Bob Jensen's Threads Frauds at Andersen, Enron, and Worldcom
Bob Jensen at Trinity University 

Table of Contents
FBI Corporate Fraud Hotline (Toll Free) 888-622-0177

My fraud.htm file became too large for my HTML editor software, so that I had to divide it into fraudEnron.htm and a fraud.htm files.  This is the fraudEnron.htm file. 
The fraud.htm file is at
http://www.trinity.edu/rjensen/fraud.htm

Bob Jensen's Enron Quiz is at http://www.trinity.edu/rjensen/FraudEnronQuiz.htm

The Andersen, Enron, and Worldcom Scandals 

Enron/Andersen Fraud Introductory Quotations 

Books and Other References on the Andersen and Enron Scandals  

Enron Fraud Updates and Timeline of Key Events in the History of the Enron Scandal

Other Fraud Updates and Other Updates to the Accounting and Finance Scandals --- 
http://www.trinity.edu/rjensen/FraudUpdates.htm 

Media Coverage is Very, Very Good and Very, Very Bad
From Enron to Earnings Reports, How Reliable is the Media's Coverage?
   http://www.trinity.edu/rjensen/FraudRotten.htm#Media

Risk-Based Auditing Under Attack  --- http://www.trinity.edu/rjensen/Fraud.htm#RiskBasedAuditing  

What's Right and What's Wrong With (SPEs), SPVs, and VIEs --- 
http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm

What are some of the main lessons learned from the Enron scandal? 
What major problems remain?

I especially like "Suggestions for Reform" listed at http://www.citizenworks.org/corp/reforms.php

A pretty good summary of lessons learned is provided at http://www.law.northwestern.edu/professionaled/documents/Ruder_Lessons_Enron.pdf

How did energy deregulation became a tangled mess? How did Enron exploit this mess?
Click Here for Question 11 and its answer --- http://www.trinity.edu/rjensen/FraudEnronQuiz.htm

 

Links Related to Andersen, Enron, Worldcom, and Other Frauds

Bob Jensen's Enron Quiz With Answers --- http://www.trinity.edu/rjensen/FraudEnronQuiz.htm
 

Enron History --- http://en.wikipedia.org/wiki/Enron_scandal

Enron Fraud Updates and Timeline of Key Events in the History of the Enron Scandal

Enron/Andersen Fraud Introductory Quotations 

Books and Other References on the Andersen and Enron Scandals  

ENRON'S CAST OF CHARACTERS AND THEIR STOCK SALES
You can read more about how much the Directors and Officers made from Enron share sales at Enron's financial meltdown wiped out tens of billions in shareholder wealth at http://www.trinity.edu/rjensen/FraudEnron.htm#StockSales 

The Famous Enron Video on Hypothetical Future Value (HFV) Accounting --- HFV

What was the total of Jeff Skilling's Enron stock sales and how much was he fined in 2006?
Ken Lay's secret recipes for looting $184,494.426 from the corporation you manage

Ken Lay's Defense

Online Videos About Enron and Other Frauds

Google, Microsoft and Yahoo are quietly developing new search tools for digital video, foreshadowing a high-stakes technology arms race in the battle for control of consumers' living rooms. Google's effort, until now secret, is arguably the most ambitious of the three. According to sources familiar with the plan, the search giant is courting broadcasters and cable networks with a new technology that would do for television what it has already done for the Internet: sort through and reveal needles of video clips from within the haystack archives of major network TV shows. The effort comes on top of Google's plans to create a multimedia search engine for Internet-only video that it will likely introduce next year, according to sources familiar with the company's plans. In recent weeks, Mountain View, Calif.-based Google has demonstrated new technology to a handful of major TV broadcasters in an attempt to forge alliances and develop business models for a TV-searchable database on the Web, those sources say.
GeekNik, December 5, 2004 --- http://www.geeknik.net/?journal,594 
The full story is at http://news.com.com/Striking+up+digital+video+search/2100-1032_3-5466491.html?tag=nefd.lede 
You can test Yahoo now.  Search for Enron at http://video.search.yahoo.com/ 
Bob Jensen's search helpers are at http://www.trinity.edu/rjensen/searchh.htm 

Frontline (from PBS) videos on accounting and finance regulation and scandals in the U.S. --- http://www.pbs.org/wgbh/pages/frontline/shows/regulation/view/

Note that one of the Frontline videos in about the Enron scandal --- http://www.pbs.org/wgbh/pages/frontline/shows/regulation/view/

Rebecca Mark's Secret Recipes for Looting $100 million from corporations you manage

Enron's E-mail (Email) messages are now part of the public record

They do it because they can get away with it!  Even if they get caught they either live lavishly in a country that will not extradite them or they serve a few years in a country club called a prison.

Free Market Myths by Agency Theorists  

The Saga of Auditor Professionalism and Independence --- http://www.trinity.edu/rjensen/fraud001.htm#Professionalism 

Andersen Audits of NASA Were Audit Failures 

The Worldcom/Andersen Scandal  

Worldcom Fraud   

What's Right and What's Wrong With (SPEs), SPVs, and VIEs --- 
http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm

Risk-Based Auditing Under Attack   

What's Right and What's Wrong With SPEs, SPVs, and VIEs --- http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm

The Enron/Andersen Scandal on Creative Accounting and My Messages to Students 

Fast Acting Texas State Board of Accountancy

I think it's spelled Andersen, but why quibble years later?
"Anderson Accountants Facing Disciplinary Actions," AccountingWeb, November 10, 2005 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=101466

The Texas State Board of Public Accountancy has filed a complaint against seven former Arthur Anderson accountants who were involved in audit operations for Enron and its subsidiaries. The Houston Chronicle reports that they failed to adequately examine and report financial events leading to Enron’s implosion according to the filed complaint. The complaint was filed with the State Office of Administrative Hearings. The complaint reads that the seven accountants audited a portion of Enron’s 1997 financial statements and allegedly did not follow proper accounting procedures that specified they consolidate the statements of the two subsidiaries named for Star Wars characters, Chewco and Jedi. After notification by the Securities and Exchange Commission, these statements were changed by Enron according to the Houston Chronicle.

The Houston Chronicle reports that actions leading from the complaint include suspension or revocation of their state accounting licenses. Arthur Anderson’s accounting license was revoked in 2002. The seven accountants may also receive fines of $1000 for each violation alleged in the complaint according to the Associated Press. There has been no date specified for their hearing.


November 11, 2005 message from Clikeman, Paul [pclikema@RICHMOND.EDU]

Can somebody please help me understand this news item?

 David Duncan, who pleaded guilty to a felony, is not one of the seven AA auditors named in the complaint. Has he already been disciplined by the Texas Board?

 And Carl Bass is named in the current complaint. The media portrayed Bass as a “hero” in 2002 for objecting to Enron’s SPE accounting. Joseph Berardino claimed in a television interview that Bass was removed from the Enron audit because Enron’s executives complained about Bass’s refusal to cooperate. Is Bass not as innocent as earlier news items indicated?

 Paul M. Clikeman, Ph.D.
Associate Professor of Accounting
Robins School of Business
University of Richmond
Richmond, VA 23173
pclikema@richmond.edu

November 11, 2005 reply from Bob Jensen

If you read Page 426-427 (especially the bottom of Page 427) of Conspiracy of Fools by Kurt Eichenwald, you get the idea that Carl Bass was made a fall guy, by Andersen executives, in Braveheart, Fishtail, and Raptor.

Bass seemed all along to argue with Duncan about accounting for derivatives and SPEs, which is why Duncan himself had Bass removed from the Enron audit.  Some might argue that Bass could have done more early on in reporting his side of things with John Stewart in Chicago.  In some ways I agree with this.  Carl Bass seemed to be a good auditor who just did not blow the whistle effectively until it was too late.  I think he had ample evidence that Duncan was not going to listen to reason and buck Rick Causey at Enron.

Bob Jensen

 


 

Enron: A Message to My Students in the Wake of Recent Auditing Scandals

Accounting Education Shares Some of the Blame --- http://www.trinity.edu/rjensen/FraudProposedReforms.htm#AccountingEducation 

The SEC will not tolerate a pattern of growing restatements, audit failures, corporate failures and massive investor losses," Pitt said in a news conference. "Somehow we have got to put a stop to the vicious cycle that has now been in evidence for far too many years."

 

Enron is Yet Another Example of a Typical Audit Committee Failing
My Gut Wrenching Memo About My Former Professor and Mentor


What were Enron's Accounting Tricks?
The best and most concise summary of tricks is Frank Portnoy's Senate Testimony --- http://www.trinity.edu/rjensen/fraudEnron.htm#FrankPartnoyTestimony

The starting draft about some of the tricks --- http://www.trinity.edu/rjensen//theory/00overview/AccountingTricks.htm 

 

Suggested Reforms
Suggested Reforms (Including those of Warren Buffet and the Andersen Accounting Firm)    
http://www.trinity.edu/rjensen/FraudProposedReforms.htm

Major New Law in the Wake of the Accounting and Finance Scandals
SARBANES-OXLEY ACT OF 2002 --- http://www.trinity.edu/rjensen/fraud082002.htm 

Bottom-Line Commentary of Bob Jensen
Bottom-Line Commentary of Bob Jensen:  Systemic Problems That Won't Go Away  
http://www.trinity.edu/rjensen/FraudConclusion.htm

 

Books and Other References on the Andersen and Enron and Related Scandals  

Related Documents in the Accounting, Finance, and Corporate Governance Scandals and Frauds

Bob Jensen's threads on professionalism and independence are at  http://www.trinity.edu/rjensen/fraud.htm#Professionalism 

Bob Jensen's threads on pro forma frauds are at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#ProForma 

Bob Jensen's threads on ethics and accounting education are at 
http://www.trinity.edu/rjensen/FraudProposedReforms.htm#AccountingEducation

The Saga of Auditor Professionalism and Independence ---
http://www.trinity.edu/rjensen/fraud001.htm#Professionalism 

Incompetent and Corrupt Audits are Routine ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#IncompetentAudits

Bob Jensen's threads on accounting theory are at http://www.trinity.edu/rjensen/theory.htm 

Future of Auditing --- http://www.trinity.edu/rjensen/FraudConclusion.htm#FutureOfAuditing

Bob Jensen's threads on accounting theory are at http://www.trinity.edu/rjensen/theory.htm 

Bob Jensen's threads on how to detect and report frauds --- http://www.trinity.edu/rjensen/FraudReporting.htm 

 

 

The Consumer Fraud Portion of this Document Was Moved to http://www.trinity.edu/rjensen/FraudReporting.htm 

 

 

Introductory Quotations 

The day Arthur Andersen loses the public's trust is the day we are out of business.  
Steve Samek, Country Managing Partner, United States, on Andersen's Independence and Ethical Standards CD-Rom, 1999.

 

One time I posed a question to the, then, Editor of The Wall Street Journal Editorial Page (my former fraternity brother Bob Bartley) about why the WSJ on that very day was attacking Mike Milken as a felonious thief on Page 1 and praising Milken as a creative capitalist on the Editorial Page. Bob Bartley's truthful response was that the WSJ, more than any other newspaper, is really two newspapers bundled into one copy. The Editorial Page is an unabashed advocate of free-reining capital markets (Damn the Torpedoes). The rest of the newspaper reports the facts (and I think the WSJ reporters are among the best in the world, especially when they commenced to prickle Ken Lay and Jeff Skilling about hidden related party transactions at Enron). See Question 22 at http://www.trinity.edu/rjensen/FraudEnronQuiz.htm
It's interesting that WSJ reporters discovered related party transactions when Enron's auditors pleaded ignorance about such fraudulent dealings. But then Andersen was becoming notorious at that time for bad audits.

 

When the Securities and Exchange Commission found evidence in e-mail messages that a senior partner at Andersen had participated in the fraud at Waste Management, Andersen did not fire him. Instead, it put him to work revising the firm's document-retention policy. Unsurprisingly, the new policy emphasized the need to destroy documents and did not specify that should stop if an S.E.C. investigation was threatened. It was that policy David Duncan, the Andersen partner in charge of Enron audits, claimed to be following when he shredded Andersen's reputation.

Floyd Norris, "Will Big Four Audit Firms Survive in a World of Unlimited Liability?," The New York Times, September 10, 2004

In his eulogy for Arthur Andersen, delivered on January 13, 1947 the Rev. Dr. Duncan E. Littlefair closed with the following words:

Mr. Andersen had great courage.  Few are the men who have as much faith in the right as he, and fewer still are those with the courage to live up to their faith as he did...For those of you who worked with him and carry on his company, the meaning is clear.  Those principles upon which his business was built and with which it is synonymous must be preserved.  His name must never be associated with any program or action that is not the highest and the best.  I am sure he would rather the doors be closed than that it should continue to exist on principles other than those he established.  To you he has left a great name.  Your opportunity is tremendous; your responsibility is great.

The most serious problems in our profession are caused by our own self-indulgence.
LEONARD SPACEK, CEO of the major accounting firm of Arthur Andersen, 1956
Loren Steffy, "Sage of ethical accounting foretold Andersen demise," The Houston Chronicle, January 13, 2005 (I thank Paul Bjorklund for pointing this article out to me.)

It is not too much to expect that principles have a place in business today.  They do.  It's too late for this once-great Firm, but there's still time for the rest of us.
As quoted from pp. 253-254 in Final Accounting, by Barbara Ley Toffler (Broadway Books, 2003).  I might  note that the main message at the start of Barbara Ley Toffler’s book is that Andersen adopted a policy of overcharging for services or in her words “padding the bill.”  This perhaps was the beginning of the end!
You can read about Arthur Andersen at http://fisher.osu.edu/acctmis/hall/members-chrono.htm 

Nothing wrong with overcharging, so long as everyone else is doing it, right?
Gretchen Morgenson"The Mutual Fund Scandal's Next Chapter," The New York Times, December 7, 2003
(For threads on the mutual fund scandals, see Rotten to the Core below.)

So what's a little business deal among friends?  It's trouble, if the friends are college or college-foundation trustees who benefit personally from the decisions they make on behalf of the institutions they serve.  
Julianne Basinger, "Boars Crack Down on Members' Insider Benefits," The Chronicle of Higher Education, February 6. 2004, Page A1.

The open-access method of distributing scientific journals, says John E. Cox, a publishing-industry consultant, "is the most articulate and serious threat to the conventional publishing market that we've seen."
Lila Gutterman, "The Promise and Peril of 'Open Access,'" The Chronicle of Higher Education, January 30, 2004, Page A10.
See The Biggest Academic Rip-off of All Time by Publishing Monopolists --- http://www.trinity.edu/rjensen/fraud033104.htm#MonopolyJournals

Conspiracy of Fools

Sometimes the key mover in Enron's shady dealings, CFO Andy Fastow, was portrayed by the media as a financial genius.  This may not be the case.
Somebody called in Kaminski.  He was soft-spoken yet excitable, a man who quickly assessed colleagues' brainpower --- and Fastow had never made it high on his list of high-voltage intellects.  Long ago, when Fastow had incorrectly boasted that his business was unaffected by interest rate, Kaminski had concluded the man was a lightweight . . . Kaminski smiled to himself.   "How could a man like this be in charge of a business?" A hedge could only offset declines in an asset's value, not operating losses from a failing business.  The only hedge for a money-losing business was a moneymaking business---and one of those certainly wasn't going to be coming out of this meeting.
Kurt Eichenwald, Conspiracy of Fools (Broadway Books, 2005, pp. 9394).
 

Nor are Andersen's managing partners on the Enron audit portrayed as rocket scientists.
Kurt Eichenwald, Conspiracy of Fools (Broadway Books, 2005, pp. 138-139).

Since 1990, Stephen Goddard at Andersen had overseen Enron--meeting the board, reviewing deals, auditing financials.  Goddard wasn't Hollywood's idea of an accountant; this was no boring technocrat with green eyeshades.  He was a specialist in client services, a backslapper who maintained a close relationship with the managers whose numbers his team reviewed.

Thanks in part to that familiarity, Andersen and Enron developed an unusually close relationship.  The firm was both its auditor and its consultant.  Veterans of Andersen's Houston office jumped to Enron as internal auditors; even Rick Causey, Enron's top accounting guru, had been an Andersen manager.  The relationship couldn't have been cozier.

But by February 1997, things had to change.  Andersen rotated partners on accounts every seven years, and Goddard's time was up.  Some partners lobbied to move up Tom Bauer, a top-notch accountant, who audited Enron's trading operations.  But Goddard thought there was only one candidate--David Duncan, a thirty-six-year-old who had worked on Enron for years.  With Goddard's support, Duncan got the nod.

Duncan rarely impressed anyone as a towering intellect, and his background was unremarkable.  Born in Lake Charles, Louisiana, and raised in Beaumont, Texas, Duncan attended Texas A&M, where he studied accounting.  In college he had been something of a party boy; he and a group of friends had formed what amounted to a co-op for illicit drugs, purchasing large quantities of marijuana that they divided among themselves.  Often, Duncan and his pals could be found around campus laughing it up, stoned.

In 1981, straight out of college, Duncan joined Andersen's Houston office but didn't change his ways.  For years, he and his friends kept up their mass drug buying.  Several days a week he would leave the staid accounting world and head home to toke up; sometimes he branched out to cocaine.  But a few years after starting on the Enron engagement, Duncan straightened up.  He didn't used illegal drugs since.

Enron seemed the ideal assignment.  In his early days at Andersen, Duncan struck up a friendship with Causey, then just another accountant in the Houston office.  The two became close, often lunching, golfing, or going out with their wives.  Now his buddy was Enron's top accountant.

Clearly, Duncan was no accounting whiz, but nobody worried about that; like most partners, he would rely on the experts in the firm's Professional Standards Group to rule on tough issues.  But he stuck some partners as top-flight where it mattered--his familiarity with Enron and a close relationship with its executives.  His good looks and disciplined organization didn't hurt, either.

In early February, Goddard and Duncan had an appointment with Lay, to notify him of the coming change.  Lay was polite, if not particularly interested; he vaguely knew Duncan and thought he seemed competent enough.

"I'm very excited about the opportunity to work more closely with Enron," Duncan said.  "It's really an honor."

Lay smiled.  "We'll have a lot of fun," he said.

By any measure, Duncan seemed a man on the precipice of big things.  But it was not to be; the great opportunity at Enron would be his last high-profile accounting job.

 

Jensen Comment:
It was Enron CEO Jeff Skilling who really got Enron into its illegal trading practices, although in fairness he did not view them as illegal when he came up (while a consultant to Enron from McKinsie) with some very clever ideas for getting Enron into the energy trading business.  Skilling is portrayed as the smartest of Enron's dim-light bulb executives but he also became the least mentally and emotionally stable.  He was great when things were rolling well but collapsed badly under pressures and pending bad news. 

The Causey of It All --- At Long Last

Of all the Enron accounting executives (Fastow was the CFO who knew epsilon about accounting) I wanted Rick Causey sent up river. Causey was the Chief Accounting Officer who worked out most of the accounting fraud and was the closest conspirator with David Duncan, Andersen's manager of the less-than-independent audit. Causey mysteriously was not called on to testify in the trials of Lay and Skilling, purportedly because he was "not a rat." It appears that he was a bit more of a rat than previously reported.

"Ex-Enron Officer Given 5½ Years in Prison," The New York Times, November 16, 2006 --- http://www.nytimes.com/2006/11/16/business/16enron.html

Richard A. Causey, the last of the top Enron executives to learn his punishment, was sentenced Wednesday to five and a half years in prison for his role in the corporate accounting scandal.

Mr. Causey, 46, the company’s former chief accounting officer, pleaded guilty in December to securities fraud, two weeks before he was to be tried along with the founder of Enron, Kenneth L. Lay, and the former chief executive, Jeffrey K. Skilling, on conspiracy, fraud and other charges related to the company’s collapse.

Mr. Causey had agreed to serve seven years in prison. Prosecutors said they could have recommended it be reduced to five if they were pleased with his cooperation.

Mr. Causey also agreed to pay $1.25 million to the government and to forfeit a claim to about $250,000 in deferred compensation as part of his plea deal. Unlike some others at Enron, he did not skim millions of dollars for himself.

Prosecutors dropped their plan to seize Mr. Causey’s home, a $950,000 two-story red-brick house in a Houston suburb.

Mr. Causey had faced more than 30 counts of conspiracy, fraud, insider trading, lying to auditors and money laundering.

In his guilty plea, made in Federal District Court, he admitted making false public findings and statements.

He did not testify in the Lay-Skilling trial this year, though he was on the defense witness list.

Mr. Skilling and Mr. Lay were convicted in May of conspiracy and fraud. Mr. Lay’s convictions were wiped out with his July death from heart disease. Mr. Skilling was sentenced last month to more than 24 years in prison.

