Fastow
andselectedfriendsandcolleagues.
May2004:PaulaRieker,former No.2executiveininvestorrelations.Pleaded guiltyto
insidertradingforsellingsharesinmid-2001uponlearningthatEnron'sbroadbandunit
lostmoremoneythanpubliclydisclosed.