The Impact o f the Crooked “E”The Enron Fraud and Scandal And What I t Means to Bus iness Today

EdFerraraMIS5208– Project1– ExamplesofCorporateFraudeferrara@temple.edu

Agenda

§ FactsAboutEnron– CompanyHistory§ ThePlayers– TheExecutives§ Enron– SoManyDimensionsofFraud§ AChronologyofEnron’sCollapse§ TheAftermath§ WhatItMeans§ References§ AppendixA– Otherperpetrators

TheEnron Players – The ExecutivesKenLay– EnronChairmanandCEOConvictedon29criminalcountsincludingconspiracy,securitiesandwirefraud.DiesinAspenColoradoonJuly52006whileawaitingsentencingforhisconvictions.1

JeffreySkilling– EnronCEOConvictedforfraud,conspiracy,insidertradingandlyingtoauditorsinthelargestcorporatefraudinhistory.Morethan4,000Enronemployeeslosttheirjobs,manylosttheirlifesavings,whenEnrondeclaredbankruptcyin2001.Investorslostbillionsofdollars.2

AndrewFastowChargedwith78countsoffraudduetohisroleinusingoff-balancesheetentitiesthatdidbusinesswithEnron.Disguisedthecompany’sfinancialcondition,pledguiltytotwocounts,forfeited$30million,andagreedtotestifyasagovernmentwitness.3

SherronWatkins– EnronVP InternalAuditWatkins,whohasneverbeenchargedwithinsidertrading,soldalmost$50,000instockafterherAugust2001meetingwithLay— andbeforeEnronsharesbecameworthlessmonthslater.“No,”shetoldprosecutorJohnHuestonwhenheaskedherifherstocksaleswereproper.“Ihadmoreinformationthanthemarketplacedid.”5

DavidDuncan– AndersenPartner– EnronPartnerresponsibleforEnron.Firedforfailuretoexercise“dueprofessionalcareandthenecessaryskepticism”.Pledguiltytoobstructionofjustice–laterrescindedplea,andstruckdealwithSEC.4

AcompletelistofexecutivesinvolvedinthefraudpleaseseeAppendixA.

Theft(Misappropriation)

CorruptionDeceptiveStatements

Enron – So Many Dimens ions o f F raud1

Enron’sMulti-

dimensionalfraud

EnergyPriceManipulation

FinancialStatementFraud

SecuritiesFraudWireFraud

StockPriceManipulation

AChrono logy o f Enron ’s Co l lapse1

Feb 5Andersen discusses dropping Enron as a client.

Feb 12Jeffrey Skilling becomes CEO

MayVice Chair Clifford Baxter complains about the “appropriateness” of Enron’s partnerships

Aug 15Lay receives a warning letter from Sherron Watkins indicating improper accounting

Aug 20, 21Lay sells 93000 shares –earns $2M, Urges employees to buy more stock

Oct 16Enron reveals $1.2B loss of shareholder value

Nov 8Andersen receives SEC subpoena, Enron admits inflating income by $600M since 1997

Oct 23Andersen accelerates the shredding of Enron related documents

Dec 2Enron files for bankruptcy

Jan 15Enron suspended from NYSE

TheAf termath

“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

What I t MeansTheEnron caseisaclassicexampleofthefraudtriangleatwork.

Companiestodayneedtobeexceptionallyvigilant.Itistooeasy(seemingly)forcorporateofficerstocommit fraud.

Fraudoccursatalllevelsofanorganization.InEnron’s caseitoccurred atthehighestlevelsofthecompany.Eventhoseentrusted toprotectthecompanyfrommalfeasance(SherronWatkins)werenotimmunetomeans,motive(pressure) andopportunity.

Sarbanes-Oxleysignedintolawin2002waspassedbytheUSCongress indirect responsetoscandalssuchasEnron.Theactrequires1:a. CEOandCFOmustreviewallfinancialreports.

b. Financialreport doesnotcontainanymisrepresentations.

c. Information inthefinancial report is"fairlypresented".

d. CEOandCFOareresponsible fortheinternalaccounting controls.

e. CEOandCFOmustreport anydeficiencies ininternal accounting controls, oranyfraudinvolvingthemanagementoftheauditcommittee.

f. CEOandCFOmustindicate anymaterialchangesininternal accounting controls.

Opportunity

Motive(Pressure)

Means

ClassicCriminal&FraudulentActivity2

WeakInternalProcess&SystemControlsWeakExternalProcess&SystemControls

PersonalGain

Access:• Physical• System• Process

Integrity?

Thank you

EndnotesSlide31Suddath,C.(2010).Hey,Hey,Hey,Goodbye- KennethLay- Enron.Time.Retrievedfromhttp://content.time.com/time/specials/packages/article/0,28804,2009445_2009447_2009502,00.html2 Smith,A.(2013).EnronconvictSkillingtogetoutofjailearly.CNNMoney.Retrievedfromhttp://money.cnn.com/2013/05/08/news/companies/skilling-enron/index.html3Elkind,P.(2013).TheconfessionsofAndyFastow.Fortune.Retrievedfromhttp://fortune.com/2013/07/01/the-confessions-of-andy-fastow/4Reuters(2008).AccountantandS.E.C.ReachDealinEnronCase.TheNewYorkTimes.Retrievedfromhttp://www.nytimes.com/2008/01/29/business/29enron.html?_r=05AssociatedPress.(2006).Enronwhistleblowertellsof‘crookedcompany’- Formermanager,accountantLay,Skillingignoredtheirwarnings.NBCNews.com.Retrievedfromhttp://www.nbcnews.com/id/11839694/ns/business-corporate_scandals/t/enron-whistleblower-tells-crooked-company/#.VOoEUPnF_18

Slide41 Elkind,P.;Gibney,Alex;McLean,Bethany.(2005).Enron:TheSmartestGuysInTheRoom.

