"We built a company that, 10 years from now, 20 years from now, is going to be a factor to be reckoned with."
That was Jeffrey Skilling, former CEO of Enron talking, back in August, 2001. Even though Enron didn't make ten months from the date of that interview before going bankrupt, Skilling is probably right. He's right because understanding why Enron went bad may give us the will to fix some serious problems.
What went wrong? One observer, William Fleckenstein put it this way: "Enron is the prime example of all the things that were allowed to go wrong during the Stock Market mania. This wall got built brick-by-brick in broad daylight in the 1990s by companies doing whatever they had to do to make their numbers, being willing to sacrifice the long-term well-being of the company so that the executives could get rich."
That's part of the story, but it's not the whole story. The dot-com hype was surely part of the mix. But the most important things have to do with integrity, honesty and communication.
You'd expect the CEO of a company to know if things were going bad, but Mr. Skilling says he didn't. Over and over again he told that to the congressional committee investigating Enron. After a while he began to look like John Erlichman at the Watergate hearings, stating the same thing, over and over again, with arrogant, combative assurance.
Ken Lay, the guy who was CEO before and after Skilling, claims he didn't know anything, either. Actually, he's not saying anything. He's taking the Fifth Amendment, but that's what his wife said.
Linda Lay went on the Today show to say that her husband was a fine fellow who would never do anything wrong and that poor Ken was misled by others. She said that she and Ken are "fighting for liquidity" which I think means they don't have a lot of cash. She said all this, by the way, sitting in a palatial living room where the furnishings were probably worth more than what's left in the retirement accounts of most Enron employees.
Both CEOs claim ignorance of any problems, even though both were approached by lower level Enron folks and told about them. Skilling's response seems to have been to ignore the messengers.
In May of 2001, for example, a tax attorney working for Enron named Jordan Mintz, sent a memo to Skilling. He noted concern about how CFO Andrew Fastow was handling some of the dealings involving partnerships in which Fastow had an interest. Specifically, Mintz noted, according to the New York Times, that the approvals for the deals required Skilling's signature, but that they were going through without them.
Mintz offered to bring the sheets over to Skilling or to send them as a package. Skilling simply didn't respond.
Lay, who's described has more of a people person than Skilling, listened. When he received the internal memo from Sherron Watkins sharing her concern that Enron might "implode in a wave of accounting scandals," he invited her in for a chat.
Then he had the company's law firm investigate. But they were the same law firm who helped structure some of the questionable deals and, besides, they were told not to criticize any of the accounting.
Do you believe all this? I don't. If I believe that Skilling and Lay didn't know what was going on then I'd have to believe that they earned million dollar salaries for running Enron without knowing key aspects of the company's operations. Skilling says that, hey, it's a big company. So was GE, but I don't recall Jack Welch ever claiming that he didn't know what was happening.
So, quite obviously, we couldn’t count on the CEO to tell us, or anyone else, that Enron was in trouble and about to go down the tubes. Who could we count on? The answer turns out to be a few employees who put themselves and their careers at risk, but just about nobody else. Most important, we couldn't count on the folks who were supposed to be watching things.
We should have been able to count on the board for oversight. Sure, they directed the CEO and others to provide oversight of some of the more "creative" partnerships that got Enron in trouble, which allows them to play Pontius Pilate right about now. But they also waived the company's ethics policy to allow some of the accounting practices to take place.
They waived the ethics policy!! What does that tell you? By the way, you can buy copies of the ethics policy on eBay right now where several copies are being offered among almost 1300 bits of Enron memorabilia. Must be some of those employees working to recoup 401(k) losses.
Do you believe all this? I don't. If Enron's accounting practices were OK, why did it take a waiver of the ethics policy? Then the board directs oversight of the policy from folks who got magnificent salaries and bonuses, but who now can only say, "I refuse to answer that question by invoking my rights under the Fifth Amendment of the US Constitution."