Andrew S. Fastow, Enron’s former chief financial officer, whose schemes helped doom the company, was sentenced in September to six years.

Mark E. Koenig, Enron’s former director of investor relations, and Michael J. Kopper, an Enron managing director and Mr. Fastow’s top aide, are scheduled to be sentenced Friday.

Enron collapsed into bankruptcy in December 2001 after years of accounting tricks could no longer hide billions in debt or make failing ventures appear profitable.

Bob Jensen's threads on Rick Causey are at http://www.trinity.edu/rjensen/FraudEnronQuiz.htm

Why white collar crime pays for Chief Enron Accountant: 
Rick Causey's fine for filing false Enron financial statements:    $1,250,000
Rick Causey's stock sales benefiting from the false reports:     $13,386,896
That averages out to winnings of $2,427,379 per year for each of the five years he's expected to be in prison
You can read what others got at http://www.trinity.edu/rjensen/FraudEnron.htm#StockSales 
Nice work if you can get it:  Club Fed's not so bad if you earn $6,650 per day plus all the accrued interest over the past 15 years.

 

"Enron’s Lasting Influence," AccountingWeb, January 10, 2006 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=101647

With the former Enron executives finally coming to trial, we are reminded again of the long shadow cast by the implosion of the company that helped enact the Sarbanes-Oxley (SOX) Act of 2002. Section 404 has added teeth to SOX, making regulation more expensive and staff intensive and the Public Company Accounting Oversight Board (PCAOB) has been created to aid in the governance and enforcement of the accounting industry. Audit committees have attained more important positions in corporate structures and are more attuned to avoid the conflicts of being both auditor and consultant for the same company. At the same time, with the collapse of Arthur Andersen, the consolidation of the Big Five to the Big Four now have four accounting firms doing the work for more than 90 percent of publicly traded companies, according to the New York Times.

“We certainly have seen some improvements in governance, but we’ve also seen some areas of no improvement, and some areas where things have gone backwards,” said Lynn E. Turner, speaking to the New York Times. Turner is the former chief accountant at the Securities and Exchange Commission (SEC) and now managing director of research at Glass, Lewis & Company.

The outright accounting scandals of Worldcom, Tyco, and Adelphia have now morphed into companies making financial restatements. Glass, Lewis & Company reports that earnings restatements numbered 1,031 through the end of October 2005, compared with 650 for 2004 and 270 in 2001, according to the New York Times. John C. Coffee, speaking in the Los Angeles Times, said the restatements were not necessarily evidence of fraud but shows the tighter focus of accountants.

Also, more than 1,250 public companies, out of around 15,000 in total, reported material weaknesses in their internal corporate controls in October 2005. Some 232 other companies reported less serious, but significant deficiencies in their internal controls, according to the New York Times.

In contrast, a new study shows that the number of securities class-action suites has come down 17 percent in 2005. The 176 filed in 2005 is the lowest since 1997, according to Cornerstone Research and Stanford Law School. 1998 saw 239 suites, the highest number in recent years, according to the Los Angeles Times.

Christopher Cox, chairman of the SEC, said in a late December interview with the New York Times, that he agreed that more should be done, disclosing his intention to lead a commission effort to rewrite rules forcing companies to provide more financial details concerning executive pay.

Tighter accounting and disclosure rules enacted to enhance the transparency of financial information have lead to an industry-lead backlash. Cox said to the New York Times that it “would be a mistake” to retract major provisions of SOX.

“The shocks were so big that no director could miss the lesson and if they did miss somehow, the significant changes in the law made it absolutely certain that they are now more focused,” Cox added. “With just a few years of Sarbanes-Oxley under their belts, most companies are begrudgingly admitting that the exercise is producing benefits.”

SOX has sincere proponents though, institutional and pension investor groups being the most vocal. Alan G. Hevesi, New York comptroller of one of the nation’s largest institutional investors, has been leading the effort to increase corporate accountability. Speaking with the New York Times, Hevesi said, “We’ve had some successes in corporate governance reform. In other words – such as giving a greater voice to shareholders to elect independent directors and curbing excessive executive compensation – we haven’t been as successful. I worry about whether the necessary reforms have really been institutionalized.”

Executives say that restatements are healthy signs of change according to the New York Times although, “The general impression of the public is that accounting rules are black and white. They are often anything but that, and in many instances the changes in earnings came after new interpretations by the chief accountant of the S.E.C.," said Steve Odland, Office Depot’s CEO and head of a corporate governance task force at the Business Roundtable.

Accounting scandals are more often settled with the SEC or actions filed by the agency now. For example, AcAfee, the Internet security company, has agreed to settle charges made by the SEC that they inflated revenues by some $622 million between 1998 and 2000. Their penalty will be $50 million. The settlement is awaiting court approval.

The SEC filed a civil lawsuit against six former executives then employed by an unnamed transfer-agent unit of Putnam Investments last week. They allegedly defrauded mutual funds and clients out of some $4 million in 2001. Also the judge has ruled that SEC testimony will be allowed into the trials of former Enron executives Jeffrey Skilling and Kenneth Lay.

What are some of the main lessons learned from the Enron scandal? 
I especially like "Suggestions for Reform" listed at http://www.citizenworks.org/corp/reforms.php

A pretty good summary of lessons learned is provided at http://www.law.northwestern.edu/professionaled/documents/Ruder_Lessons_Enron.pdf

Bob Jensen's threads on reforms are at http://www.trinity.edu/rjensen/FraudProposedReforms.htm

Bob Jensen's Enron Quiz is at http://www.trinity.edu/rjensen/FraudEnronQuiz.htm

KPMG’s “Unusual Twist”
While KPMG's strategy isn't uncommon among corporations with lots of units in different states, the accounting firm offered an unusual twist: Under KPMG's direction, WorldCom treated "foresight of top management" as an intangible asset akin to patents or trademarks.  
See  http://www.trinity.edu/rjensen/FraudEnron.htm#WorldcomFraud

Punch Line
This "foresight of top management" led to a 25-year prison sentence for Worldcom's CEO, five years for the CFO (which in his case was much to lenient) and one year plus a day for the controller (who ended up having to be in prison for only ten months.) Yes all that reported goodwill in the balance sheet of Worldcom was an unusual twist.

 

Professional Fees in Enron Bankruptcy Top $780 million (as of December 2004) --- http://www.accountingweb.com/item/100263 
Guess who pays the next time you pay your power bill?

A jury has convicted four former Merrill Lynch executives and a former Enron finance executive for helping push through a sham deal to pad the energy company's earnings
"5 Executives Convicted of Fraud in First Enron Trial," The New York Times, November 3, 2004 --- http://www.nytimes.com/aponline/business/03WIRE-ENRON.html 

Update on October 2007

Then how come Merrill Lynch is on the verge of escaping the wrath of investors because of its involvement in some of Enron's corporate and accounting frauds? The Securities and Exchange Commission lays out the facts in various documents such as Litigation Release No. 20159 and Accounting and Auditing Enforcement Release No. 2619, and in the related Complaint in the U.S. District Court.
"The Accounting Cycle:  The Merrill Lynch-Enron-Government Conspiracy," by: J. Edward Ketz, SmartPros, October 2007 --- http://accounting.smartpros.com/x59129.xml 

In a 2004 trial, a jury found these four Merrill executives guilty of participating in a fraudulent scheme. The former Merrill managers appealed the verdicts, and amazingly the Fifth Circuit tossed them out. The appellate court held that those bankers provided "honest services" and that they did not personally profit from the deal.

That argument assumes that getaway drivers supply honest services to bank robbers; after all, an oral agreement to repurchase the investment at 22 percent return is a strong signal that something is amiss with the transaction. The argument also shows a lack of understanding how managers profit in the real world. Investment bankers advance their careers by bringing in business that generates income for the bank; Merrill Lynch's executives did that with the Enron barge transaction, thereby promoting their careers, their promotions, and their salaries and bonuses, even if in an indirect fashion.

 

 

Enron documentary will be available soon
For the preview screening in Houston last week of the documentary " Enron: The Smartest Guys in the Room," two indicted executives from the company, Kenneth L. Lay and Jeffrey K. Skilling, were not in the room - even though their multimillion-dollar homes were just a few blocks from the theater. "We invited them, but we didn't hear back," Alex Gibney, the documentary's director, said with a straight face. Hundreds of former Enron employees, however, did attend the screening. Many groaned and shook their heads at archival clips in which top-level management appeared arrogant, dishonest and greedy. "Try 'em and fry 'em," said Michael Ratner, who was a manager in Enron's pipeline division and now works for an investment bank. But in the same breath, he said wistfully: "It was a great place to work. You could do anything if you proved that you could make money."
Kate Murphy, "Mr. Skilling, Come On Over," The New York Times, April 24, 2005 --- http://www.nytimes.com/2005/04/24/business/yourmoney/24suits.html

Sherron Watkins' whistle blowing Memo2 to Enron CEO Ken Lay as quoted on Page 366 of her book  Power Failure (Doubleday, 2003):

Summary of Raptor oddities: 

1.  The accounting treatment looks questionable. 

a. Enron booked a $500 mm gain from equity derivatives from a related party. 
b. That related party is thinly capitalized, with no party at risk except Enron. 
c. It appears Enron has supported an income statement gain by a contribution of its own shares.

One basic question: The related party entity has lost $500 mm in its equity derivative transactions with Enron. Who bears that loss? I can't find an equity or debt holder that bears that loss. Find out who will lose this money. Who will pay for this loss at the related party entity?

Scandals Are a Hot Topic in College Courses --- http://www.smartpros.com/x42201.xml

The Lawyers and Accountants Hit'em Hardest When Their Down
Executives from failed energy giant Enron say its total legal and accounting costs since declaring bankruptcy may top $1 billion by 2006, according to a newspaper report.
SmartPros, November 14, 2003 --- http://www.smartpros.com/x41372.xml 

Enron had done its homework in Washington. Help came largely from the husband-and-wife team of economists Senator Phil Gramm and his wife, Wendy. Before joining the Enron board, Wendy Gramm had exempted energy futures contracts from government oversight in 1992; her husband now pushed for the Commodity Futures Modernization Act in December 2000, which would deregulate energy trading. There was strong opposition to Phil Gramm's bill in the House, mainly from the President's Working Group on Financial Markets, who included Secretary of the Treasury Lawrence Summers; Alan Greenspan, the chairman of the Federal Reserve; and Arthur Levitt, chairman of the SEC. But Enron spent close to $2 million lobbying to combat that opposition, while Gramm kept the bill from floor debate in the waning days of the Clinton administration. He reintroduced it under a new name immediately after Bush assumed office and got his bill passed. Enron, in turn, got the opportunity to trade with abandon. No one needed to know--or could find out--how much power Enron owned and how or why the company moved it from place to place.
Power Failure: The Inside Story of the Collapse of Enron, by Mimi Swartz, Sherron Watkins, Page 227.  See "What was Enron getting for its political bribes?"

"Who Will Fastow Implicate? Enron's ex-CFO is a loose cannon who could shoot in several directions, at a string of Enron execs, bankers, and lawyers," Business Week, January 15, 2004 --- http://www.businessweek.com/bwdaily/dnflash/jan2004/nf20040115_1433_db035.htm 

It's a safe bet that a lot of people in Houston probably had trouble falling asleep last night. Now that former Enron (ENRNQ ) Corp. Chief Financial Officer Andrew S. Fastow has joined forces with the Justice Dept., he could potentially implicate dozens of execs, bankers, and lawyers for contributing to the company's downfall (see BW Online, 1/8/04, "From the Fastows to the Bigger Fish?"). Unlike Worldcom (WCOEQ ), Tyco (TYC ) HealthSouth, (HLSH ), and many other recent corporate scandals, where the circle of accused wrongdoers is small, the Enron case involved "large groups of officers and employees, representing such diverse functions as finance, accounting, tax, and legal," according to a report filed last year by bankruptcy examiner R. Neal Batson.

Continued in the article

Does all of this add up to a convincing indictment against the market? No. Even those economists like MIT's Paul Joskow who are most convinced that illegal market manipulation played a major role in the California meltdown continue to support the introduction of (better designed) markets to the electricity sector. Other economists are of the opinion that market design ought to be left to trial and error in the context of more complete deregulation rather than to some template drafted by experts who think they can know a priori how electricity markets could best be organized.
Jerry Taylor (See below.)

A paragraph form Page 360 of Pipe Dreams:  Greed, Ego, and the Death of Enron, by Robert Bryce (Public Affairs, 2002):

On June 17, Enron filed documents in bankruptcy court that showed total cash payments of $309.8 million to a group of 144 top Enron executives during 2001. In addition, those same executives cashed in stock options worth $311.7 million. There were lots of other perquisites that haven't been made public. According to one Enron insider, since the bankruptcy the company has been canceling club memberships all over Houston. When Enron filed for bankruptcy, the insider said, the company was paying for twenty-nine different country club memberships, each of which were costing the company an average of $28,000 per year.

The secret of success is sincerity. Once you can fake that, you've got it made!
Arthur Bloch  (although Chris Nolan says it should be attributed to Daniel Schorr)

New York State Attorney General Eliott Spitzer's charges of improper trading practices by several leading mutual fund families are another blow to public trust in financial institutions. Mutual funds have been the place you would advise the most unsophisticated investors to go: Mutual funds were designed for grandpa and grandma, and repeatedly recommended to them by all kinds of benevolent authorities. Thus scandals in the mutual fund sector are potentially much more damaging to public trust in our financial institutions than are scandals in other sectors -- such as the one playing out in the New York Stock Exchange right now.
See Robert Shiller's article below under "Rotten to the Core"

Good accounting serves as a check on speculation.  Good accounting challenges the pyramid scheme that bubbles perpetuate.  Bad accounting perpetuates pyramid schemes.  Bad accounting creates false earnings momentum that feeds price momentum.  GAAP , unfortunately, does have features that can be used to perpetuate bubbles. 
Stephen H. Penman, Financial Statement Analysis and Security Valuation (McGraw-Hill, 2004, Page 48).

Off Balance Sheet Financing Lives On
"Creative Deal or Highflying Pork?" by Leslie Wayne, The New York Times, April 28, 2003

The plan — in which Boeing and the Air Force propose to employ the kind of off-the-books financing made infamous by the Enron scandal — could provide Boeing up to $30 billion in fresh military contracts. The proposal would lease 100 planes — Boeing 767 airborne refueling tankers — to the Air Force. To critics, it is a perfect example not only of creative accounting but also of the political pork that has crept into government spending since the terrorist attacks of Sept. 11, 2001. Senator John McCain, Republican of Arizona and an influential member of the Senate Armed Services Committee, has called the Boeing proposal "cockamamie" and has vowed "to do everything I can to see the taxpayers of America are protected from this military-industrial rip-off." But what is a rip-off to Senator McCain, who has thrown one roadblock after another in front of the proposal, is portrayed by Boeing and the Air Force as a cost-effective way to provide a new link in the military supply chain as the Air Force begins to face the issue of replacing aging air refueling tankers. Some of the tankers date back to the Eisenhower administration, and many are now in use refueling Air Force military jets over Iraq and Afghanistan. "New tankers are a critical need," said Marvin R. Sambur, assistant secretary of the Air Force for acquisitions. "But we don't have that money to put out front." The lease proposal, he said, "gives us the ability to leverage the total amount of money the Air Force has. It's a super lease deal." But studies from the General Accounting Office, the Office of Management and Budget and the Congressional Budget Office, some ordered by Senator McCain, conclude that the Boeing-Air Force lease option is more costly than buying the planes outright. The studies also say the lease plan is far more expensive than simply overhauling the existing tanker fleet, an option the Air Force calls unrealistic, given the fleet's age. Now Mr. Rumsfeld must choose between the two sides. At a news conference last month, he declined to tip his hand as the Pentagon budget begins to move through Congress. He said that the issue was complex and that he had asked for more information. "And it's something that I guess I'll decide when I decide," he said. "But I don't need to set arbitrary deadlines as to when that might be."

QWEST EX-CEO JOSEPH NACCHIO soon may face civil charges over improper accounting. The telecom firm agreed to a preliminary $250 million settlement with the SEC.
Deborah Solomon et al, The Wall Street Journal, September 13, 2004, Page A3 --- http://online.wsj.com/article/0,,SB109483441282814794,00.html?mod=technology_main_whats_news 

Iwan Lost
Qwest executives massaged a deal with the Arizona School Facilities board to book the sale early and misled auditors about their actions, former Arthur Andersen auditor Mark Iwan testified Thursday.  Iwan said Grant Graham, a former Qwest finance executive, assured him the transaction would comply with accounting standards necessary to book the $33.6 million in the second quarter of 2001.
Tom McGhee, The Denver Post, March 19, 2004 --- http://www.denverpost.com/Stories/0,1413,36%257E26430%257E2027537,00.html

At least they will spend a little time in prison
 A federal judge in Houston gave two former Merrill Lynch & Co. officials substantially shorter prison sentences than the government was seeking in a high-profile case that grew out of the Enron Corp. scandal. In a separate decision yesterday, another Houston federal judge said that bank-fraud charges against Enron former chairman Kenneth Lay would be tried next year, immediately following the conspiracy trial against Mr. Lay, which is set for January. Judge Sim Lake had previously separated the bank-fraud charges from the conspiracy case against Mr. Lay and his co-defendants, Enron former president Jeffrey Skilling and former chief accounting officer Richard Causey. The government had been seeking to try Mr. Lay on the bank-fraud charges within about the next two months . . . Judge Ewing Werlein, Jr. sentenced former Merrill investment banking chief Daniel Bayly to 30 months in federal prison and James Brown, who headed the brokerage giant's structured-finance group, to a 46-month term. The federal probation office, with backing from Justice Department prosecutors, had recommended sentences for Messrs. Bayly and Brown of about 15 and 33 years, respectively. Mr. Brown had been convicted on more counts than Mr. Bayly.
John Emshwiller and Kara Scannell, "Merrill Ex-Officials' Sentences Fall Short of Recommendation," The Wall Street Journal, April 22, 2005, Page C3 ---
http://online.wsj.com/article/0,,SB111410393680013424,00.html?mod=todays_us_money_and_investing
Jensen Comment:  I double dare you to go to my "Rotten to the Core" threads and search for every instance of "Merrill" --- http://www.trinity.edu/rjensen/FraudRotten.htm

Update on October 2007

Then how come Merrill Lynch is on the verge of escaping the wrath of investors because of its involvement in some of Enron's corporate and accounting frauds? The Securities and Exchange Commission lays out the facts in various documents such as Litigation Release No. 20159 and Accounting and Auditing Enforcement Release No. 2619, and in the related Complaint in the U.S. District Court.
"The Accounting Cycle:  The Merrill Lynch-Enron-Government Conspiracy," by: J. Edward Ketz, SmartPros, October 2007 --- http://accounting.smartpros.com/x59129.xml 

In a 2004 trial, a jury found these four Merrill executives guilty of participating in a fraudulent scheme. The former Merrill managers appealed the verdicts, and amazingly the Fifth Circuit tossed them out. The appellate court held that those bankers provided "honest services" and that they did not personally profit from the deal.

That argument assumes that getaway drivers supply honest services to bank robbers; after all, an oral agreement to repurchase the investment at 22 percent return is a strong signal that something is amiss with the transaction. The argument also shows a lack of understanding how managers profit in the real world. Investment bankers advance their careers by bringing in business that generates income for the bank; Merrill Lynch's executives did that with the Enron barge transaction, thereby promoting their careers, their promotions, and their salaries and bonuses, even if in an indirect fashion.

 

 

From SmartPros on April 17, 2003 --- http://www.smartpros.com/x37911.xml 

According to the Wall Street Journal, more than 60% of the money paid to auditors by companies last year was for nonaudit services.

The huge amount is partly due to the new definition of "audit fees", which now covers services that were previously considered nonaudit.

The Securities and Exchange Commission is seeking to limit nonaudit services to preserve the independence of accountants and protect investors.

Hypocrisy of an unusual purity is on display as union leaders try to avoid disclosing truthful financial information to their members.
George Will 

 
Cooking the Books --- See http://www.trinity.edu/rjensen/fraudFirms.htm#Cooking

References

Frontline (from PBS) videos on accounting and finance regulation and scandals in the U.S. --- http://www.pbs.org/wgbh/pages/frontline/shows/regulation/view/ Note that one of the Frontline videos in about the Enron scandal --- http://www.pbs.org/wgbh/pages/frontline/shows/regulation/view/

March 31, 2008 message from rock musician larry@mightymoonmen.com

I just found your Enron links and stories from 2002...brings up bad memories
I wrote a song based loosely on Jeff skilling ... "Medicine Man"
You can listen to the song and read the lyrics --- www.mightymoonmen.com 
thanx

 

July 13, 2006 message from Linda Kidwell, University of Wyoming [lkidwell@UWYO.EDU]

The AccountingWeb.com weekly news service gave a link to a company that helped the SEC explain the case against Waste Management's Koenig. If you visit the site, at http://www.thefocalpoint.com/news/recent-cases_sec.htm,

you will find a pretty interesting series of power points that boil the issues down to basics.