Slide51 TimeMagazine.(2005).Enron’sCollapse.Time.Retrievedfromhttp://content.time.com/time/interactive/0,31813,2013797,00.html

Slide61 Elkind,P.(2013).TheconfessionsofAndyFastow.Fortune.Retrievedfromhttp://fortune.com/2013/07/01/the-confessions-of-andy-fastow/2 Ibid.

Slide71 SarbanesOxley101.(2015).Sarbanes-OxleyActSummaryofMajorSections.Retrievedfromhttp://sarbanes-oxley-101.com/sarbanes-oxley-compliance.htm2 Coderre,D.G.(2009).ComputerAidedFraudPreventionandDetection:AStepbyStepGuide.JohnWiley&Sons,Inc.

Appendix A1 AssociatedPress.(2005).AlookatthoseinvolvedintheEnronscandal.USAToday.Retrievedfromhttp://usatoday30.usatoday.com/money/industries/energy/2005-12-28-enron-participants_x.htm

Append ix AOtherEnronGuiltyPleasDecember2005:FormerEnronchiefaccountingofficerRichardCausey.OriginallyindictedinJanuary2004,CauseywaspartofaunifieddefenseteamwithSkillingandLayfornearly twoyearsuntilhedecidedtopleadguilty tosecuritiesfraud.

July2005:ChristopherCalger,aformerexecutive inEnron'stradingbusiness,pleadedguiltytoparticipatinginanassetsaleschemetorecognizeearningsprematurelyandimproperly.

October2004:TimothyDeSpain,formerassistanttreasurer,pleadedguiltytoconspiracy,andadmittedlyingorwithholdingpertinentinformationfromcreditratingagenciesattherequestofmultiplesuperiorssotheenergygiant'sfinancialpictureappearedhealthier thanit was.

August2004:KevinHannon,formerchiefoperatingofficerforthebroadbandunit,pleadedguiltytoconspiracyforschemingwithRiceandotherstotoutEnron'sbroadbandnetworkashavingcapabilitiesitdidn'thavetoimpressanalystsandinflatecompanystock.

August2004:MarkKoenig,formerheadofinvestorrelations,pleadedguiltytoaidingandabettingsecuritiesfraud.

August2004:JohnForney,formerenergytrader,pleadedguiltytowire fraudformanipulatingenergy marketsduringCalifornia'spowercrisisof2000-2001

July2004:KennethRice,formerbroadbandunitCEO,pleadedguiltytosecuritiesfraud.Admitted toconspiringwithotherstodescribeEnron'snetworkcontrolsoftwareasrevolutionaryandthenetworkasupandrunningwhenneitherwastruesoEnronstockwouldriseandhecouldprofitfromsalesofinflatedshares.

May2004:PaulaRieker,formerNo.2executiveininvestorrelations.Pleadedguiltytoinsidertradingforsellingsharesinmid-2001uponlearningthatEnron'sbroadbandunitlostmoremoneythanpubliclydisclosed.

January/May2004:LeaFastow,formerassistanttreasurerandwifeofformerfinancechiefAndrewFastow,whoquitEnronin1997.Pleadedguiltyfirsttoafelonytaxcrime,admitting tohelpinghideill-gottengainsfromherhusband'sschemesfromthegovernment.Withdrewplea, thenpleadedguilty inMaytoanewly filedmisdemeanortaxcrime.Released inJuly2005fromyear-longprisonsentence.

October2003:DavidDelainey,formerheadofEnron'stradingandmoney-losingretailenergyunits.Pleadedguilty toinsidertrading.

September 2003:BenGlisanJr.,formerEnrontreasurer,pleadedguiltytoconspiracy.Admitted tohelpingdesignfinancialdealsthatenrichedhimandillegallykeptinvestment lossesofformanipulatedEnron'sbooks.Wentstraighttoprisonforafive-year term.Begancooperatingwithinvestigatorsinearly2004.

February2003:JeffreyRichter,formerEnrontrader.Pleadedguiltytowire fraud,admitting tomanipulatingtheCaliforniapowermarket.

November2002:LarryLawyer,pleadedguiltytofilingfalsetaxreturnsthatdidn'tidentifymore than$79,000inincomeoverfouryearshereceivedas"gifts"fromKopperforhisworkinoneofFastow'sschemes.

October2002:TimothyBelden,formertopEnrontrader.Pleadedguiltytowire fraudforparticipatingintradingschemestomanipulateCaliforniapowermarkets.

August2002:MichaelKopper,formertopFastowaide.FirstEnroninsidertopleadguilty;pleadedguilty totwocountsofconspiracy.AdmittedtohelpingFastowcarryoutschemestohelpEnronmanipulateitsbookswhileskimmingmillionsforhimself,Fastowandselectedfriendsandcolleagues.