One reason for the notable silence among executives is that they were taking home lots of money. The salaries and benefits were substantial. Ken Lay's salary was $8,300,000 or roughly $160,000 a week. That's a lot of money for not knowing what was going on.
And, just for the record, there was a whole lot more insider selling than buying. In 2001, Enron corporate insiders bought only $369,800 worth of stock, while selling stock valued at $139,972,228.
Well, if the executives and the board won't watch over what's going on, that's why we've got independent auditors, right? Not in this case.
The auditing firm, Arthur Andersen, may go down in history as the firm that tried to add shredding to generally accepted accounting principles. Enron isn't their only failure. Let's not forget Cendant, Sunbeam, and Waste Management in the US, not to mention firms in England and Europe.
Their appalling conduct at Enron has several causes. First, they weren't only Enron's independent audit firm. Andersen also performed some of the internal audit functions on contract, and functioned as a consultant to Enron, garnering billions in consulting fees. Can you say "conflict of interest" boys and girls?"
Even with all those conflicted feelings, they still should have known that something was up. They did. They just chose not to do anything about it.
Early last year two of the lead accountants on the Enron account met with colleagues in Houston and via speakerphone from other places. They discussed some of the "creative" partnerships that Fastow was involved in, among other things.
The meeting ended with the accountants drawing up a "to do" list that involved, among other things talking to the Board about the partnerships. The idea was to have the Board set up a committee to review the partnerships.
A week later the accountants met with the Board. It was the perfect time to raise the issue. But they didn't. No one is saying why.
That wasn't all that was ignored. Sherron Watkins, who had sent the "imploding" memo to Lay, brought her concerns to folks at Andersen responsible for the Enron account. There's no record of the firm taking any action based on that information.
As the house of cards began fluttering to the ground, folks at Andersen started shredding documents. Andersen has fired David Duncan, the lead partner on the Enron account. Their position is that he was the one responsible. The firm is pure as the driven snow.
Do you believe this? I don't. This isn't a case of some poor schlep hiding in his office shredding one document at a time. This is lots of folks wheeling in cartloads of documents. Legal staff was present during the shredding. Duncan says he was in regular contact with the firm's Chicago headquarters. I believe him, not Andersen's oh-so-smooth CEO, Joseph F. Berardino.
That pretty much covers everyone officially connected with Enron. What about the analysts at brokerage firms who are paid enormous salaries to analyze publicly traded companies?
It seems that they bought the hype. They really believed that what Enron was doing was different. Every other company releases a balance sheet and cash flow analysis when they announce their quarterly results. Enron didn't. But only one analyst, Richard Grubman, bothered to question them on the practice.
Now that I believe.
If we allow it, the Enron bankruptcy can just furnish another example of greed run rampant. But we don't have to just sit back and watch. We use Enron as a spur to change things that need changing. And if we do that, Enron may be something to be reckoned with in 20 years.
CEOs should be responsible for what goes on at their companies. Independent auditors should be independent, not strange bedfellows of the folks they're auditing. Ethics policies that you waive and slick accounting practices should be causes for scrutiny.
We won't get human nature to change. There will still be greed and folks who figure that they're smarter than everyone else. No matter what system we put in place, someone will find a way to exploit it. But we can fix the big, ugly, systemic things that are wrong.
We can hold CEOs and boards accountable for their performance and the actions of their companies.
We can improve the ways we police the accountants and rule out the consulting/auditing conflict of interest.
We can reward analysts who ask hard questions by doing business with the firms they represent.
We can show the Ken Lays and Jeffrey Skillings of the world that pumping the stock price at all costs is not what business is about and that it's their job to lead their companies and be responsible for what the company does, not just how it does. We can show the Andrew Fastows of the world that slick accounting is not worth as much as delivering value.
We can do all those things, but we need to get started. Today would be a good time.
This feature appeared on 11 Februrary 2002