Linda Kidwell

Risk-Based Auditing Under Attack   

Quotations for the Enron/Andersen scandals were moved to http://www.trinity.edu/rjensen/FraudEnron.htm#Quotations

Selected works of FRANK PARTNOY
Bob Jensen at Trinity University

 

1.  Who is Frank Partnoy?

Cheryl Dunn requested that I do a review of my favorites among the “books that have influenced [my] work.”   Immediately the succession of FIASCO books by Frank Partnoy came to mind.  These particular books are not the best among related books by Wall Street whistle blowers such as Liar's Poker: Playing the Money Markets by Michael Lewis in 1999 and Monkey Business: Swinging Through the Wall Street Jungle by John Rolfe and Peter Troob in 2002.  But in1997.  Frank Partnoy was the first writer to open my eyes to the enormous gap between our assumed efficient and fair capital markets versus the “infectious greed” (Alan Greenspan’s term) that had overtaken these markets.

Partnoy’s succession of FIASCO books, like those of Lewis and Rolfe/Troob are reality books written from the perspective of inside whistle blowers.  They are somewhat repetitive and anecdotal mainly from the perspective of what each author saw and interpreted. 

My favorite among the capital market fraud books is Frank Partnoy’s latest book Infectious Greed: How Deceit and Risk Corrupted the Financial Markets (Henry Holt & Company, Incorporated, 2003, ISBN: 080507510-0- 477 pages).  This is the most scholarly of the books available on business and gatekeeper degeneracy.  Rather than relying mostly upon his own experiences, this book drawn from Partnoy’s interviews of over 150 capital markets insiders of one type or another.  It is more scholarly because it demonstrates Partnoy’s evolution of learning about extremely complex structured financing packages that were the instruments of crime by banks, investment banks, brokers, and securities dealers in the most venerable firms in the U.S. and other parts of the world.  The book is brilliant and has a detailed and helpful index.

 

What did I learn most from Partnoy?

I learned about the failures and complicity of what he terms “gatekeepers” whose fiduciary responsibility was to inoculate against “infectious greed.”  These gatekeepers instead manipulated their professions and their governments to aid and abet the criminals.  On Page 173 of Infectious Greed, he writes the following: 

Page #173

When Republicans captured the House of Representatives in November 1994--for the first time since the Eisenhower era--securities-litigation reform was assured.  In a January 1995 speech, Levitt outlined the limits on securities regulation that Congress later would support: limiting the statute-of-limitations period for filing lawsuits, restricting legal fees paid to lead plaintiffs, eliminating punitive-damages provisions from securities lawsuits, requiring plaintiffs to allege more clearly that a defendant acted with reckless intent, and exempting "forward looking statements"--essentially, projections about a company's future--from legal liability.

The Private Securities Litigation Reform Act of 1995 passed easily, and Congress even overrode the veto of President Clinton, who either had a fleeting change of heart about financial markets or decided that trial lawyers were an even more important constituency than Wall Street.  In any event, Clinton and Levitt disagreed about the issue, although it wasn't fatal to Levitt, who would remain SEC chair for another five years.

 

He later introduces Chapter 7 of Infectious Greed as follows:

Pages 187-188

The regulatory changes of 1994-95 sent three messages to corporate CEOs.  First, you are not likely to be punished for "massaging" your firm's accounting numbers.  Prosecutors rarely go after financial fraud and, even when they do, the typical punishment is a small fine; almost no one goes to prison.  Moreover, even a fraudulent scheme could be recast as mere earnings management--the practice of smoothing a company's earnings--which most executives did, and regarded as perfectly legal.

Second, you should use new financial instruments--including options, swaps, and other derivatives--to increase your own pay and to avoid costly regulation.  If complex derivatives are too much for you to handle--as they were for many CEOs during the years immediately following the 1994 losses--you should at least pay yourself in stock options, which don't need to be disclosed as an expense and have a greater upside than cash bonuses or stock.

Third, you don't need to worry about whether accountants or securities analysts will tell investors about any hidden losses or excessive options pay.  Now that Congress and the Supreme Court have insulated accounting firms and investment banks from liability--with the Central Bank decision and the Private Securities Litigation Reform Act--they will be much more willing to look the other way.  If you pay them enough in fees, they might even be willing to help.

Of course, not every corporate executive heeded these messages.  For example, Warren Buffett argued that managers should ensure that their companies' share prices were accurate, not try to inflate prices artificially, and he criticized the use of stock options as compensation.  Having been a major shareholder of Salomon Brothers, Buffett also criticized accounting and securities firms for conflicts of interest.

But for every Warren Buffett, there were many less scrupulous CEOs.  This chapter considers four of them: Walter Forbes of CUC International, Dean Buntrock of Waste Management, Al Dunlap of Sunbeam, and Martin Grass of Rite Aid.  They are not all well-known among investors, but their stories capture the changes in CEO behavior during the mid-1990s.  Unlike the "rocket scientists" at Bankers Trust, First Boston, and Salomon Brothers, these four had undistinguished backgrounds and little training in mathematics or finance.  Instead, they were hardworking, hard-driving men who ran companies that met basic consumer needs: they sold clothes, barbecue grills, and prescription medicine, and cleaned up garbage.  They certainly didn't buy swaps linked to LIBOR-squared.

 

The book Infectious Greed has chapters on other capital markets and corporate scandals.  It is the best account that I’ve ever read about Bankers Trust the Bankers Trust scandals, including how one trader named Andy Krieger almost destroyed the entire money supply of New Zealand.  Chapter 10 is devoted to Enron and follows up on Frank Partnoy’s invited testimony before the United States Senate Committee on Governmental Affairs, January 24, 2002 --- http://www.senate.gov/~gov_affairs/012402partnoy.htm

The controversial writings of Frank Partnoy have had an enormous impact on my teaching and my research.  Although subsequent writers wrote somewhat more entertaining exposes, he was the one who first opened my eyes to what goes on behind the scenes in capital markets and investment banking.  Through his early writings, I discovered that there is an enormous gap between the efficient financial world that we assume in agency theory worshipped in academe versus the dark side of modern reality where you find the cleverest crooks out to steal money from widows and orphans in sophisticated ways where it is virtually impossible to get caught.  Because I read his 1997  book early on, the ensuing succession of enormous scandals in finance, accounting, and corporate governance weren’t really much of a surprise to me.

From his insider perspective he reveals a world where our most respected firms in banking, market exchanges, and related financial institutions no longer care anything about fiduciary responsibility and professionalism in disgusting contrast to the honorable founders of those same firms motivated to serve rather than steal.

Young men and women from top universities of the world abandoned almost all ethical principles while working in investment banks and other financial institutions in order to become not only rich but filthy rich at the expense of countless pension holders and small investors.  Partnoy opened my eyes to how easy it is to get around auditors and corporate boards by creating structured financial contracts that are incomprehensible and serve virtually no purpose other than to steal billions upon billions of dollars.

 

Most importantly, Frank Partnoy opened my eyes to the psychology of greed.  Greed is rooted in opportunity and cultural relativism.  He graduated from college with a high sense of right and wrong.  But his standards and values sank to the criminal level of those when he entered the criminal world of investment banking.  The only difference between him and the crooks he worked with is that he could not quell his conscience while stealing from widows and orphans.

 

Frank Partnoy has a rare combination of scholarship and experience in law, investment banking, and accounting.  He is sometimes criticized for not really understanding the complexities of some of the deals he described, but he rather freely admits that he was new to the game of complex deceptions in international structured financing crime.

2.  What really happened at Enron?


I begin with the following document the best thing I ever read explaining fraud at Enron.
Testimony of Frank Partnoy Professor of Law, University of San Diego School of Law Hearings before the United States Senate Committee on Governmental Affairs, January 24, 2002 --- http://www.senate.gov/~gov_affairs/012402partnoy.htm 

The following selected quotations from his Senate testimony speak for themselves:

 

  • Quote:  In other words, OTC derivatives markets, which for the most part did not exist twenty (or, in some cases, even ten) years ago, now comprise about 90 percent of the aggregate derivatives market, with trillions of dollars at risk every day.  By those measures, OTC derivatives markets are bigger than the markets for U.S. stocks. Enron may have been just an energy company when it was created in 1985, but by the end it had become a full-blown OTC derivatives trading firm.  Its OTC derivatives-related assets and liabilities increased more than five-fold during 2000 alone.

     
  • Quote: And, let me repeat, the OTC derivatives markets are largely unregulated.  Enron’s trading operations were not regulated, or even recently audited, by U.S. securities regulators, and the OTC derivatives it traded are not deemed securities.  OTC derivatives trading is beyond the purview of organized, regulated exchanges.  Thus, Enron – like many firms that trade OTC derivatives – fell into a regulatory black hole.

     
  • Quote:  Specifically, Enron used derivatives and special purpose vehicles to manipulate its financial statements in three ways.  First, it hid speculator losses it suffered on technology stocks.  Second, it hid huge debts incurred to finance unprofitable new businesses, including retail energy services for new customers.  Third, it inflated the value of other troubled businesses, including its new ventures in fiber-optic bandwidth.  Although Enron was founded as an energy company, many of these derivatives transactions did not involve energy at all.


     
  • Quote:  Moreover, a thorough inquiry into these dealings also should include the major financial market “gatekeepers” involved with Enron: accounting firms, banks, law firms, and credit rating agencies.  Employees of these firms are likely to have knowledge of these transactions.  Moreover, these firms have a responsibility to come forward with information relevant to these transactions.  They benefit directly and indirectly from the existence of U.S. securities regulation, which in many instances both forces companies to use the services of gatekeepers and protects gatekeepers from liability.


     
  • Quote:  Recent cases against accounting firms – including Arthur Andersen – are eroding that protection, but the other gatekeepers remain well insulated.  Gatekeepers are kept honest – at least in theory – by the threat of legal liability, which is virtually non-existent for some gatekeepers.  The capital markets would be more efficient if companies were not required by law to use particular gatekeepers (which only gives those firms market power), and if gatekeepers were subject to a credible threat of liability for their involvement in fraudulent transactions.  Congress should consider expanding the scope of securities fraud liability by making it clear that these gatekeepers will be liable for assisting companies in transactions designed to distort the economic reality of financial statements.


     
  • Quote:  In a nutshell, it appears that some Enron employees used dummy accounts and rigged valuation methodologies to create false profit and loss entries for the derivatives Enron traded.  These false entries were systematic and occurred over several years, beginning as early as 1997.  They included not only the more esoteric financial instruments Enron began trading recently – such as fiber-optic bandwidth and weather derivatives – but also Enron’s very profitable trading operations in natural gas derivatives.


     
  • Quote:  The difficult question is what to do about the gatekeepers.  They occupy a special place in securities regulation, and receive great benefits as a result.  Employees at gatekeeper firms are among the most highly-paid people in the world.  They have access to superior information and supposedly have greater expertise than average investors at deciphering that information.  Yet, with respect to Enron, the gatekeepers clearly did not do their job.

3.  What are some of Frank Partnoy’s best-known works?

 

Frank Partnoy, FIASCO: Blood in the Water on Wall Street (W. W. Norton & Company, 1997, ISBN 0393046222, 252 pages). 

This is the first of a somewhat repetitive succession of Partnoy’s “FIASCO” books that influenced my life.  The most important revelation from his insider’s perspective is that the most trusted firms on Wall Street and financial centers in other major cities in the U.S., that were once highly professional and trustworthy, excoriated the guts of integrity leaving a façade behind which crooks less violent than the Mafia but far more greedy took control in the roaring 1990s. 

After selling a succession of phony derivatives deals while at Morgan Stanley, Partnoy blew the whistle in this book about a number of his employer’s shady and outright fraudulent deals sold in rigged markets using bait and switch tactics.  Customers, many of them pension fund investors for schools and municipal employees, were duped into complex and enormously risky deals that were billed as safe as U.S. Treasury bonds.

His books have received mixed reviews, but I question some of the integrity of the reviewers from the investment banking industry who in some instances tried to whitewash some of the deals described by Partnoy.  His books have received a bit less praise than the book Liars Poker by Michael Lewis, but critics of Partnoy fail to give credit that Partnoy’s exposes preceded those of Lewis. 

Frank Partnoy, FIASCO: Guns, Booze and Bloodlust: the Truth About High Finance (Profile Books, 1998, 305 Pages)

Like his earlier books, some investment bankers and literary dilettantes who reviewed this book were critical of Partnoy and claimed that he misrepresented some legitimate structured financings.  However, my reading of the reviewers is that they were trying to lend credence to highly questionable offshore deals documented by Partnoy.  Be that as it may, it would have helped if Partnoy had been a bit more explicit in some of his illustrations.

Frank Partnoy, FIASCO: The Inside Story of a Wall Street Trader (Penguin, 1999, ISBN 0140278796, 283 pages). 

This is a blistering indictment of the unregulated OTC market for derivative financial instruments and the million and billion dollar deals conceived in investment banking.  Among other things, Partnoy describes Morgan Stanley’s annual drunken skeet-shooting competition organized by a “gun-toting strip-joint connoisseur” former combat officer (fanatic) who loved the motto:  “When derivatives are outlawed only outlaws will have derivatives.”  At that event, derivatives salesmen were forced to shoot entrapped bunnies between the eyes on the pretense that the bunnies were just like “defenseless animals” that were Morgan Stanley’s customers to be shot down even if they might eventually “lose a billion dollars on derivatives.”
 
This book has one of the best accounts of the “fiasco” caused almost entirely by the duping of Orange County ’s Treasurer (Robert Citron) by the unscrupulous Merrill Lynch derivatives salesman named Michael Stamenson. Orange County eventually lost over a billion dollars and was forced into bankruptcy.  Much of this was later recovered in court from Merrill Lynch.  Partnoy calls Citron and Stamenson “The Odd Couple,” which is also the title of Chapter 8 in the book.Frank Partnoy, Infectious Greed: How Deceit and Risk Corrupted the Financial Markets (Henry Holt & Company, Incorporated, 2003, ISBN: 080507510-0, 477 pages)

Partnoy shows how corporations gradually increased financial risk and lost control over overly complex structured financing deals that obscured the losses and disguised frauds  pushed corporate officers and their boards into successive and ingenious deceptions." Major corporations such as Enron, Global Crossing, and Worldcom entered into enormous illegal corporate finance and accounting.  Partnoy documents the spread of this epidemic stage and provides some suggestions for restraining the disease.

The Siskel and Ebert of Financial Matters: Two Thumbs Down for the Credit Reporting Agencies" by Frank Partnoy, Washington University Law Quarterly, Volume 77, No. 3, 1999 --- http://ls.wustl.edu/WULQ/ 

4.  What are examples of related books that are somewhat more entertaining than Partnoy’s early books?

Michael Lewis, Liar's Poker: Playing the Money Markets (Coronet, 1999, ISBN 0340767006)

Lewis writes in Partnoy’s earlier whistleblower style with somewhat more intense and comic portrayals of the major players in describing the double dealing and break down of integrity on the trading floor of Salomon Brothers.

John Rolfe and Peter Troob, Monkey Business: Swinging Through the Wall Street Jungle (Warner Books, Incorporated, 2002, ISBN: 0446676950, 288 Pages)

This is a hilarious tongue-in-cheek account by Wharton and Harvard MBAs who thought they were starting out as stock brokers for $200,000 a year until they realized that they were on the phones in a bucket shop selling sleazy IPOs to unsuspecting institutional investors who in turn passed them along to widows and orphans.  They write. "It took us another six months after that to realize that we were, in fact, selling crappy public offerings to investors."

There are other books along a similar vein that may be more revealing and entertaining than the early books of Frank Partnoy, but he was one of the first, if not the first, in the roaring 1990s to reveal the high crime taking place behind the concrete and glass of Wall Street.  He was the first to anticipate many of the scandals that soon followed.  And his testimony before the U.S. Senate is the best concise account of the crime that transpired at Enron.  He lays the blame clearly at the feet of government officials (read that Wendy Gramm) who sold the farm when they deregulated the energy markets and opened the doors to unregulated OTC derivatives trading in energy.  That is when Enron really began bilking the public.

 

 

Conspiracy of Fools by Kurt Eichenwald

Product Details:
ISBN: 0767911784
Format: Hardcover, 768pp
Pub. Date: March 2005
Publisher: Broadway Books

 Description --- http://www.randomhouse.com/broadway/conspiracyoffools/about_the_book.html

From an award-winning New York Times reporter comes the full, mind-boggling story of the lies, crimes, and ineptitude behind the spectacular scandal that imperiled a presidency, destroyed a marketplace, and changed Washington and Wall Street forever...

It was the corporate collapse that appeared to come out of nowhere. In late 2001, the Enron Corporation—a darling of the financial world, a company whose executives were friends of presidents and the powerful—imploded virtually overnight, leaving vast wreckage in its wake and sparking a criminal investigation that would last for years. But for all that has been written about the Enron debacle, no one has yet to re-create the full drama of what has already become a near-mythic American tale.

Until now. With Conspiracy of Fools, Kurt Eichenwald transforms the unbelievable story of the Enron scandal into a rip-roaring narrative of epic proportions, one that is sure to delight readers of thrillers and business books alike, achieving for this new decade what books like Barbarians at the Gate and A Civil Action accomplished in the 1990s.

Written in the roller-coaster style of a novel, the compelling narrative takes readers behind every closed door—from the Oval Office to the executive suites, from the highest reaches of the Justice Department to the homes and bedrooms of the top officers. It is a tale of global reach—from Houston to Washington, from Bombay to London, from Munich to São Paulo—laying out the unbelievable scenes that twisted together to create this shocking true story.

Eichenwald reveals never-disclosed details of a story that features a cast including George W. Bush, Dick Cheney, Paul O’Neill, Harvey Pitt, Colin Powell, Gray Davis, Arnold Schwarzenegger, Alan Greenspan, Ken Lay, Andy Fastow, Jeff Skilling, Bill Clinton, Rupert Murdoch, and Sumner Redstone. With its you-are-there glimpse into the secretive worlds of corporate power, Conspiracy of Fools is an all-true financial and political thriller of cinematic proportions.

One of the interesting outcomes is why top executives Rebecca Mark (stock sales of $8 million) and Lou Pai (stock sales of $270 million) escaped with fortunes and no legal repercussions like other top executives.  You can read about what they hauled home at http://www.trinity.edu/rjensen/FraudEnron.htm#StockSales

I've commented about Rebecca Mark previously at http://www.trinity.edu/rjensen/FraudEnron.htm#RebeccaMark

Lou Pai seems to be the biggest winner of all the "fools" in the Conspiracy of Fools.  Why he escaped is largely a matter of what seemed like bad luck that turned into good luck.  Although married, Lou became addicted to strip tease clubs.  He ultimately became involved and impregnated one of the young entertainers.  His messy divorce settlement called for him to sell his Enron stock holdings when the stock price was very high and appeared to have a great future.  That looked like his bad luck.  However, he actually cashed in at near the high point for reasons other than clairvoyance regarding the pending collapse of share prices.  In other words he cashed in at a high.  That was his good luck, because he cashed in early for reasons other than inside information.

Lou Pai became so wealthy at Enron that he managed to purchase a Colorado ranch larger than the State of Rhode Island.  The ranch even has a mountain which he named Pai Mountain that was actually a bit higher than his pile of cash from Enron stock sales and other compensation from Enron.  To make matters worse, the operation that he actually managed while at Enron was a big money loser for the company.  Who says sin doesn't pay?

I accidentally stumbled on Julian Pye's Photo Diary --- http://www.photodiary.org/index.html 

At this point the diary contains 1741 entries, most of the earlier are done with Nikon Coolpixes (N950, N995, N4500), a Canon S110, and most of the later ones with a Canon D30 and a Canon 10D. Thereally old ones have been scanned in from older photos, mostly taken with my Nikon 801 SLR, even earlier ones with my dad's Canon F1 and my first own camera, a Minolta AF-1.... And I'll just add more and more as time goes along..... Please check back from time to time and also leave lots of comments if you want ;-)

Note the keywords at http://www.photodiary.org/keywords.html 

Actually I was looking for Websites on Enron's scandalous Rebecca Mark --- http://www.photodiary.org/ph_c_4837.shtml 

What eventually happened to Rhyolite and its past glory is similar to what happened to ENRON in 2001. Peter Cooper is now the administrator of the Houston based company which was headed by former Navy veteran Ken Lay, a swindler. Skilling made a killing. Remember Rebecca Mack.

