Enron’s Questionable Transactions
Enron’s Questionable Transactions
1. The special purpose entities (SPEs) got Enron into trouble.
2. It is debatable whether Enron’s directors knew how profits were being made through the SPEs. Speculation is that they did have knowledge, but did not question the questionable procedures.
Evidence that indicates the directors knew how profits were being made includes the following:
• Andrew Fastow’s role in establishing the SPEs and falsely creating 3% independent investors in each. • Fastow’s manipulation of financial statements that overinflated profits for several years. • When Sharron Watkins anonymously wrote a letter disclosing her concerns to Ken Lay, he reported the letter to Enron lawyers who had been involved in the scheme. Some speculate that Lay intentionally went to the lawyers knowing they would not put an end to the manipulations, thus implying that he knew what was going on. • Although several people expressed concern about Enron’s accounting practices, many others did nothing, indicating that they may have been involved or at least profited from the scheme. The scarcity of whistle-blowers at Enron, to some, indicates a cover-up.
The board’s failure to stop the unethical accounting or blow the whistle may suggest that the board was largely ignorant of what was going on.
3. The CEO and chairman of the board have different responsibilities. The board is intended to provide a system of accountability and of checks and balances for the CEO: the CEO is most concerned with profit and company expansion, while the board ensures the company is accountable to stakeholders. If Ken Lay were acting in both capacities, his interests could conflict. The system of checks and balances cannot function properly if one person is both CEO and chairman of the board.
4. The board failed to provide guidance on company policies or to enforce the code of conduct; had suspended guidance on company audits by Arthur Andersen or by
1. The special purpose entities (SPEs) got Enron into trouble.
2. It is debatable whether Enron’s directors knew how profits were being made through the SPEs. Speculation is that they did have knowledge, but did not question the questionable procedures.
Evidence that indicates the directors knew how profits were being made includes the following:
• Andrew Fastow’s role in establishing the SPEs and falsely creating 3% independent investors in each. • Fastow’s manipulation of financial statements that overinflated profits for several years. • When Sharron Watkins anonymously wrote a letter disclosing her concerns to Ken Lay, he reported the letter to Enron lawyers who had been involved in the scheme. Some speculate that Lay intentionally went to the lawyers knowing they would not put an end to the manipulations, thus implying that he knew what was going on. • Although several people expressed concern about Enron’s accounting practices, many others did nothing, indicating that they may have been involved or at least profited from the scheme. The scarcity of whistle-blowers at Enron, to some, indicates a cover-up.
The board’s failure to stop the unethical accounting or blow the whistle may suggest that the board was largely ignorant of what was going on.
3. The CEO and chairman of the board have different responsibilities. The board is intended to provide a system of accountability and of checks and balances for the CEO: the CEO is most concerned with profit and company expansion, while the board ensures the company is accountable to stakeholders. If Ken Lay were acting in both capacities, his interests could conflict. The system of checks and balances cannot function properly if one person is both CEO and chairman of the board.
4. The board failed to provide guidance on company policies or to enforce the code of conduct; had suspended guidance on company audits by Arthur Andersen or by