Rebecca Mark's timely selling of her Enron shares yielded $82,536,737.  You can read 1997  good stuff about her in http://www.businessweek.com/1997/08/b351586.htm and bad stuff about her (with pictures) at http://www.apfn.org/enron/mark.htm 

Rebecca Mark-Jusbasche has held major leadership positions with one of the world's largest corporations.  She was chairman and CEO of Azurix from 1998 to 2000.  Prior to that time, she joined Enron Corp. in 1982, became executive vice president of Enron Power Corp. in 1986, chairman and CEO of Enron Development Corp. in 1991, chairman and CEO of Enron International in 1996 and vice chairman of Enron Corp. in 1998.  She was named to Fortune's "50 Most Powerful Women in American Business" in 1998 and 1999 and Independent Energy Executive of the Year in 1994.  She serves on a number of boards and is a member of the Young President's Organization.

She is a graduate of Baylor University and Harvard University.  She is married and has two children.
http://superwomancentral.com/panelists.htm

If Mark had taken a bitter pleasure in Skilling’s current woes—the congressional grilling, the mounting lawsuits, the inevitable criminal investigation—no one would have blamed her. And yet she was not altogether happy to be out of the game. Sure, she had sold her stock when it was still worth $56 million, and she still owns her ski house in Taos. Her battle with Skilling, however, had been a wild, exhilarating ride.
TIME TABLE AND THE REST OF THE STORY:
http://www.msnbc.com/news/718437.asp

Rebecca P. Mark-Jusbasche, now listed as a director, bagged nearly $80 million for her 1.4 million shares. Rebecca was just Rebecca P. Mark without the hyphenated flourish in 1995, though I shouldn't say "just" because she was also Enron's CEO at the time, busily trying to smooth huge wrinkles in the unraveling Dabhol power project outside Bombay. That deal, projected to run to $40 billion and said to be the biggest civilian deal ever written in India, hinged on a power purchase agreement between the Maharashtra State Electricity Board (MSEB) and Enron's Dabhol Power Corp. (a JV led with project manager Bechtel and generator supplier GE).

There had been a lot of foot-dragging on the Indian side and Becky was there to light a fire. A memorandum of understanding between Enron and the MSEB had been signed in June '92 – only two weeks, as it happened, before the World Bank said it couldn't back the project because it would make for hugely expensive electricity and didn't make sense.

According to the state chief minister's account given two years later, the phase-one $910 million 695 MW plant was to run on imported distillate oil till liquefied natural gas became available. By the time the phase-two $1.9 billion 1320 MW plant was to be commissioned, all electricity would be generated by burning LNG – a very sore point with World Bank and other critics, given the availability of much cheaper coal.

In the event, by December '93, the power purchase agreement was signed, but with an escape clause for MSEB to jump clear of the second, much bigger plant.

State and union governments in India came and went, and for every doubt that surfaced, two were assuaged long enough for Indian taxpayers to sink deeper into Enron's grip.

Soon they were bound up in agreements to go ahead with the second phase of the project -- which now promised electricity rates that would be twice those levied by Tata Power and other suppliers. Unusually for this kind of project, the state government, with Delhi acting as a back-up guarantor, backed not just project loans but actually guaranteed paying the monthly power bill forever -- all in U.S. dollars – in the event the electricity board, DPC's sole customer, defaulted.

"The deal with Enron involves payments guaranteed by MSEB, Govt. of Maharashtra and Govt. of India, which border on the ridiculous," noted altindia.net on its Enron Saga pages. "The Republic of India has staked all its assets (including those abroad, save diplomatic and military) as surety for the payments due to Enron."
http://www.asiawise.com/mainpage.asp?mainaction=50&articleid=2389 

Key Lay and Rebecca Mark attempted to strong arm President Bush and Vice President Cheney into holding back on U.S. Aid payments to India if India defaulted on payments to India for the almost-useless power plant built by Enron (because it was gas in coal-rich India).  However, about the same time, the Gulf War commenced.  The U.S. needed all the allies it could get, including India.  Hence, the best laid political strong arm intentions of Lay and Mark failed.


Book Reviews by Nancy Bagranoff
JOURNAL OF INFORMATION SYSTEMS
Vol. 18, No. 2
Fall 2004
pp. 127-131

BETHANY MCLEAN AND PETER ELKIND, The Smartest Guys in the Room (New York, NY: Penguin Group, 2003).

Many books describe the Enron scandal.  This book's special niche is twofold.  First, it focuses on the cast of characters responsible--these are the smartest guys, or perhaps the greediest guys, on the planet.  Second, the authors provide a detailed explanation of the finance and accounting issues behind the company's downfall.  They can do so because McLean, in addition to her reporting skill, was also a Goldman Sachs analyst who was among the first to question Enron's business model and practices (see McLean's [March 5, 2001, pages 122-125] Fortune article: "Is Enron Overpriced?").

The scandal cast is large, so large that the book includes a guide to people and their jobs.  The cast includes insiders, accountants at Arthur Andersen, and the lawyers, bankers, and analysts at affiliated firms.  Ken Lay is the charismatic leader who set the tone at the top--the culture of greed.  Jeffrey Skilling is the brilliant Harvard M.B.A. who was an intellectual purist and gambler.  These qualities may have helped him to overlook the reality behind his ideas and take enormous risks.  The accountants in the story include Andy Fastow, the CFO who plea-bargained for a reduced sentence in return for ratting out the rest of the group; Rick Causey, the Chief Accounting Officer; and David Duncan, Enron's engagement partner at Arthur Andersen, best known for being a "yes man" to Enron management.  Every reader will have a favorite villain.  Mine is Andy Fastow, who the book portrays as the guy who came up with the schemes to juggle the numbers, while robbing the company like a common thief.

The Smartest Guys in the Room details Fastow's creative accounting "Structured financing" is the term used to describe the inventive measures Fastow's team used to find Enron's too-good-to-be-true growth.  One of the tools employed was a by-product of "securitization" (i.e., bundling a bunch of loans and getting investors to purchase them--like factoring accounts receivable) that allowed independent entities to purchase one or more securitized assets.  The independent entity set up to do this is the now infamous special purpose entity (SPE).  Enron became enamored with SPEs.  Fastow set up SPEs to bear risk and improve Enron's financial picture by supplying cash flows and earnings.  SPEs are not necessarily illegal and Enron's creative accounting began as just a stretch of the rules.  But Enron needed capital to continue its growth.  This pressured the financial team to increase cash flow and earnings.  Additionally, Fastow started thinking he should grab more profits for himself.  Some of his early SPEs were named after Star Wars characters (JEDI and Chewco, for example), but later entities that Fastow himself controlled were named for his family.  For example, the LJM funds are an acronym representing Fastow's wife and children's first names.  The chutzpah of some of Fastow's deals is breathtaking.  Accountants will love reading about them and wondering how anyone who took Accounting 101 could fail to see through them.

Jeffrey Skilling brought his consulting experience in the financial services industry to Enron where he introduced the concept of trading natural gas contracts, thereby creating a complex and hard-to-understand business model.  He insisted that Enron value its energy trade transactions using mark-to-market accounting.  The Smartest Guys in the Room explains that Skilling wanted this accounting method to be used at Enron so badly that it was "make or break" to get him to join the company.  Perhaps his motives were pure and he genuinely thought this was the best accounting method for these transactions.  He's been indicted, so the courts will decide.  Regardless of his intent, we now know the dangers of applying mark-to-market to difficult-to-value assets, such as energy contracts.  The book returns to the concept of mark-to-market many times in describing Enron's escalating financial woes.  It illustrates accounting method abuse, offering instructors rich fodder for classroom debates over principles- versus rules-based standards and conventional versus riskier accounting methods.

This book articulates Enron's undoing of Arthur Andersen.  In Andersen's culture, auditors saw themselves as enablers rather than as protectors of the public interest.  Andersen's auditors did, of course, question the financials and much of Andy Fastow's creative accounting.  The trouble is that they bent under management pressure and continued to issue clean opinions.  Even worse, anyone within the firm who objected, such as Carl Bass from Andersen's Professional Standards Group, was ignored or removed from the Enron account.  Exacerbating Andersen's lack of independence was the fact that many of the Enron's accountants were former Andersen employees.  For example, Rick Causey and David Duncan were close friends who began their careers together at Andersen.  The book explains, "The problem, of course, wasn't merely that Duncan was going to the Masters with Causey; it was that he saw things the way the client wanted him to see them and gave his assent to Enron accounting treatments that bore little relationship to economic reality" (p. 147).  Of course, the accountants were not the only ones who stood by and let Enron happen.  McLean and Elkind appropriately take the lawyers, bankers, and analysts to task, too.

The Enron story is likely to appear in accounting classrooms for years, much as Equity Funding's scandal did throughout the 1970s and beyond.  Enron's downfall contains many useful lessons and this book may be the best at detailing them for accounting and auditing students.  It is also a great morality play with important ethical lapses and lessons.  Interestingly, the book begins with a Statement of Values reprinted from Enron's 1998 annual report.  It also describes the Code of Ethics at Enron and how Lay often touted the integrity of the company's leaders.  Amazing.

Accounting Information Systems faculty might use the book to spark debates among students about how IT controls or continuous auditing might have helped to protect investors.  They can also discuss how much Andersen's reliance on consulting revenues might have helped them to turn a blind eye.  No matter how a faculty member uses it, faculty and students will enjoy a good read.

NANCY A. BAGRANOFF
Old Dominion University

"Sage of ethical accounting foretold Andersen demise," by Loren Steffy, The Houston Chronicle, January 13, 2005 

''The most serious problems in our profession are caused by our own self-indulgence."
LEONARD SPACEK, 1956

Spacek was the chief executive of Arthur Andersen from 1947 to 1973, when Andersen was the moral voice of public accounting, and the ironic truth of his comments lingers even as the Supreme Court decided last week to consider overturning the accounting firm's conviction for obstruction of justice.

The court will review whether U.S. District Judge Melinda Harmon's jury instructions were too vague when it came to determining whether Andersen employees knew it was a crime to shred documents related to Enron.

The Supremes' decision, though, doesn't really involve the particulars of Andersen's demise. Regardless of how they rule, it won't bring the firm back, and it won't change the fact that Andersen was a victim of its own self-indulgence.

After all, jury foreman Oscar Criner told the Chronicle's Mary Flood that Harmon's instructions pertaining to the document destruction didn't affect the panel's decision. He said the nail in Andersen's coffin was a memo written by in-house attorney Nancy Temple advising colleagues to alter documents that discussed Enron's finances.

The government showed how Andersen's previous transgressions motivated Temple in urging others to cover their Enron-related tracks, Criner said.

Make no mistake, the government's decision to indict Andersen was harsh, and prosecutors knew it would kill the firm. Andersen, though, was a recidivist. It was the third time in a year that the firm was mired in a major accounting scandal, each bigger than the last. Seven months before Enron's bankruptcy, Andersen had been hit with the biggest fine ever for an audit failure because it approved bogus financial statements at Houston-based Waste Management.

Punishment didn't change the firm's behavior. Andersen's role as Enron's shredder-in-chief wasn't a fluke, and it wasn't a mistake. It was inevitable given the firm's track record.

Record-setting fines The tragedy of Andersen's collapse is that thousands of good, honest accountants were caught in the vortex of its failure. As too often happens in corporate malfeasance, the innocent bore the penalty.

The legions of loyal Andersen partners didn't deserve to be put out on the street, and they didn't deserve a leadership that kept the firm on the wrong side of too many blown audits.

Between 1997 and 2001, the year Enron collapsed, Andersen paid more than $500 million to settle claims of blown audits, including four of the five largest settlements. In May 2001, it settled claims that it had approved fraudulent audits at Sunbeam for $110 million, and a month later it shelled out $95 million more to settle similar claims involving Waste Management.

Look the other way In the Waste Management case in particular, internal SEC documents show that Andersen's senior executives knew the company was overstating earnings as far back as 1993, yet the auditors continued to sign off on Waste Management's financial statements. Year after year, the company promised to change its ways. Andersen acquiesced.

Continued in the article

From Smart Stops on the Web, Journal of Accountancy, January 2004, Page 27 --- 

Accountability Resources Here
www.thecorporatelibrary.com
CPAs can read about corporate governance in the real world in articles such as “Alliance Ousts Two Executives” and “Mutual Fund Directors Avert Eyes as Consumers Get Stung” at this Web site. Other resources here include related news items from wire services and newspapers, details on specific shareholder action campaigns and links to other corporate governance Web stops. And on the lighter side, visitors can view a slide show of topical cartoons.

Cartoon archives --- http://www.thecorporatelibrary.com/cartoons/tcl_cartoons.htm

Cartoon 1:  Two kids competing on the blackboard.  One writes 2+2=4 and the other kid writes 2+2=40,000.  Which kid as the best prospects for an accounting career?

Cartoon 36:  Where the Grasso is greener (Also see Cartoon 37)

 

Show-and-Tell
www.encycogov.com
This e-stop, while filled with information on corporate governance, also features detailed flowcharts and tables on bankruptcy, information retrieval and monitoring systems, as well as capital, creditor and ownership structures. Practitioners will find six definitions of the term corporate governance and a long list of references to books, papers and periodicals about the topic.

Investors, Do Your Homework
www.irrc.org
At this Web site CPAs will find the electronic version of the Investor Responsibility Research Center’s IRRC Social Issues Reporter, with articles such as “Mutual Funds Seldom Support Social Proposals.” Advisers also can read proposals from the Shareholder Action Network and the IRRC’s review of NYSE and Sarbanes-Oxley Act reforms, as well as use a glossary of industry terms to help explain to their clients concepts such as acceleration, binding shareholder proposal and cumulative voting.

 

SARBANES-OXLEY SITES

Get Information Online
www.sarbanes-oxley.com
CPAs looking for links to recent developments on the Sarbanes-Oxley Act of 2002 can come here to review current SEC rules and regulations with cross-references to specific sections of the act. Visitors also can find the articles “Congress Eyes Mutual Fund Reform” and “FBI and AICPA Join Forces to Help CPAs Ferret Out Fraud.” Tech-minded CPAs will find the list of links to Sarbanes-Oxley compliance software useful as well.

Direct From the Source
www.sec.gov/spotlight/sarbanes-oxley.htm
To trace the history of the SEC’s rule-making policies for the Sarbanes-Oxley Act, CPAs can go right to the source at this Web site and follow links to press releases pertaining to the commission’s involvement since the act’s creation. Visitors also can navigate to the frequently asked questions (FAQ) section about the act from the SEC’s Division of Corporation Finance.

PCAOB Online
www.pcaobus.org
The Public Company Accounting Oversight Board e-stop offers CPAs timely articles such as “Board Approves Registration of 598 Accounting Firms” and the full text of the Sarbanes-Oxley rules. Users can research proposed standards on accounting support fees and audit documentation and enforcement. Accounting firms not yet registered with the PCAOB can do so here and check out the FAQ section about the registration process.

Bank of America will pay $69 million to settle a class-action suit alleging it was among top U.S. financial firms that participated in a scheme with Enron's top executives to deceive shareholders.

"Bank of America Settles Suit Over the Collapse of Enron," by Rick Brooks and Carrick Mollekamp, The Wall Street Journal, July 4, 2004 --- http://online.wsj.com/article/0,,SB108879162283854269,00.html?mod=home_whats_news_us 

Bank of America Corp. became the first bank to settle a class-action lawsuit alleging that some of the U.S.'s top financial institutions participated in a scheme with Enron Corp. executives to deceive shareholders.

The Charlotte, North Carolina, bank, the third-largest in the U.S. in assets, agreed to pay $69 million to investors who suffered billions of dollars in losses as a result of Enron's collapse amid scandal in 2001. In making the settlement, Bank of America denied that it "violated any law," adding that it decided to make the payment "solely to eliminate the uncertainties, expense and distraction of further protracted litigation," according to a statement.

The settlement with Bank of America raises the possibility that it could cost other banks and securities firms still embroiled in the suit much more to settle the allegations against them, should they decide to do so. Bank of America had relatively small-scale financial dealings with Enron compared with other banks, and was sued only for its role as an underwriter for certain Enron and Enron-related debt offerings.

In contrast with other financial institutions being pursued by Enron shareholders, led by the Regents of the University of California, which lost nearly $150 million from Enron, Bank of America wasn't accused of defrauding the energy company's shareholders. Other remaining defendants in the class-action suit, filed in 2002 in U.S. District Court in Houston, are alleged to have helped Enron with phony deals to inflate the energy company's earnings, potentially exposing those banks and securities firms to much steeper damages.

William Lerach, the lead attorney representing the University of California, predicted that the $69 million payment from Bank of America "will be the precursor of much larger ones in the future, especially with the banks that face liability for participating in the scheme to defraud Enron's common stockholders."

Still, it won't be clear until additional settlements are reached or the suit goes to trial whether Bank of America was able to negotiate a better agreement because of its willingness to strike a deal with Enron shareholders before other defendants. Bank of America's payment to settle the claims against it represents more than half its potential exposure, Mr. Lerach added.

Citigroup Inc. and J.P. Morgan Chase & Co., still defendants in the suit, declined to comment. Enron shareholders also sued Merrill Lynch & Co.; Credit Suisse First Boston, a unit of Credit Suisse Group; Deutsche Bank AG; Canadian Imperial Bank of Commerce; Barclays PLC; Toronto-Dominion Bank; and Royal Bank of Scotland PLC. Named as defendants in the class-action suit before it was amended to include the banks and securities firms were several Enron officers and directors and its former outside auditor, Arthur Andersen LLP.

The only other firm to settle allegations against it in the class-action suit is Andersen Worldwide SC, the Swiss organization that oversees Andersen Worldwide's independent partnerships. In 2002, it reached a $40 million deal with the University of California that released Andersen Worldwide from the suit. That agreement also raised questions among some other Enron claimants about whether they would recover anything more sizable from Enron's accounting firm.

The University of California's board of regents, a 26-member supervisory panel, is expected to give final approval to the settlement agreement with Bank of America later this month. A trial in the Enron class-action suit is set to start in October 2006.

Enron also triggered huge losses for Bank of America shortly after the energy company collapsed. Bank of America incurred a charge of $231 million related to its lending relationship with Enron Corp. The bulk of that stemmed from $210 million in loans that were charged off, which essentially means the bank declared them worthless. Four Bank of America employees tied to the bank's relationship with Enron left the bank in January 2002, a week after Bank of America took the Enron-related charge.

Where are some great resources (hard copy and electronic) for teaching ethics?

"An Inventory of Support Materials for Teaching Ethics in the Post-Enron Era,” by C. William Thomas, Issues in Accounting Education, February 2004, pp. 27-52 --- http://aaahq.org/ic/browse.htm

ABSTRACT: This paper presents a "Post-Enron" annotated bibliography of resources for accounting professors who wish to either design a stand-alone course in accounting ethics or who wish to integrate a significant component of ethics into traditional courses across the curriculum.  Many of the resources listed are recent, but some are classics that have withstood the test of time and still contain valuable information.  The resources listed include texts and reference works, commercial books, academic and professional articles, and electronic resources such as film and Internet websites.  Resources are listed by subject matter, to the extent possible, to permit topical access.  Some observations about course design, curriculum content, and instructional methodology are made as well.

Bob Jensen's threads on resources for accounting educators are at http://www.trinity.edu/rjensen/000aaa/newfaculty.htm#Resources 

Discount retailer Kmart is under investigation for irregular accounting practices. In January an anonymous letter initiated an internal probe of the company's accounting practices. Now, the Detroit News has obtained a copy of the letter that contains allegations pointing to senior Kmart officials as purposely violating accounting principles with the knowledge of the company's auditors, PricewaterhouseCoopers. http://www.accountingweb.com/item/82286 

Bankrupt retailer Kmart explained the impact of accounting irregularities and said employees involved in questionable accounting practices are no longer with the company. http://www.accountingweb.com/item/90935 

Kmart's CFO Steps up to Accounting Questions
AccountingWEB US - Sep-19-2002 -  Bankrupt retailer Kmart explained the impact of accounting irregularities in a Form 10-Q filed with the U.S. Securities and Exchange Commission (SEC) this week. Chief Financial Officer Al Koch said several employees involved in questionable accounting practices are no longer with the company.

Speaking to the concerns about vendor allowances recently raised in anonymous letters from in-house accountants, Mr. Koch said, "It was not hugely widespread, but neither was it one or two people."

The Kmart whistleblowers who wrote the letters said they were being asked to record transactions in obvious violation of generally accepted accounting principles. They also said "resident auditors from PricewaterhouseCoopers are hesitant to pursue these issues or even question obvious changes in revenue and expense patterns."

In response to the letters, the company admitted it had erroneously accounted for certain vendor transactions as up-front consideration, instead of deferring appropriate amounts and recognizing them over the life of the contract. It also said it decided to change its accounting method. Starting with fourth quarter 2001, Kmart's policy is to recognize a cost recovery from vendors only when a formal agreement has been obtained and the underlying activity has been performed.

According to this week's Form 10-Q, early recognition of vendor allowances resulted in understatement of the company's fiscal year 2000 net loss by approximately $26 million and overstatement of its fiscal year 2001 net loss by approximately $78 million, both net of taxes. The 10-Q also said the company has been looking at historical patterns of markdowns and markdown reserves and their relation to earnings.

Kmart is under investigation by the SEC and the Justice Department. The Federal Bureau of Investigation, which is handling the investigation for the U.S. Attorney, said its investigation could result in criminal charges. In the months before Kmart's bankruptcy filing, top executives took home approximately $29 million in retention loans and severance packages. A spokesperson for PwC said the firm is cooperating with the investigations.

 

24 Days: How Two Wall Street Journal Reporters Uncovered the Lies that Destroyed Faith in Corporate America, by John R. Emshiller and Rebecca Smith (Haper Collins, 2003, ISBN: 0060520736) 

Here's a powerful Enron Scandal book in the words of the lead whistle blower herself:
Power Failure: The Inside Story of the Collapse of Enron
by Mimi Swartz, Sherron Watkins

ISBN: 0385507879
Format: Hardcover, 400pp
Pub. Date: March 2003		 Publisher: Doubleday & Company, Incorporated
Edition Description: 1ST

“They’re still trying to hide the weenie,” thought Sherron Watkins as she read a newspaper clipping about Enron two weeks before Christmas, 2001. . . It quoted [CFO] Jeff McMahon addressing the company’s creditors and cautioning them against a rash judgment....

Related Books

February 1, 2005 message from Boyd, Colin [boyd@commerce.usask.ca] 

Hi Bob,

I note that you have some of my stuff on one of your excellent web sites. You may be interested in 2 more articles that I had published in July of last year.

Here are the URLs to get to the articles – you can click a link on each of the two web sites so as to get pdf copies of the original published articles. I suspect that you may be particularly interested in some of the analysis I offer in my review of Toffler’s book, which is the second piece below.

Colin Boyd

http://www.commerce.usask.ca/faculty/boyd/StructuralOrigins.html 

http://www.commerce.usask.ca/faculty/boyd/LastStraw.html 

Colin Boyd, Professor of Management, 
Department of Management and Marketing, 
College of Commerce, 
University of Saskatchewan, 
25 Campus Drive, Saskatoon, Sask., Canada S7N 5A7

February 1, 2005 reply from Bob Jensen

Thank you so much for these highly informative papers.

I will add your entire message to the February 18 forthcoming edition of New Bookmarks --- http://www.trinity.edu/rjensen/bookurl.htm 

Since your first paper deals with auditor professionalism, I will also add your message to my module on auditor professionalism at http://www.trinity.edu/rjensen/fraud001.htm#Professionalism 

Since your second paper is an excellent Enron reference, I will add it to my Enron references at http://www.trinity.edu/rjensen/FraudEnron.htm#References 

Thanks again, 

Bob Jensen

Chronicling the inner workings of Andersen at the height of its success, Toffler reveals "the making of an Android," the peculiar process of employee indoctrination into the Andersen culture; how Androids - both accountants and consultants--lived the mantra "keep the client happy"; and how internal infighting and "billing your brains out" rather than quality work became the all-important goals. Final Accounting should be required reading in every business school, beginning with the dean and the faculty that set the tone and culture." - Paul Volker, former Chairman of the Federal Reserve Board.
The AccountingWeb, March 25, 2003.

Barbara Ley Toffler is the former Andersen was the partner-in-charge of 
Andersen's Ethics & Responsible Business Practices Consulting Services.

Title:  Final Accounting: Ambition, Greed and the Fall of Arthur Andersen 
Authors:  Barbara Ley Toffler, Jennifer Reingold
ISBN: 0767913825 
Format: Hardcover, 288pp Pub. 
Date: March 2003 
Publisher: Broadway Books

Book Review from http://www.amazon.com/exec/obidos/tg/stores/detail/-/books/0767913825/reviews/002-8190976-4846465#07679138253200 

Book Description A withering exposé of the unethical practices that triggered the indictment and collapse of the legendary accounting firm.

Arthur Andersen's conviction on obstruction of justice charges related to the Enron debacle spelled the abrupt end of the 88-year-old accounting firm. Until recently, the venerable firm had been regarded as the accounting profession's conscience. In Final Accounting, Barbara Ley Toffler, former Andersen partner-in-charge of Andersen's Ethics & Responsible Business Practices consulting services, reveals that the symptoms of Andersen's fatal disease were evident long before Enron. Drawing on her expertise as a social scientist and her experience as an Andersen insider, Toffler chronicles how a culture of arrogance and greed infected her company and led to enormous lapses in judgment among her peers. Final Accounting exposes the slow deterioration of values that led not only to Enron but also to the earlier financial scandals of other Andersen clients, including Sunbeam and Waste Management, and illustrates the practices that paved the way for the accounting fiascos at Worldcom and other major companies.

Chronicling the inner workings of Andersen at the height of its success, Toffler reveals "the making of an Android," the peculiar process of employee indoctrination into the Andersen culture; how Androids—both accountants and consultants--lived the mantra "keep the client happy"; and how internal infighting and "billing your brains out" rather than quality work became the all-important goals. Toffler was in a position to know when something was wrong. In her earlier role as ethics consultant, she worked with over 60 major companies and was an internationally renowned expert at spotting and correcting ethical lapses. Toffler traces the roots of Andersen's ethical missteps, and shows the gradual decay of a once-proud culture.

Uniquely qualified to discuss the personalities and principles behind one of the greatest shake-ups in United States history, Toffler delivers a chilling report with important ramifications for CEOs and individual investors alike.

From the Back Cover "The sad demise of the once proud and disciplined firm of Arthur Andersen is an object lesson in how 'infectious greed' and conflicts of interest can bring down the best. Final Accounting should be required reading in every business school, beginning with the dean and the faculty that set the tone and culture.” -Paul Volker, former Chairman of the Federal Reserve Board

“This exciting tale chronicles how greed and competitive frenzy destroyed Arthur Andersen--a firm long recognized for independence and integrity. It details a culture that, in the 1990s, led to unethical and anti-social behavior by executives of many of America's most respected companies. The lessons of this book are important for everyone, particularly for a new breed of corporate leaders anxious to restore public confidence.” -Arthur Levitt, Jr., former chairman of the Securities and Exchange Commission

“This may be the most important analysis coming out of the corporate disasters of 2001 and 2002. Barbara Toffler is trained to understand corporate ‘cultures’ and ‘business ethics’ (not an oxymoron). She clearly lays out how a high performance, manically driven and once most respected auditing firm was corrupted by the excesses of consulting and an arrogant culture. One can hope that the leaders of all professional service firms, and indeed all corporate leaders, will read and reflect on the meaning of this book.” -John H. Biggs, Former Chairman and Chief Executive Officer of TIAA CREF

“The book exposes the pervasive hypocrisy that drives many professional service firms to put profits above professionalism. Greed and hubris molded Arthur Andersen into a modern-day corporate junkie ... a monster whose self-destructive behavior resulted in its own demise." -Tom Rodenhauser, founder and president of Consulting Information Services, LLC

"An intriguing tale that adds another important dimension to the now pervasive national corporate governance conversation. -Charles M. Elson, Edgar S. Woolard, Jr., Professor of Corporate Governance, University of Delaware

“You could not ask for a better guide to the fall of Arthur Andersen than an expert on organizational behavior and business ethics who actually worked there. Sympathetic but resolutely objective, Toffler was enough of an insider to see what went on but enough of an outsider to keep her perspective clear. This is a tragic tale of epic proportions that shows that even institutions founded on integrity and transparency will lose everything unless they have internal controls that require everyone in the organization to work together, challenge unethical practices, and commit only to profitability that is sustainable over the long term. One way to begin is by reading this book. –Nell Minow, Editor, The Corporate Library

About the Author Formerly the Partner-in-Charge of Ethics and Responsible Business Practices consulting services for Arthur Andersen, BARBARA LEY TOFFLER was on the faculty of the Harvard Business School and now teaches at Columbia University's Business School. She is considered one of the nation's leading experts on management ethics, and has written extensively on the subject and has consulted to over sixty Fortune 500 companies. She lives in the New York area. Winner of a Deadline Club award for Best Business Reporting, JENNIFER REINGOLD has served as management editor at Business Week and senior writer at Fast Company. She writes for national publications such as The New York Times, Inc and Worth and co-authored the Business Week Guide to the Best Business Schools (McGraw-Hill, 1999).

Also see the review at  http://www.nytimes.com/2003/02/23/business/yourmoney/23VALU.html 

March 8, 2004 message from neil glass [neil.glass@get2net.dk] 
Note that you can download the first chapter of his book for free.  The book may be purchased as an eBook or hard copy.

Dr. Jensen,

I just came across your website and was pleased to find you talk about some of the frauds and other problems I reveal in my latest book. If you had a moment, you might be amused to look at my website only-on-the-net.com where I am trying to attract some attention to my book Rip-Off: The scandalous inside story of the Management Consulting Money Machine.

best wishes

neil glass

The link is http://www.only-on-the-net.com/ 

The AICPA's Prosecution of Dr. Abraham Briloff, Some Observations --- http://accounting.rutgers.edu/raw/aaa/pi/newsletr/spring99/item07.htm 

Art Wyatt admitted:
"ACCOUNTING PROFESSIONALISM: THEY JUST DON'T GET IT" --- http://aaahq.org/AM2003/WyattSpeech.pdf 

Here is some earlier related material you can find at http://www.trinity.edu/rjensen/fraudVirginia.htm 

Lessons Learned From Paul Volker:  
The Culture of Greed Sucked the Blood Out of Professionalism
In an effort to save Andersen's reputation and life, the top executive officer, Joe Berardino, in Andersen was replaced by the former Chairman of the Federal Reserve Board, Paul Volcker.  This great man, Volcker, really tried to instantly change the culture of greed that overtook professionalism in  Andersen and other public accounting firms, but it was too little too late --- at least for Andersen.

The bottom line:

I have a mental image of the role of an auditor. He’s a kind of umpire or referee, mandated to keep financial reporting within the established rules. Like all umpires, it’s not a popular or particularly well paid role relative to the stars of the game. The natural constituency, the investing public, like the fans at a ball park, is not consistently supportive when their individual interests are at stake. Matters of judgment are involved, and perfection in every decision can’t be expected. But when the “players”, with teams of lawyers and investment bankers, are in alliance to keep reported profits, and not so incidentally the value of fees and stock options on track, the pressures multiply. And if the auditing firm, the umpire, is itself conflicted, judgments almost inevitably will be shaded. 
Paul Volcker (See below)

"Volcker says "new Andersen" no longer possible," by Kevin Drawbaugh, CPAnet, May 17, 2002 --- http://www.cpanet.com/up/s0205.asp?ID=0572

WASHINGTON, May 17 (Reuters) - Former Federal Reserve Board Chairman Paul Volcker, who took charge of a rescue team at embattled accounting firm Andersen (ANDR), said on Friday that creating "a new Andersen" was no longer possible.

In a letter to Sen. Paul Sarbanes, Volcker said he supports the Maryland Democrat's proposals for reforming the U.S. financial system to prevent future corporate disasters such as the collapse of Enron Corp. (ENRNQ).

"The sheer number and magnitude of breakdowns that have increasingly become the daily fare of the business press pose a clear and present danger to the effectiveness and efficiency of capital markets," Volcker said in the letter released to Reuters.

"FINALLY, A TIME FOR AUDITING REFORM" 
REMARKS BY PAUL A. VOLCKER  
AT THE CONFERENCE ON CREDIBLE FINANCIAL DISCLOSURES 
KELLOGG SCHOOL OF MANAGEMENT 
NORTHWESTERN UNIVERSITY 
EVANSTON, ILLINOIS 
JUNE 25, 2002
http://www.fei.org/download/Volker_Kellogg_Speech_6-25-02.pdf 

How ironic that we are meeting near Arthur Andersen Hall with the leadership of the Leonard Spacek Professor of Accounting. From all I have learned, the Andersen firm in general, and Leonard Spacek in particular, once represented the best in auditing. Literally emerging from the Northwestern faculty, Arthur Andersen represented rigor and discipline, focused on the central mission of attesting to the fairness and accuracy of the financial reports of its clients. 

The sad demise of that once great firm is, I think we must now all realize, not an idiosyncratic, one-off, event. The Enron affair is plainly symptomatic of a larger, systemic problem. The state of the accounting and auditing systems which we have so confidently set out as a standard for all the world is, in fact, deeply troubled.

The concerns extend far beyond the profession of auditing itself. There are important questions of corporate governance, which you will address in this conference, but which I can touch upon only tangentially in my comments. More fundamentally, I think we are seeing the bitter fruit of broader erosion of standards of business and market conduct related to the financial boom and bubble of the 1990’s. 

From one angle, we in the United States have been in a remarkable era of creative destruction, in one sense rough and tumble capitalism at its best bringing about productivity-transforming innovation in electronic technology and molecular biology. Optimistic visions of a new economic era set the stage for an explosion in financial values. The creation of paper wealth exceeded, so far as I can determine, anything before in human history in relative and absolute terms. 

Encouraged by ever imaginative investment bankers yearning for extraordinary fees, companies were bought and sold with great abandon at values largely accounted for as “intangible” or “good will”. Some of the best mathematical minds of the new generation turned to the sophisticated new profession of financial engineering, designing ever more complicated financial instruments. The rationale was risk management and exploiting market imperfections. But more and more it has become a game of circumventing accounting conventions and IRS regulations. 

Inadvertently or not, the result has been to load balance sheets and income statements with hard to understand and analyze numbers, or worse yet, to take risks off the balance sheet entirely. In the process, too often the rising stock market valuations were interpreted as evidence of special wisdom or competence, justifying executive compensation packages way beyond any earlier norms and relationships. 

It was an environment in which incentives for business management to keep reported revenues and earnings growing to meet expectations were amplified. What is now clear, is that insidiously, almost subconsciously, too many companies yielded to the temptation to stretch accounting rules to achieve that result.

I state all that to emphasize the pressures placed on the auditors in their basic function of attesting to financial statements. Moreover, accounting firms themselves were caught up in the environment – - to generate revenues, to participate in the new economy, to stretch their range of services. More and more they saw their future in consulting, where, in the spirit of the time, they felt their partners could “better leverage” their talent and raise their income. 

I have a mental image of the role of an auditor. He’s a kind of umpire or referee, mandated to keep financial reporting within the established rules. Like all umpires, it’s not a popular or particularly well paid role relative to the stars of the game. The natural constituency, the investing public, like the fans at a ball park, is not consistently supportive when their individual interests are at stake. Matters of judgment are involved, and perfection in every decision can’t be expected. But when the “players”, with teams of lawyers and investment bankers, are in alliance to keep reported profits, and not so incidentally the value of fees and stock options on track, the pressures multiply. And if the auditing firm, the umpire, is itself conflicted, judgments almost inevitably

Continued at http://www.fei.org/download/Volker_Kellogg_Speech_6-25-02.pdf 

"We're The Front Line For Shareholders,"  by Phil Livingston (President of Financial Executives International), January/February 2002 --- http://www.fei.org/magazine/articles/1-2-2002_president.cfm 

At FEI's recent financial reporting conference in New York, Paul Volcker gave the keynote address and declared that the accounting and auditing profession were in a "state of crisis." Earlier that morning, over breakfast, he lamented the daily bombardment of financial reporting failures in the press.

I agree with his assessment. The causes and contributing factors are numerous, but one thing is clear: We as financial executives need to do better, be stronger and take the lead in restoring the credibility of financial reporting and preserving the capital markets.

If you didn't already know it and believe it deeply, recent cases prove the value of a financial management team that is ethical, credible and clear in its communications. A loss of confidence in that team can be a fatal blow, not just to the individuals, but to the company or institution that entrusts its assets to their stewardship. I think the FEI Code of Ethical Conduct says it best, and it is worth reprinting the opening section here. The full code (signed by all FEI members) can be found here.

. . .

So how did the profession reach the state Volcker describes as a crisis?

  • The market pressure for corporate performance has increased dramatically over the last 10 years. That pressure has produced better results for shareholders, but also a higher fatality rate as management teams pressed too hard at the margin.
  • The standard-setters floundered in the issue de jour quagmire, writing hugely complicated standards that were unintelligible and irrelevant to the bigger problems.
  • The SEC fiddled while the dot-com bubble burst. Deriding and undermining management teams and the auditors, the past administration made a joke of financial restatements.
  • We've had no vision for the future of financial reporting. Annual reports, 10Ks and 10Qs are obsolete. Bloomberg and Yahoo! Finance have replaced the horse-and-buggy vehicles with summary financial information linked to breaking news.
  • We've had no vision for the future of accounting. Today's mixed model is criticized one day for recognizing unrealized fair value contractual gains and alternatively for not recognizing the fair value of financial instruments.
  • The auditors dropped their required skeptical attitude and embraced business partnering philosophies. Adding value and justifying the audit fees became the mandate. Management teams and audit committees promoted this, too.
  • Audit committees have not kept up with the challenges of the assignment. True financial reporting experts are needed on these committees, not the general management expertise required by the stock exchange rules.

Beta Gamma Sigma honor society --- http://cba.unomaha.edu/bg/ 

I’ve been a member of BGS for 40 years, but somehow I’ve managed to overlook B-Zine

From Beta Gamma Sigma BZine Electronic Magazine --- http://cba.unomaha.edu/bg/ 

CEOs may need to speak up
by Tim Weatherby, Beta Gamma Sigma
As more Fortune 500 companies and their executives are sucked into the current crisis, it may be time for the good guys to put their two cents in. The 2002 Beta Gamma Sigma International Honoree did just that in April.
http://www.betagammasigma.org/news/bzine/august02feature.html

How Tyco's CEO Enriched Himself
by Mark Maremont and Laurie P. Cohen, The Wall Street Journal
The latest story of corporate abuse surrounds the former Tyco CEO. This story provides a vivid example of the abuses that are leading many to question current business practices.
http://www.msnbc.com/news/790996.asp

A Lucrative Life at the Top
by MSNBC.com
Highlights pay and incentive packages of several former corporate executives currently under investigation.
http://www.msnbc.com/news/783953.asp

A To-Do List for Tyco's CEO
by William C. Symonds, BusinessWeek online
The new CEO of Tyco has a tough job ahead of him cleaning up the mess left behind.
http://www.businessweek.com/magazine/content/02_32/b3795050.htm

Implausible Deniability: The SEC Turns Up CEO Heat
by Diane Hess, TheStreet.com
The SEC's edict requires written statements, under oath, from senior officers of the 1,000 largest public companies attesting to the accuracy of their financial statements.
http://www.thestreet.com/markets/taleofthetape/10029865.html

Corporate Reform: Any Idea in a Storm?
by BusinessWeek online
Lawmakers eager to appease voters are trying all kinds of things.
http://www.businessweek.com/magazine/content/02_32/b3795045.htm

Sealing Off the Bermuda Triangle
by Howard Gleckman, BusinessWeek online
Too many corporate tax dollars are disappearing because of headquarters relocations, and Congress looks ready to act.
http://www.businessweek.com/bwdaily/dnflash/jun2002/nf20020625_2167.htm 

"Adding Insult to Injury: Firms Pay Wrongdoers' Legal Fees," by Laurie P. Cohen, The Wall Street Journal, February 17, 2004 --- http://online.wsj.com/article/0,,SB107697515164830882,00.html?mod=home%5Fwhats%5Fnews%5Fus 

You buy shares in a company. The government charges one of the company's executives with fraud. Who foots the legal bill?

All too often, it's you.

Consider the case of a former Rite Aid Corp. executive. Four days before he was set to go to trial last June, Frank Bergonzi pleaded guilty to participating in a criminal conspiracy to defraud Rite Aid while he was the company's chief financial officer. "I was aggressive and I pressured others to be aggressive," he told a federal judge in Harrisburg, Pa., at the time.

Little more than a month later, Mr. Bergonzi sued his former employer in Delaware Chancery Court, seeking to force the company to pay more than $5 million in unpaid legal and accounting fees he racked up in connection with his defense in criminal and civil proceedings. That was in addition to the $4 million that Rite Aid had already advanced for Mr. Bergonzi's defense in civil, administrative and criminal proceedings.

In October, the Delaware court sided with Mr. Bergonzi. It ruled that Rite Aid was required to advance Mr. Bergonzi's defense fees until a "final disposition" of his legal case. The court interpreted that moment as sentencing, a time that could be months -- or even years -- away. Mr. Bergonzi has agreed to testify against former colleagues at coming trials before he is sentenced for his crimes.

Rite Aid's insurance, in what is known as a directors-and-officers liability policy, already has been depleted by a host of class-action suits filed against the company in the wake of a federal investigation into possible fraud that began in late 1999. "The shareholders are footing the bill" because of the "precedent-setting" Delaware ruling, laments Alan J. Davis, a Philadelphia attorney who unsuccessfully defended Rite Aid against Mr. Bergonzi.

Rite Aid eventually settled with Mr. Bergonzi for an amount it won't disclose. While it is entitled to recover the fees it has paid from Mr. Bergonzi after he is sentenced, the 58-year-old defendant has testified he has few remaining assets. "We have no reason to believe he'll repay" Rite Aid, Mr. Davis says.

Rite Aid has lots of company. In recent government cases involving Cendant Corp.; Worldcom Inc., now known as MCI; Enron Corp.; and Qwest Communications International Inc., among others, companies are paying the legal costs of former executives defending themselves against fraud allegations. The amount of money being paid out isn't known, as companies typically don't specify defense costs. But it totals hundreds of millions, or even billions of dollars. A company's average cost of defending against shareholder suits last year was $2.2 million, according to Tillinghast-Towers Perrin. "These costs are likely to climb much higher, due to a lot of claims for more than a billion dollars each that haven't been settled," says James Swanke, an executive at the actuarial consulting firm.

Continued in the article

Corporate Accountability: A Toolkit for Social Activists
The Stakeholder Alliance (ala our friend Ralph Estes and well-meaning social accountant) --- http://www.stakeholderalliance.org/

From the Chicago Tribune, February 19, 2002  --- http://www.smartpros.com/x33006.xml 

International Standards Needed, Volcker Says

WASHINGTON, Feb. 19, 2002 (Knight-Ridder / Tribune News Service) — Enron Corp.'s collapse was a symptom of a financial recklessness that spread during the 1990s economic boom as investors and corporate executives pursued profits at all costs, former Federal Reserve Chairman Paul Volcker told a Senate committee Thursday.

Volcker -- chairman of the new oversight panel created by Enron's auditor, the Andersen accounting firm, to examine its role in the financial disaster -- told the Senate Banking Committee he hoped the debacle would accelerate current efforts to achieve international accounting standards. Such standards could reassure investors around the world that publicly traded companies met certain standards regardless of where such companies were based, he said.

"In the midst of the great prosperity and boom of the 1990s, there has been a certain erosion of professional, managerial and ethical standards and safeguards," Volcker said.

"The pressure on management to meet market expectations, to keep earnings rising quarter by quarter or year by year, to measure success by one 'bottom line' has led, consciously or not, to compromises at the expense of the public interest in full, accurate and timely financial reporting," he added.

But the 74-year-old economist also blamed the new complexity of corporate finance for contributing the problem. "The fact is," Volcker said "the accounting profession has been hard-pressed to keep up with the growing complexity of business and finance, with its mind-bending complications of abstruse derivatives, seemingly endless varieties of securitizations and multiplying, off-balance-sheet entities. (Continued in the article.)

 

May 15, 2003 message from Dave Albrecht [albrecht@PROFALBRECHT.COM] 

I've been teaching Intermediate Financial Accounting for several years. Recently, I've been thinking about having students read a supplemental book . Given the current upheaval, there are several possibilities for additional reading. Can anyone make a recommendation? BTW, these books would make great summer reading.

Dave Albrecht

Benston et. al. (2003). Following the Money: The Enron Failure and the State of Corporate Disclosure.

Berenson, Alex. (2003). The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America.

Brewster, Mike. (2003). Unaccountable: How the Accounting Profession Forfeited an Public Trust.

Brice & Ivins. (2002.) Pipe Dreams: Greed, Ego and the Death of Enron.

DiPiazza & Eccles. (2002). Building Public Trust: The Future of Corporate Reporting.

Fox, Loren. (2002). Enron, the Rise and Fall.

Jeter, Lynne W. (2003). Disconnected: Deceit and Betrayal at Worldcom.

Mills, D. Quinn. (2003). Wheel, Deal and Steal: Deceptive Accounting, Deceitful CEOs, and Ineffective Reforms.

Mulford & Comiskey. (2002). The Financial Numbers Game: Detecting Creative Accounting Practices.

Nofsinger & Kim. (2003). Infectious Greed: Restoring Confidence in America's Companies.

Squires, Susan. (2003). Inside Arthur Andersen: Shifting Values, Unexpected Consequences.

Swartz & Watkins. (2003). Power Failure: The Inside Story of the Collapse of Enron.

Toffler, Barbara. (2003). Final Accounting: Ambition, Greed and the Fall of Arthur Andersen

May 15, 2003 reply from Bruce Lubich [blubich@UMUC.EDU] 

I would add Schilit, Howard. (2002) Financial Shenanigans.

Bruce Lubich

May 15, 2003 reply from Neal Hannon [nhannon@COX.NET] 

Suggested Additions to Summer Book List:

Financial Shenanigans : How to Detect Accounting Gimmicks & Fraud in Financial Reports by Howard Schilit (McGraw-Hill Trade; 2nd edition (March 1, 2002))

How Companies Lie: Why Enron Is Just the Tip of the Iceberg by Richard J. Schroth, A. Larry Elliott

Quality Financial Reporting by Paul B. W. Miller, Paul R. Bahnson

Take On the Street: What Wall Street and Corporate America Don't Want You to Know by Arthur Levitt, Paula Dwyer (Contributor)

And for fun: Who Moved My Cheese? An Amazing Way to Deal with Change in Your Work and in Your Life by Spencer, M.D. Johnson, Kenneth H. Blanchard

Neal J. Hannon, CMA Chair, I.T. Committee, Institute of Management Accountants Member, XBRL_US Steering Committee University of Hartford (860) 768-5810 (401) 769-3802 (Home Office)

 

Book Recommendation from The AccountingWeb on April 25, 2003

The professional service accounting firm is being threatened by a variety of factors: new technology, intense competition, consolidation, an inability to incorporate new services into a business strategy, and the erosion of public trust, just to name a few. There is relief. And promise. And hope. In The Firm of the Future: A Guide for Accountants, Lawyers, and Other Professional Services, confronts the tired, conventional wisdom that continues to fail its adherents, and present bold, proven strategies for restoring vitality and dynamism to the professional service firm. http://www.amazon.com/exec/obidos/ASIN/0471264245/accountingweb 

Question
What is COSO?

Answer --- http://www.coso.org/ 

COSO is a voluntary private sector organization dedicated to improving the quality of financial reporting through business ethics, effective internal controls, and corporate governance. COSO was originally formed in 1985 to sponsor the National Commission on Fraudulent Financial Reporting, an independent private sector initiative which studied the causal factors that can lead to fraudulent financial reporting and developed recommendations for public companies and their independent auditors, for the SEC and other regulators, and for educational institutions.

The National Commission was jointly sponsored by the five major financial professional associations in the United States, the American Accounting Association, the American Institute of Certified Public Accountants, the Financial Executives Institute, the Institute of Internal Auditors, and the National Association of Accountants (now the Institute of Management Accountants). The Commission was wholly independent of each of the sponsoring organizations, and contained representatives from industry, public accounting, investment firms, and the New York Stock Exchange.

The Chairman of the National Commission was James C. Treadway, Jr., Executive Vice President and General Counsel, Paine Webber Incorporated and a former Commissioner of the U.S. Securities and Exchange Commission. (Hence, the popular name "Treadway Commission"). Currently, the COSO Chairman is John Flaherty, Chairman, Retired Vice President and General Auditor for PepsiCo Inc.

Title:  ENRON: A Professional's Guide to the Events, Ethical Issues, and Proposed Reforms 
Authur: L. Berkowitz, CPA
ISBN: 0-8080-0825-0
Publisher:  CCH --- http://tax.cchgroup.com/Store/Products/CCE-CCH-1959.htm?cookie%5Ftest=1 
Pub. Date:  July 2002

Title:  Take On the Street: What Wall Street and Corporate America Don't Want You to Know, 
Authors:  Arthur Levitt and Paula Dwyer (Arthor Levitt is the highly controversial former Chairman of the SEC)
Format: Hardcover, 288pp.  This is also available as a MS Reader eBook --- http://search.barnesandnoble.com/booksearch/ISBNinquiry.asp?userid=16UOF6F2PF&isbn=0375422358 
ISBN: 0375421785
Publisher: Pantheon Books
Pub. Date: October  2002
See http://search.barnesandnoble.com/booksearch/isbnInquiry.asp?userid=16UOF6F2PF&isbn=0375421785 

This is Levitt's no-holds-barred memoir of his turbulent tenure as chief overseer of the nation's financial markets. As working Americans poured billions into stocks and mutual funds, corporate America devised increasingly opaque strategies for hoarding most of the proceeds. Levitt reveals their tactics in plain language, then spells out how to intelligently invest in mutual funds and the stock market. With integrity and authority, Levitt gives us a bracing primer on the collapse of the system for overseeing our capital markets, and sage, essential advice on a discipline we often ignore to our peril - how not to lose money. http://www.amazon.com/exec/obidos/ASIN/0375421785/accountingweb 

Don Ramsey called my attention to the following audio interview:
For a one-hour audio archive of Diane Rehm's recent interview with Arthur Levitt, go to this URL:   http://www.wamu.org/ram/2002/r2021015.ram

A free video from Yale University and the AICPA (with an introduction by Professor Rick Antle and Senior Associate Dean from Yale).  This video can be downloaded to your computer with a single click on a button at http://www.aicpa.org/video/ 
It might be noted that Barry Melancon is in the midst of controversy with ground swell of CPAs and academics demanding his resignation vis-a-vis continued support he receives from top management of large accounting firms and business corporations.

A New Accounting Culture
Address by Barry C. Melancon
President and CEO, American Institute of CPAs
September 4, 2002
Yale Club - New York City
Taped immediately upon completion

From The Conference Board
Corporate Citizenship in the New Century: Accountability, Transparency, and Global Stakeholder Engagement
Publication Date:  July 2002
Report Number:  R-1314-02-RR --- http://www.conference-board.org/publications/describe.cfm?id=574 

My new and updated documents the recent accounting and investment scandals are at the following sites:

Bob Jensen's threads on the Enron/Andersen scandals are at  http://www.trinity.edu/rjensen/fraud.htm  
Bob Jensen's SPE threads are at http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm  
Bob Jensen's threads on accounting theory are at http://www.trinity.edu/rjensen/theory.htm

Bob Jensen's Summary of Suggested Reforms --- http://www.trinity.edu/rjensen/FraudProposedReforms.htm 

Bob Jensen's Bottom Line Commentary --- http://www.trinity.edu/rjensen/FraudConclusion.htm 

The Virginia Tech Overview:  What Can We Learn From Enron? --- http://www.trinity.edu/rjensen/fraudVirginia.htm 

Disconnected: Deceit and Betrayal at Worldcom, by Lynne W. Jeter

Inside Arthur Andersen: Shifting Values, Unexpected Consequences by Lorna McDougall, Cynthia Smith, Susan E. Squires, William R. Yeack.

Final Accounting: Ambition, Greed and the Fall of Arthur Andersen by Barbara Ley Toffler and Jennifer Reingold

Bisk CPEasy's "Accounting Profession Reform: Restoring Confidence in the System" --- http://www.cpeasy.com/ 

"The fall of Andersen," Chicago Tribune --- http://www.chicagotribune.com/business/showcase/chi-andersen.special 

Chicago's Andersen accounting firm must stop auditing publicly traded companies following the firm's conviction for obstructing justice during the federal investigation into the downfall of Enron Corp. For decades, Andersen was a fixture in Chicago's business community and, at one time, the gold standard of the accounting industry. How did this legendary firm disappear?

Civil war splits Andersen
September 2, 2002.  Second of four parts

The fall of Andersen
September 1, 2002.  This series was reported by Delroy Alexander, Greg Burns, Robert Manor, Flynn McRoberts and E.A. Torriero. It was written by McRoberts.

Greed tarnished golden reputation
September 1, 2002.  First of four parts

'Merchant or Samurai?'
September 1, 2002.  Dick Measelle, then-chief executive of Andersen's worldwide audit and tax practice, explores a corporate cultural divide in an April 1995 newsletter essay to Andersen partners.

What will the U.S. accounting business look like when the dust settles on Arthur Andersen? http://www.trinity.edu/rjensen/fraud041202.htm#Future 
Also see http://www.trinity.edu/rjensen/FraudConclusion.htm 

The Washington Post put together a terrific Corporate Scandal Primer that includes reviews and pictures of the "players," "articles,", and an "overview" of each major accounting and finance scandal of the Year 2002 --- http://www.washingtonpost.com/wp-srv/business/scandals/primer/index.html 
I added this link to my own reviews at http://www.trinity.edu/rjensen/fraud.htm#Governance

 

The AccountingWeb recommends a number of books on accounting fraud --- http://www.amazon.com/exec/obidos/ASIN/0471353787/accountingweb/103-6121868-8139853 

  • The Fraud Identification Handbook by George B. Allen (Preface)
  • Financial Investigation and Forensic Accounting by George A. Manning
  • Business Fraud by James A. Blanco, Dave Evans
  • Document Fraud and Other Crimes of Deception by Jesse M. Greenwald, Holly K. Tuttle (Illustrator)
  • Fraud Auditing and Forensic Accounting by Jack Bologna, et al
  • The Financial Numbers Game by Charles W. Mulford, Eugene E. Comiskey
  • How to Reduce Business Losses from Employee Theft and Customer Fraud by Alfred N. Weiner
  • Financial Statement Fraud by Zabihollah Rezaee, Joseph T. Wells
  • Transnational Criminal Organizations, Cybercrime, and Money Laundering by James R. Richards

The three books below are reviewed in the December 2002 issue of the Journal of Accountancy, pp. 88-90 --- http://www.aicpa.org/pubs/jofa/dec2002/person.htm 

Two Books on Financial Statement Fraud

Financial Statement Fraud:  Prevention and Detection
by Zabihollah Razaee (Certified Fraud Examiner and Accounting Professor at the University of Memphis)
Format: Hardcover, 336pp.
ISBN: 0471092169
Publisher: Wiley, John & Sons, Incorporated
Pub. Date: March  2002 
http://search.barnesandnoble.com/booksearch/isbnInquiry.asp?userid=16UOF6F2PF&isbn=0471092169  

The Financial Numbers Game:  Detecting Creative Accounting Practices
by Charles W. Mulford and Eugene Comiskey (good old boys from the Georgia Institute of Technology)
Format: Paperback, 408pp.
ISBN: 0471370088
Publisher: Wiley, John & Sons, Incorporated
Pub. Date: February  2002 
http://search.barnesandnoble.com/booksearch/isbnInquiry.asp?userid=16UOF6F2PF&isbn=0471370088 

One New Book on Accounting Professionalism and Public Trust

Building Public Trust:  The Future of Corporate Reporting
by Samuel A. DiPiazza, Jr (CEO of PricewaterhouseCoopers (PwC))
and Robert G. Eccies (President of Advisory Capital Partners)
Format: Hardcover, 1st ed., 192pp.
ISBN: 0471261513
Publisher: Wiley, John & Sons, Incorporated
Pub. Date: June  2002 
http://search.barnesandnoble.com/booksearch/isbnInquiry.asp?userid=16UOF6F2PF&isbn=0471261513 

Books on Fraud --- Enter the word "fraud" in the search box at http://www.bn.com/ 

 

Yahoo's choices for top fraud sites --- http://dir.yahoo.com/Society_and_Culture/Crime/Types_of_Crime/Fraud/Finance_and_Investment/ 

You might enjoy "The AICPA's Prosecution of Dr. Abraham Briloff: Some Observations," by Dwight M. Owsen --- http://accounting.rutgers.edu/raw/aaa/pi/newsletr/spring99/item07.htm  
I think Briloff was trying to save the profession from what it is now going through in the wake of the Enron scandal.

My Interview With The Baltimore Sun --- http://www.trinity.edu/rjensen/fraudBaltimoreSun.htm 

My Philadelphia Inquirer Interview 1 --- http://www.trinity.edu/rjensen/philadelphia_inquirer.htm 

My Philadelphia Inquirer Interview 2 ---  http://www.trinity.edu/rjensen/FraudPhiladelphiaInquirere022402.htm 

My Interview With National Public Radio --- http://www.trinity.edu/rjensen/fraudNPRfeb7.htm 

Question
Should companies be allowed to outsource internal auditing to their external auditors?
An Enron Message

Shari Thompson in the early 1990s was an African American internal auditor in Enron trying her best to be a good auditor.

She gave me permission to forward two of her messages that I received out of the blue from her. For those of you that still hold deep abiding sympathies for Andersen's top management, I suggest that you read both of these messages, especially Message 2.

Message 1 appears below. Note that this message contains a lot more messaging than just her message to me. That messaging is very critical of some BYU professors and arguments that internal auditing might be outsourced to external auditors.

My main Enron and Worldcom fraud document (especially note Enron's Timeline) ---
http://www.trinity.edu/rjensen/FraudEnron.htm
This Timeline will soon be updated for Shari's assertion that Enron outsourced internal auditing to Andersen in 1994.

My Enron Quiz will soon be updated for Shari's messages --- http://www.trinity.edu/rjensen/FraudEnronQuiz.htm  

Bob Jensen's threads on professionalism and auditor independence are at (scroll down) ---  http://www.trinity.edu/rjensen/Fraud001.htm

 

Message 1 from Shari Thompson to Bob Jensen

-----Original Message-----
From: Thompson, Shari [mailto:shari.thompson@pvpl.com] 
Sent: Friday, February 27, 2009 2:33 PM
To: 'dboje@nmsu.edu' ; rjensen@trinity.edu
Subject: Please update your Enron blog (from former Enron Internal Auditor)

Why is it that everyone who chronologizes Enron's fall misses a hugely significant, contributing factor to Enron's demise?  That is, that Enron's entire internal audit department was systematically eliminated by Andersen, when the internal audit function was outsourced to Andersen.  This outsourcing was instrumental in allowing Lay/Skilling/Fastow to commit accounting fraud undetected for a long period of time.

 The outsourcing of Enron's internal audit function is one of the most festering flaws in the debacle, yet no one has sufficiently reported it.  As a former Enron senior internal auditor, I have brought this flaw to the attention of reporters and bloggers over the years since 2001.  To no avail, however.  Some of them respond "interesting, I never knew that."  But that's it.  No one follows up and reports on the incestuous relationship Enron had with Andersen as the "internal" audit department.

Now we have three professors concluding that companies should outsource internal audit to external auditors.  Please be cognizant enough to add the rest of the story, so that the Finance world can clearly connect the dots between outsourcing internal audit and accounting fraud.  http://www.cfo.com/article.cfm/13111528

Shari Thompson CIA
Direct 402.829.5248 Mobile 402.740.4012

 _____________________________________________

From: Thompson, Shari

Sent: Friday, February 27, 2009 1:28 PM
To: 'richard.chambers@theiia.org' ; 'edward.nusbaum@gt.com '; 'douglas_prawitt@byu.edu '; 'nsharp@mays.tamu.edu '; 'davidwood@byu.edu'
Subject: Thank you to IIA President Richard Chambers

 Good afternoon Mr. Chambers,

I just read an article about professors at Brigham Young and Texas A&M claiming that companies gain from having external auditors perform their internal audits.  I was a senior internal auditor for Enron and subsidiaries (before outsourcing to Andersen) for 24 years (1981 to 2004).  I can attest that having companies use their external auditor as internal auditor is a toxic and deceptive practice.

Thank you so much for voicing your disagreement with this conclusion.  Please keep up the fight to not have this practice become acceptable again.

____________________________________________________________

 Mr. Nusbaum:

You've changed your tune much from your 2006 letter to the SEC when you advocated " Equally without question is that these early experiences with implementation have been costly, but we cannot and should not go back."  http://www.sec.gov/news/press/4-511/enusbaum051006.pdf

____________________________________________________________

 Messieurs Prawitt, Wood, and Sharp:

I am shocked and appalled at your "findings."  Has someone at KPMG, PWC, E&Y or D&T paid you enormous sums of money in return for your publishing such a ludicrous recommendation to outsource internal audit to external auditors?  How could you even preliminarily come to such an incestuous conclusion?

I invite you to talk to me about real world consequences of the unintelligence of outsourcing internal audit to externals.  Blending the two functions is purely a management's self-serving act.  The very phrase "outsourcing internal audit" is an oxymoron, and the terms "outsource" and "internal audit" should be forever mutually exclusive.

I'm 50 years old, an expert internal auditor that worked for Enron and its subsidiaries for 24 of my 28 years in the auditing industry.  And yet I-as well as hundreds of my former Enron colleagues, and untold others around the world-have no 401k nor ESOP savings to show for all my years of hard work.  Why?  Because of the very thing you recommend-outsourcing internal audit.

 When I was a college student years ago, I enjoyed engaging in theoretical debates with my professors.  However, they were wise enough to caveat their opinions with warnings that they'd never worked-or hadn't worked for some time-in corporate America.  Unfortunately, you lack the sageness to recognize the limitations of your insulated confines of collegiate life.

 You state: "Our results indicate that, prior to SOX, outsourcing the work of the IAF to the external auditor is associated with lower accounting risk as compared to keeping the IAF in-house or outsourcing the work of the IAF to a third party other than the external auditor."

*       Must I remind you that the lack of accounting controls is precisely what tanked Enron?

*       Must I remind you of why were there were no controls?  Because Lay, Fastow and Skilling hired Andersen to perform both internal and external audits.  Lay, Fastow, and Skilling knew that Andersen's heads would willingly participate in accounting fraud cover-up as long as Enron paid them well.  And they also knew that any Andersen soul brave enough to dissent would be summarily removed from the Enron account, or from Andersen altogether.

*       Do you know that a few months before the outsourcing to Andersen, one of my former internal audit colleagues discovered irregularities in Enron's accounting transactions related to a bank in New York?  A few months later, after the internal auditors discussed the matter with Lay, Lay outsourced the entire audit function.  This outsourcing came after several yearly sales pitches by Andersen, where Andersen requested the internal auditing job.  It's clear that Lay felt the internal auditors were getting too close to uncovering fraud.  So he outsourced the function to a bunch of yes-men.

 I can only conclude that you obviously have been recently cut in on Lay's, Skilling's or Fastow's Enron bounty.

 

Shari Thompson CIA
Direct 402.829.5248
Mobile 402.740.4012

 

Message 2 from Shari Thompson to Bob Jensen

Hi Bob,

Thanks for your reply. I should mention that I really like your website, and have referred to it many times over the years. It was very helpful when studying for the CIA exam—some of the exam study guides don’t do near a good job as your site in explaining accounting theory, especially the complexities introduced changed since I was in college…

But, to your question, the internal auditors came from a number of the (back then anyway) big 8, and also many of us were from industry. Like for instance, I’ve never worked for a public accounting firm. (Could have something to do with when I graduated in 1980 many of publics wouldn’t hear of hiring a female, let alone a African American female. But that’s another story.) So anyway, the internal audit department in Enron Houston was initially formed in 1986 as a combining of all the audit departments of Enron subsidiaries around the nation. So we came from all over. I came in from Omaha, others from Enron subsidiaries on the East Coast, Texas and Oklahoma. The goal after the “merger” of HNG & InterNorth was to centralize the audit function. So, there weren’t an inordinate amount of internal auditors from Andersen as from any other public accounting firm. I’ve not read Eichenwald’s book. I’ll check it out.

Actually the department was eliminated as far as being an effective, functional department. That is, it was eliminated by Enron’s replacing us “real” internal auditors with fake Andersen “internal” auditors. So technically the department still existed in name only, but was functionally ineffective since it was outsourced to Andersen. This outsourcing happened in 1994. I had, at that time, worked for an Enron subsidiary in Omaha for about a year, so I wasn’t at risk of losing my job. Everyone else in the Houston office, however, was told by Andersen that they had 12 months to get their CPA’s or they were out. Many of them that had CPA’s quit anyway, because they didn’t like the environment of the Andersen-run department. We didn’t know what was going on, we just knew something wasn’t right, and didn’t like it. So most of the real auditors quit, or were run out by Andersen leaning on them to get their CPA. The CPA requirement was just a ploy to get the real auditors out as fast as possible.

An interesting development: While writing this email, one of the author’s (Doug Prawitt) of the article that prompted my email called. He explained to me that the CFO.com reporter omitted key pieces of his interview. Namely, that he did not recommend outsourcing to externals, and that this finding is one of thousands of points of information in their study. I apologized for the email-trigger finger, but he said he enjoyed the opportunity to meet me. And hopes to talk to me again about my experience at Enron, which I welcome. I am definitely enjoying the opportunity to communicate with you as well.

Regards,
Shari

 

Note from Bob Jensen

My main Enron and Worldcom fraud document (especially note Enron's Timeline) ---
http://www.trinity.edu/rjensen/FraudEnron.htm
This Timeline will soon be updated for Shari's assertion that Enron outsourced internal auditing to Andersen in 1994.

My Enron Quiz will soon be updated for Shari's messages --- http://www.trinity.edu/rjensen/FraudEnronQuiz.htm  

Bob Jensen's threads on professionalism and auditor independence are at (scroll down) ---  http://www.trinity.edu/rjensen/Fraud001.htm

 

 

Articles on Internal Auditing and Fraud Investigation 
Web Site of Mark R. Simmons, CIA CFE 
http://www.dartmouth.edu/~msimmons/ 

Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations.  It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. (Institute of Internal Auditors)

Fraud Investigation consists of the multitude of steps necessary to resolve allegations of fraud - interviewing witnesses, assembling evidence, writing reports, and dealing with prosecutors and the courts. (Association of Certified Fraud Examiners)

This site focuses on topics that deal with Internal Auditing and Fraud Investigation with certain hyper-links to other associated and relevant sources. It is dedicated to sharing information.

 

Other Shared and Unshared Course Material

You might find some useful material at http://www.indiana.edu/~aisdept/newsletter/current/forensic%20accounting.html

I have two cases and some links to John Howland's course materials at http://www.trinity.edu/rjensen/acct5342/262wp/262case1.htm

You might find some materials of interest at http://www.trinity.edu/rjensen/ecommerce/assurance.htm

Also see http://www.networkcomputing.com/1304/1304ws2.html

Micromash has a bunch of courses, but I don't think they share materials for free --- http://www.cyberu.com/classes.asp

Important Database  --- From the Scout Report on February 1, 2001

LLRX.com: Business Filings Databases http://www.llrx.com/columns/roundup19.htm 

This column from Law Library Resource Xchange (LLRX) (last mentioned in the September 7, 2001 Scout Report) by Kathy Biehl becomes more interesting with every revelation of misleading corporate accounting practices. This is a straightforward listing of state government's efforts to provide easy access to required disclosure filings of businesses within each state. Each entry is clearly annotated, describing services offered and any required fees (most services here are free). The range of information and services varies considerably from very basic (i.e. "name availability") to complete access to corporate filings. The noteworthy exception here is tax filings. Most states do not currently include access to filings with taxing authorities.

 

Threads on Accounting for Derivative Financial Instruments 
http://www.trinity.edu/rjensen/caseans/000index.htm 

Threads on Accounting, Business, Economic, and Related History 
http://www.trinity.edu/rjensen/history.htm 

The Saga of Auditor Professionalism and Auditor Independence 
http://www.trinity.edu/rjensen/fraud.htm#Professionalism 

What's Right and What's Wrong With Special Purpose Entities (SPEs) http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm

Bob Jensen's Threads on Accounting Theory
http://www.trinity.edu/rjensen/theory.htm

Bob Jensen's Threads on Return on Business Valuation, Business Combinations, 
Investment (ROI), and Pro Forma Financial Reporting
http://www.trinity.edu/rjensen/roi.htm

 

Video Summary of the Enron Mess

Hi Bernadine,
 
Do you mean that my 100+ pages are not "succinct?" --- http://www.trinity.edu/rjensen/fraud.htm 

Because of your message I wrote the summary of the Enron mess at Betting the Farm: Where's the Crime?

 
Actually, there was a wonderful overview on Sam Donaldson's Sunday Morning (January 13) ABC show called "This Week."   You can purchase it for $30 at http://www.abcnewsstore.com/product-details.cgi?_item_code=B020113+01 
The show and video are entitled "The Collapse of Enron."  You might watch for follow-ups on future Sunday mornings (10:00 a.m. in the Midwest Time Zone).  I captured the show on my VCR and plan to play it for students.  
 
If you have RealPlayer, you can download the first few minutes of another show (free) from http://abcnews.go.com/sections/business/DailyNews/enron_inquiry020111.html
Scroll down to the Video link for "Enron Furor Grows"  and download the video segment.
 
One of the best summary articles to date is the Time Magazine article at http://www.time.com/time/business/article/0,8599,193520,00.html
This article will probably not be free after a few days, so download it now. 
 
As Linda Kidwell noted, download the three free articles at http://www.accountingmalpractice.com/res/articles/enron-1.pdf
 
We are still awaiting good reviews of the specifics on how Enron lost money.  It appears to be a combination of debt and derivative financial speculation with much of the details hidden in Cayman Island SPEs formed by the double-dealing Enron CFO named Andy Fastow.  But I have seen specifics other than the limited amount of information that you can find in the revised financial statements.
 
At Enron's Website, the annual reports are still glowing.  For example, in the Year 2000 Enron Annual Report, you can still read the following in the Letter to Shareholders at http://www.enron.com/corp/investors/annuals/2000/shareholder.html

****************************************************************************************

Enron’s performance in 2000 was a success by any measure, as we continued to outdistance the competition and solidify our leadership in each of our major businesses. In our largest business, wholesale services, we experienced an enormous increase of 59 percent in physical energy deliveries. Our retail energy business achieved its highest level ever of total contract value. Our newest business, broadband services, significantly accelerated transaction activity, and our oldest business, the interstate pipelines, registered increased earnings. The company’s net income reached a record $1.3 billion in 2000. 
**************************************************************************************
That of course is a bunch of bull since Enron was forced to revise the past five years worth of financial statements and Enron performance was not a success by any measure.  I can't find any mention of the infamous financial statement revisions at Enron's Website.  Everything is still glowing and gilded with gold at the Enron site.
 

Bob (Robert E.) Jensen
Jesse H. Jones Distinguished Professor of Business
Trinity University, San Antonio, TX 78212
Voice: (210) 999-7347  Fax:  (210) 999-8134 
Email:  rjensen@trinity.edu
http://www.trinity.edu/rjensen
 

-----Original Message-----
From: Bernadine and Peter Raiskums [mailto:berna@GCI.NET]
Sent: Monday, January 14, 2002 1:10 PM
To: AECM@LISTSERV.LOYOLA.EDU
Subject: Enron
Can someone point me to a site where I can find a succint recap of the issues in the Enron case?
 
Bernadine Raiskums, Adjunct
University of Alaska Anchorage
 

 

 

Deloitte Touche Tomatsu
See http://www.trinity.edu/rjensen/Fraud001.htm#others


 

Bob Jensen's Enron Quiz With Answers --- http://www.trinity.edu/rjensen/FraudEnronQuiz.htm

Timeline of key events in the history of the Enron scandal

The Justice Racer Cannot Beat a Snail:  Andersen's David Duncan Finally Has Closure

"Andersen Figure Settles Charges: Former Head of Enron Team Barred From Some Professional Duties," by Kristen Hays, SmartPros, January 29, 2008 --- http://accounting.smartpros.com/x60631.xml 

The former head of one-time Big Five auditing firm Arthur Andersen's Enron accounting team has settled civil charges that he recklessly failed to recognize that the risky yet lucrative client cooked its books.

David Duncan, who testified against his former employer after Andersen cast him aside as a rogue accountant, didn't admit or deny wrongdoing in a settlement with the Securities and Exchange Commission announced Monday.

The SEC said in the settlement that he violated securities laws and barred him from ever practicing as an accountant in a role that involves signing a public company's financial statements, such as a chief accounting officer. But he could be a company director or another kind of officer and was not assessed any fines or otherwise sanctioned.

Three other former partners at the firm have been temporarily prohibited from acting as accountants before the SEC in separate settlements unveiled Monday.

Andersen crumbled amid the Enron scandal after the accounting firm was indicted, tried and found guilty -- a conviction that eventually was overturned on appeal.

The settlements came six years after Andersen came under fire for approving fudged financial statements while collecting tens of millions of dollars in fees from Enron each year.

Greg Faragasso, an assistant director of enforcement for the SEC, said Monday that the agency focused on wrongdoers at Enron first and moved on to gatekeepers accused of allowing fraud to thrive at the company.

"When auditors of public companies fail to do their jobs properly, investors can get hurt, as happened quite dramatically in the Enron matter," he said.

Barry Flynn, Duncan's longtime lawyer, said his client has made "every effort" to cooperate with authorities and take responsibility for his role as Andersen's head Enron auditor.

That included pleading guilty to obstruction of justice in April 2002, testifying against his former employer and waiting for years to be sentenced until he withdrew his plea with no opposition from prosecutors.

"After six years of government investigations and assertions, surrounding his and Andersen's activities, it was decided that it was time to get these matters behind him," Flynn said.

Duncan, 48, has worked as a consultant in recent years.

He was a chief target in the early days of the government's Enron investigation as head of a team of 100 auditors who oversaw Enron's books. In the fall of 2001, he and his staff shredded and destroyed tons of Enron-related paper and electronic audit documents as the SEC began asking questions about Enron's finances.

Andersen fired Duncan in January 2002, saying he led "an expedited effort to destroy documents" after learning that the SEC had asked Enron for information about financial accounting and reporting.

The firm also disciplined several other partners, including the three at the center of the other settlements announced Monday. They are Thomas Bauer, 54, who oversaw the books of Enron's trading franchise; Michael Odom, 65, former practice director of the Gulf region for Andersen; and Michael Lowther, 51, the former partner in charge of Andersen's energy audit division.

Their settlement agreements said that they weren't skeptical enough of risky Enron transactions that skirted accounting rules. Odom and Lowther were barred from accounting before the SEC for two years, and Bauer for three years. None was fined.

Their lawyer, Jim Farrell, declined to comment Monday.

Duncan's firing and the other disciplinary moves were part of Andersen's failed effort to avoid prosecution. But the firm was indicted on charges of obstruction of justice in March 2002, and Duncan later pleaded guilty to the same charge.

In Andersen's trial, Duncan recalled how he advised his staff to follow a little-known company policy that required retention of final audit documents and destruction of drafts and other extraneous paper.

That meeting came 11 days after Nancy Temple, a former in-house lawyer for Andersen, had sent an e-mail to Odom advising that "it would be helpful" that the staff be reminded of the policy.

Duncan testified that he didn't believe their actions were illegal at the time, but after months of meetings with investigators, he decided he had committed a crime.

Bauer and Temple invoked their 5th Amendment rights not to testify in the Andersen trial. However, Bauer testified against former Enron Chairman Ken Lay and CEO Jeff Skilling in their 2006 fraud and conspiracy trial.

Andersen insisted that the document destruction took place as required by policy and wasn't criminal, but the firm was convicted in June 2002.

Three years later the U.S. Supreme Court unanimously overturned the conviction because U.S. District Judge Melinda Harmon in Houston gave jurors an instruction that allowed them to convict without having to find that the firm had criminal intent.

That ruling paved the way for Duncan -- the only individual at Andersen charged with a crime -- to withdraw his guilty plea in December 2005.

In his plea, he said he instructed his staff to comply with Andersen's document policy, knowing the destroyed documents would be unavailable to the SEC. But he didn't say he knew he was acting wrongfully.

I draw some conclusions about David Duncan (they're not pretty) at http://www.trinity.edu/rjensen/FraudEnronQuiz.htm

My Enron timeline is at http://www.trinity.edu/rjensen/FraudEnron.htm#EnronTimeline

 

Enron and the Social Contract
May 4, 2007 message from Ruth Bender [r.bender@CRANFIELD.AC.UK]

A friend recommended me this paper, presented at the European Accounting Association's annual congress last month.  It's about how Enron et al, have changed the perception of accountants and auditors, analysed through the various books published on the frauds.  As the topic has come up on various occasions in different forms on this list, I thought that it might be of interest - it's very readable. 

THE PORTRAYAL OF ACCOUNTING AND ACCOUNTANTS FOLLOWING THE ENRON COLLAPSE
Garry D. Carnegie and Christopher J. Napier
ABSTRACT                The dramatic collapse of Enron, among other corporations including Worldcom in the USA, HIH in Australia and Equitable Life Assurance Society in the UK, combined with the demise of Arthur Andersen in the early 2000s, brought professional accountants and the international accounting profession under intense scrutiny. This latest round of financial scandals provides the opportunity to examine how professional accountants, and accounting

under duress, are portrayed in popular culture. The paper examines the array of books written on the failures themselves and their implications for corporate governance and the survival of the financial system. Changing public stereotypes of accountants may lead to renegotiation or even termination of the “social contract” between society and key organisations (such as the large international accounting firms). The paper explores how commentators have drawn on the history of accounting to analyse the changing activities of accountants (including the rise of consulting) and to contrast the personalities of “founding fathers” of the US accountancy profession with their early 21st-century successors. The paper concludes that episodes such as Enron and the public reaction to the role of auditors in corporate collapse may be “negative signals of movement” for the accountancy profession, creating threats to the ongoing professionalisation project.

The conference home page is http://www.eaa2007lisbon.org/main.htm

The link to the full paper is http://www.licom.pt/eaa2007/papers/EAA2007_0268_final.pdf  -  I don't know how long the papers will be available on the conference website.

Dr Ruth Bender
Cranfield School of Management
UK
r.bender@cranfield.ac.uk

Also see http://www.trinity.edu/rjensen/FraudEnronSocialContract.pdf

Enron Scandal Updates

Long-time subscribers to the AECM may remember my quips (years ago) about Michael Kopper ---
These inspired AECMers to write their own quips about Enron and about accounting in general.
You can read some of these AECM originals at http://www.trinity.edu/rjensen/FraudEnron.htm#Humor

And don't forget about the Enron home video starring some of the real players (including Jeff Skilling) befpre they got caught --- http://www.trinity.edu/rjensen/FraudEnron.htm#HFV

Bob Jensen's Enron Quiz is at http://www.trinity.edu/rjensen/FraudEnronQuiz.htm

Enron Updates --- http://www.trinity.edu/rjensen/FraudEnron.htm#EnronUpdates

ENRON'S CAST OF CHARACTERS AND THEIR STOCK SALES ---
http://www.trinity.edu/rjensen/FraudEnron.htm#StockSales

Enron's E-mail (Email) messages are now part of the public record at http://enron.trampolinesystems.com/

"Picking Over Enron's E-Mail Remains," by Frank Ahrens, The Washington Post, June 11, 2006, Page F06 --- Click Here

Thanks to the combination of the Internet, software that lets employers scan employee e-mail for objectionable material and the evil genius of public relations, you can now search a bunch of Enron e-mails. A company called InBoxer Inc. sponsors the search, as a way of touting its business ( http://www.enronemail.com  ).

One is from the office of the chairman (Lay) to Houston employees, telling them that their hard work had pushed Enron stock over $50 per share. In return, each would get 50 Enron stock options. Gee, thanks.

There is a mournful exchange between two employees in February 2002, two months after bankruptcy, bemoaning Enron whistle-blower Sherron Watkins's $500,000 book advance. "I want what I had," one writes.

Others include mawkish lines between ex-lovers and forwarded jokes, many of a sexual and otherwise offensive nature. (Remember when we forwarded jokes via e-mail? How 1998.)

We love picking over the carcasses of big, dead things. Here's one more way to do a little corporate autopsy.

Continued in article

"Science Puts Enron E-Mail to Use," by Ryan Singel, Wired News, January 30, 2006 ---

In March 2001, just a few months before Enron CEO Jeffrey Skilling resigned, an employee e-mailed him a joke about a policeman pulling over a speeding driver, whose wife subsequently rats him out to the cop for other offenses, including being drunk.

Skilling and Enron chairman Ken Lay, whose federal trial on multiple felony fraud charges starts Monday, might not see the irony that, like the driver's wife, their e-mails will soon be testifying against them, both in court and in public opinion.

Enron's inbox first hit the internet in March 2003 when the Federal Energy Regulatory Commission made public more than 1.5 million e-mails from 176 Enron employees as part of its investigation of the company's manipulation of California energy markets in 2000.

Journalists quickly scoured the e-mail for embarrassing moments and incriminating missives. Among the finds: Lay family members' thoughts about finding the perfect wedding photographer (someone who did one of the Kennedy's weddings), Enron executives angling for ambassadorships and positions in the Bush administration, instructions from Tom DeLay's staff to Lay and Skilling on how to handle $100,000 contributions and messages from Lay's secretary bemoaning the fact that she could not get tech support to fix Lay's phone, which would disconnect if answered before the third ring.

All this among countless jokes about Texas, sex, nuns, women, Latinos and priests. Other tasteful tidbits include an offensive booty-call contract and a fashion critique of government lawyers investigating Enron.

The e-mails drew the attention of more than just Californians looking for some payback for the rolling blackouts and astronomical energy bills. InBoxer, an antispam company, turned to the archive to help test its newest product, which scans company e-mails in real time for objectionable content or confidential information, according to CEO Roger Matus.

For an accurate test, Matus needed a sample of corporate e-mail in all its raw, unadulterated drama and glory. He was unsure of how useful the Enron e-mails would be, until he loaded the database and looked at the first message.

The e-mail read in whole: "So you were looking for a one-night stand, after all?"

"That was the moment I knew we had a good testing corpus," Matus said.

Of the 500,000 e-mails InBoxer included in the database, the company's algorithms identified 10,275 with offensive words and another 71,268 that included potentially inappropriate messages, such as sexual innuendos or lists of employee Social Security numbers.

"Enron had an extreme culture of people who worked hard and played hard," Matus said.

Company engineers also found some great jokes, including one about how to feed a pill to a cat, inspiring InBoxer to make the e-mails searchable inside a demo of the new product, called the Anti-Risk Appliance.

While searching through the e-mails for more on the Raptor subterfuge, visitors can also try to win Apple iPod shuffles given away to those who dig up the funniest joke, the most fireable e-mail, and the most regrettable message sent.

Commercial outfits aren't the only ones exploiting the Enron e-mail dump.

“There are three kinds of people you don’t make look bad: your mom, the home plate umpire and your own lawyer on direct. Direct examination is supposed to be the open-book exam, the 200 points you get on your SAT for spelling your name right. By making his attorney look bad, Ken Lay blew it.” Brian Wice, defense . . .Lay has another trial following this one, concerning four counts of bank fraud, that will be tried by U.S. District Judge Sim Lake. The Houston Chronicle reports that Lake asked attorneys to complete testimony by May 11 in order for closing arguments to begin on May 15.
"Testimony Ends in Enron Trial," AccountingWeb, May 4, 2006 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=102111

Update on May 26, 2006

Top Enron Executives are now convicted felons

"Lay, Skilling Are Convicted of Fraud:  Jurors Reject Defense Claim That Enron Was Clean; Question of Credibility Two 'Very Controlling People'," by John R. Emshwiller, Gary McWilliams, and Ann Davis, The Wall Street Journal, May 26, 2006; Page A1 --- http://online.wsj.com/article/SB114789594247955693.html?mod=todays_us_page_one

The convictions of former Enron Corp. chairman Kenneth Lay and former president Jeffrey Skilling decimated their high-stakes argument that Enron was a law-abiding company done in by newspaper reports, short-sellers and market panic. The jury's decision cemented the once-highflying energy company's legacy as one of the most egregious corporate offenders of the 1990s.

The verdicts yesterday against both men on numerous federal fraud and conspiracy charges cap a string of prosecutions in which hundreds of senior corporate executives at numerous companies have been held accountable for wrongdoing on their watches.

Once viewed as one of the biggest business success stories of the 1990s, Enron collapsed in 2001, the first of a string of corporate scandals. Its fall marked a dramatic end to the stock-market boom and the beginning of a wave of corporate and regulatory reforms, including the 2002 Sarbanes-Oxley law.

Juror Kathy Harrison, an elementary-school teacher, said after the verdicts that she hoped executives at other companies would realize that "those in charge have responsibility. There's too much hurt here. If something good can come out, companies can be aware that they must be conscientious." (Read more reactions to the verdicts.)

After delivering their verdicts, the Enron jurors said they had focused partly on the credibility of the two former executives. In a risky legal strategy, both men had argued that no crimes were committed at Enron, apart from a few largely irrelevant ones involving former Chief Financial Officer Andrew Fastow. Messrs. Lay and Skilling both testified during the trial, and both faced withering cross-examinations by prosecutors.

Judge Sim Lake read the string of guilty verdicts in a packed courtroom. Both defendants stood calmly as family members gasped and some began to sob.

Mr. Skilling, 52 years old, was convicted on 19 of 28 counts of conspiracy, fraud and insider trading. He was acquitted on nine counts of insider trading. Mr. Lay, 64, was convicted on all six conspiracy and fraud counts he faced. After reading the jury verdicts, Judge Lake also found Mr. Lay guilty of all four counts in a separate banking-fraud case heard by the judge while the jury was deliberating.

After the verdicts were announced, Mr. Lay joined more than a dozen friends and family members in a circle in one corner of the courtroom to pray. One of Mr. Lay's supporters, Rev. Bill Lawson, could be heard invoking the story of Jesus, "who was convicted and even executed," he said.

"We'll all come through this stronger," said Mr. Lay, occasionally tugging at the hand of his wife, Linda, who had sat through the entire four-month trial. Later, Mr. Lawson said he advised Mr. Lay "to hang in there and trust God."

In a telephone interview last night, Mr. Skilling said that when he was pronounced guilty on the first count of conspiracy, "that floored me. God, there was no conspiracy." He said that the relatively short jury deliberations had raised his hopes. But "we were just on a tilted football field," he said, referring to going on trial in Enron's headquarters city.

The convictions came despite Messrs. Lay and Skilling putting on one of the most expensive criminal defenses ever, spending an estimated $60 million. Both men remain free pending sentencing, which is set for Sept. 11. Each faces many years in prison.

Attorneys for both men said they would appeal the verdicts, which came on the sixth day of jury deliberations that many observers had expected to stretch for weeks. The verdict "doesn't change our view of what happened at Enron, or of Jeff Skilling's innocence," said a clearly upset Daniel Petrocelli, Mr. Skilling's lead lawyer. "We told our story and the jury disagreed with it."

At a press conference after the verdicts, several jurors said that government witnesses, many of them former Enron executives testifying as part of plea bargains, had convinced them that illegal activities had occurred at Enron, and that the defendants were responsible.

Defense lawyers had decided to put both Mr. Skilling and Mr. Lay on the stand. "I wanted badly to believe what they were saying," said juror Wendy Vaughan, a small-business owner. But "there were places in their testimony where I felt their character was questioned," she said.

"Both men said they had their hands firmly on the wheel" of the company, said another juror, elementary-school principal Freddy Delgado. For the two executives to later claim they didn't know about wrongdoing, said Mr. Delgado, was "not the right thing."

Continued in article

Accounting Standard Setters Are Making Some Dangerous Mistakes in the Wake of Enron
From a short seller who made a fortune at the expense of Enron shareholders
From an investor who is not in favor of "principles-based standards" relative to "rule-based standards"

"Short-Lived Lessons From an Enron Short," by Jim Chanos, The Wall Street Journal, May 30, 2006; Page A14 --- http://online.wsj.com/article/SB114894232503965715.html?mod=todays_us_opinion

The convictions of Ken Lay and Jeff Skilling are less than a week old, and yet conclusions are already being drawn about whether "corporate wrongdoing" is a thing of the past. As someone with more than a passing interest in the Enron story -- I was, to quote Ken Lay's bizarre testimony, one of the "short-sellers that were organized and working together and conspiring together" against Enron -- I feel a need to examine what lessons those of us who slog it out daily in the corporate trenches might gain from Enron's spectacular collapse. I propose to offer the top 10 lessons from Enron that executives, investors and lawyers will soon forget:

1. The Enron scandal shows a need for a standards-based accounting system, rather than a rules-based one.

Wait a minute, you must be saying -- in the wake of Enron, don't we need more accounting rules to cover every possible situation, not some mushy "standards"-based guidelines?

No. It is precisely our "check-the-box" accounting rules that get written for every type of transaction that helped create the financial monster that was Enron. By having armies of clever bankers and lawyers pretzel-twist uneconomic deals into profit sources that conformed to GAAP ("Generally Accepted Accounting Principles," or "Good As Actual Profits" as it's sometimes known), dishonest management teams always hide behind the disclaimer that their accounting has been blessed by their auditors. The problem is, I can think of no major financial fraud in the 25 years I've been on Wall Street that did not have audited financials that conformed to GAAP! Yet reasonable independent auditors and audit committees, using the "standard" of economic common sense, would have unmasked most of the financial chicanery that became apparent at these companies only after their collapse.

2. Mark-to-Market accounting was not the problem at Enron, Mark-to-Model was.

Many casual observers of the Enron saga have pointed to the shortcomings of the Mark-to-Market (MTM) method of accounting that Enron used for its trading assets (i.e., the act of recording the price or value of a security, portfolio or account to reflect its current market value rather than its book value). But MTM is entirely appropriate -- and necessary -- for trading assets held at financial firms. How else would one handle valuation for assets that trade on verifiable exchanges and/or electronic networks?

In Enron's case, however, non-exchange traded assets and illiquid private deals were treated similarly, with today's "prices" derived by computer models that estimated future prices and volatility. The "estimates" in these models were helpfully provided by . . . Enron itself! As any capable financial economist will point out, today's market prices offer only a starting point for estimating future prices and volatility, which are, by definition, unknowable. In an MTM system with no independent source of current prices, when one feeds the "unknowables" of future prices and volatility, and the "probable" of time, into a computer, a "certain" current price is calculated! Neat, huh?

3. Off-balance-sheet deals and entities are "off" the balance sheet for a reason.

One would think that this concept would be pretty obvious, given the LJM, Jedi, Chewco, Deathstar, Jabba the Hut (OK, I made that last one up) monikers used to describe off-balance-sheet entities at Enron. One would be wrong. Yet it is my experience, pre- and post-Enron, that such accounting is used by companies to hide things they don't want investors to see. Pre-Enron saw silliness such as the Coca-Cola/Coca-Cola Enterprises "two-step," while today one can ponder the off-balance-sheet "land banking" that exists at the publicly traded U.S. homebuilders. If a company is determined to keep a significant aspect of its business off its books, investors should simply ask why.

4. Wall Street analysts don't "do" complex.

Isn't that what securities analysts are for, you might ask? Silly reader . . . analysis is for kids! Literally. At most large Wall Street firms, the tedious job of constructing financial models and answering client accounting queries is handled by the junior analyst on the team. It still shocks me today that when meeting with a team of "sell-side" Wall Street analysts from a firm to discuss a particular company, the senior analyst invariably concedes the answer to a complex financial question to a junior analyst working for him.

In a post-Eliot Spitzer world, how can this be? Simple. Senior analysts still spend most of their time on the road making client presentations. That is, of course, if they aren't playing golf with the CEO or organizing the menu at the next investor conference in Las Vegas. The recent attempts by certain companies to discourage hard-hitting independent research will only serve to maintain the chasm between those that "do the numbers" and those with, hopefully, the experience to know what the numbers mean.

5. The rating agency system breaks down when most needed. Rely on it at your own peril.

Time and again, when confronted with negative financial "surprises" by corporate issuers during the last decade, the "independent" ratings agencies fell down on the job. This kept slow-on-the-uptake investors dancing on the decks of numerous financial Titanics, while those heeding other signals (such as the burgeoning market for credit-default derivatives) prepared to man the lifeboats.

Whether it was the hubris of not wanting to precipitate a run on the bank (as if it wasn't happening already!), or the incompetence of one ratings agency analyst admitting to not having read the company's SEC filings, the shortcomings of an analyst-based ratings agency system became apparent in the Enron fiasco. Market-based price-discovery agents, such as short sellers in the equity market and purchasers of credit-default insurance in the bond/derivative markets, supplanted the Big Three ratings agencies as accurate predictors of Enron's financial distress.

6. Beware of, and question, unexpected executive resignations.

This lesson should seem obvious, but cognitive dissonance assures that it isn't. When Jeff Skilling resigned abruptly after six months as Enron's CEO, alarm bells should have been going off on Wall Street, as they were in Houston. But mindful of the still-bountiful fees Enron promised the Street, virtually every analyst covering Enron told his/her clients "all was well"! Didn't anyone find it disconcerting that despite claiming (the still undisclosed) "personal reasons" for his resignation, Mr. Skilling admitted on the front page of this newspaper the next day that if Enron's stock price had stayed up, "I don't think that I would have felt the pressure to leave"?

By asking the right questions, investors in August 2001 (with Enron's stock still at $40) might have been able to deduce that Enron's stock was not just a barometer of its financial health, but was also an actual component (through the investor-guarantee mechanism in the Fastow partnerships) of its health, as this newspaper's reporters would so convincingly point out two months later. Mr. Skilling hid the road map to Enron's future collapse on the front page of The Wall Street Journal, but few noticed.

7. Whistleblowers aren't whistleblowers if they blow their whistles inside the company walls.

Someone should inform Time magazine's Person-of-the-Year Department that writing a "cover-your-behind" memo to your boss about financial irregularities within the firm is not "whistleblowing." Having the guts to risk your job and reputation, by bringing evidence of those irregularities to the proper financial authorities, is. Enough said.

8. Special investigations by corporate boards are almost always a waste of time/money, and often prove highly misleading.

As a corollary to Lesson No. 7, when questions are raised internally about possible financial improprieties, corporate boards often hire counsel to conduct investigations on their behalf. This is done foremost for their own protection ("We investigated once we knew!"), and only incidentally to uncover unpleasant facts that such boards, charged with oversight as a duty, should've known about already. Many boards, in a wonderful example of willful blindness, simply don't want to know. In fact, one well-regarded Washington law firm forensic accounting SWAT team, headed by a former SEC enforcement director, managed to not find much wrong at either Enron or Tyco, despite abundant internal documents at their disposal. Such incompetence is highly rewarded in future corporate assignments. Rely on these reports at your own risk.

9. Character cannot be compartmentalized.

This lesson may be the most important of all. Investors and outside advisors often seem preoccupied with analyzing the formal propriety of specific corporate transactions, and the associated financial accounting. Questionable deals and disclosures are analyzed discretely, and not as part of any disturbing pattern of dubious corporate policies. Yet one had only to read the history of Ken Lay's involvement in the Valhalla energy-trading scandal at Enron in 1987 to detect a harbinger of scandals yet to come. That bad guys have a pattern of dishonest behavior should seem obvious, but it's not.

And, finally, 10: Friends do not let (possibly guilty) friends take the stand in criminal trials.

Let's face it, the Enron trials of Lay and Skilling had it all; greed, arrogance, an incompetent defense strategy (oh, how I wish short sellers had the power that Enron's defense team claimed we have!) and, of course, larger-than-life corporate villains. One would assume the high profile nature of the trial itself might underscore this observer's list of lessons learned from Enron's spectacular collapse. But thankfully, I'm pretty confident that they will be forgotten soon.

Mr. Chanos is managing partner of Kynikos Associates.

Bob Jensen's threads on lessons learned from Enron are given as answers to Question 3 at http://www.trinity.edu/rjensen/FraudEnronQuiz.htm

Bob Jensen's Enron Updates are at http://www.trinity.edu/rjensen/FraudEnron.htm#EnronUpdates 

The Big Mystery in the Enron Trial of Lay and Skilling:
To my knowledge, neither the prosecution nor the defense is calling up the two key players who know where Enron’s accounting skeletons are buried. Rick Causey dug most of the holes and was helped by Dave Duncan when shoveling the dirt back over the bones.  

Most of the top executive orders to bury the bones allegedly went to Rick Causey who then carried them out. Causey also persuaded Duncan not to raise any fuss about the graveyard with Andersen’s Chicago office.

When Andersen’s true expert, Carl Bass, started sniffing around the bone yard, Duncan forced Bass off the audit.

Update on May 9, 2006

It appears that Rick Causey refused to testify unless granted immunity from other possible criminal charges for Enron accounting fraud.

Judge Lake refused to force prosecutors to grant immunity to the witnesses, all of whom face potential criminal liability for their role in Enron's demise. In the end, these central participants were not heard from in this case because of their fears that their statements could be used against them in subsequent prosecutions. While such an outcome is not unusual, it is particularly important in this case. It means that several meetings involving potential wrongdoing by Mr. Skilling and Mr. Lay boiled down to he-said, she-said statements on the stand. With no third witness to offer corroborating testimony either way, the truth is left in the eye of the beholder . . . Legal experts said the defense may well continue seizing on the theme of the missing witnesses in its closing arguments, which will begin next Monday and run through next Wednesday.
Alexei Barrionuevo and Kurt Eichenwald, "What Remains Unanswered at Enron Trial," The New York Times, May 9, 2006 --- http://www.nytimes.com/2006/05/09/business/businessspecial3/09enron.html

Bob Jensen's Enron updates are at http://www.trinity.edu/rjensen/FraudEnron.htm#EnronUpdates

Also see the following links from http://www.trinity.edu/rjensen/FraudEnronQuiz.htm

http://www.trinity.edu/rjensen/FraudEnronQuiz.htm#27

http://www.trinity.edu/rjensen/FraudEnronQuiz.htm#21
At one point in 1999 Duncan privately agreed with his Andersen colleague Carl Bass that Enron should take an added $30-$50 million charge to earnings, but that these were not material. How much was this charge? Why do you really think Duncan did not want to force Enron to make this charge?

********************************

Why white collar crime pays for Chief Enron Accountant: 
Rick Causey's fine for filing false Enron financial statements:    $1,250,000
Rick Causey's stock sales benefiting from the false reports:     $13,386,896
That averages out to winnings of $2,427,379 per year for each of the five years he's expected to be in prison
You can read what others got at http://www.trinity.edu/rjensen/FraudEnron.htm#StockSales 
Nice work if you can get it:  Club Fed's not so bad if you earn $6,650 per day plus all the accrued interest over the past 15 years.

"Ex-Enron Accountant Pleads Guilty to Fraud," Kristen Hays, Yahoo News, December 28, 2005 --- http://news.yahoo.com/s/ap/20051228/ap_on_bi_ge/enron_causey

Bob Jensen's running updates on the Enron scandal are at http://www.trinity.edu/rjensen/FraudEnron.htm#EnronUpdates

Bob Jensen's Enron Quiz is at http://www.trinity.edu/rjensen/FraudEnronQuiz.htm

Bob Jensen's threads on the Enron scandal are at http://www.trinity.edu/rjensen/FraudEnron.htm

May 4, 2006 reply from Linda Kidwell, University of Wyoming [lkidwell@UWYO.EDU]

Actually, I found it pretty interesting that his fee is being reported at all. What were O.J.'s DNA experts paid? How much were the Enron prosecutor's experts paid? How much were the doctors on both sides of the Terry Schiavo case paid? I suspect they did not receive a million dollars, but this is complicated testimony and Kenneth Lay has an awful lot at stake here (not that the others didn't, but I suspect the public had a more open mind). The whole point of disclosing the fee was an attempt to discredit Arnold. I have mixed feelings about that.

Linda K.

May 4, 2006 reply from Bob Jensen

Hi Linda,

Is Enron (or Enron's insurance) paying for the massive legal defense of Lay and Skilling?

Arnold's fee is a drop in the bucket relative to the multimillions being spent for Lay and Skilling. It adds insult to injury whenever legal defense of executives takes priority over creditor and low-level employee claims. The lawyers and CEOs of the U.S. have in general seen to it that the priority for them takes precedence. Their stashed millions are safe even if they do a bit of Club Fed time. Michael Milken kept over $1 billion even though he did a little Club Fed time. That's one of the reasons I hope there's a special place in hell for all of them.

My question is whether Arnold is really needed. The Chief Accounting Officer, Causey, has already confessed to accounting fraud, paid a $1,250,000 fine, and is in Federal prison for five years. Fastow has confessed to accounting fraud, paid a $30 million fine, and is in Club Fed for 10 years.

Do we need Jerry Arnold to now tell us there was no accounting fraud at Enron? Point one is that we will never believe Arnold no matter what good accounting practices he cherry picks. Point two is that accounting fraud has already been established by confessions of high-ranking Enron executives. If Arnold convinces this jury that Enron had no accounting fraud, should the confessions of Fastow and Causey be thrown out like their confessions were as insane as the confession of Zacarias Moussaoui?

The issue in the Skilling and Lay trials is not whether there was accounting fraud. The issue is whether Skilling and/or Lay perpetrated the frauds from up above or whether Causey (CAO) and Fastow (CFO) were as high as the frauds went. Having memorized all the FASB standards will not help Arnold or any other outside accounting witness answer those questions.

Fastow has already testified that he had orders from above for some of his accounting frauds. Causey mysteriously is not being called upon to testify. I'm told he prides himself on not being a rat.

Bob Jensen

May 4, 2006 reply from Richard Campbell [campbell@RIO.EDU]

Bob:

There is an article about your Rick Causey question in today’s Journal – below is the first couple of paragraphs:

Essentially BOTH the defense counsel AND the prosecutors think he may hurt each of their cases. Don’t you just love the way lawyers search for the truth???

FROM Wall Street Journal:

“At the criminal trial here of former Enron Corp. top executives Kenneth Lay and Jeffrey Skilling, the man known to some as the company's "Pillsbury doughboy" has come to loom large by his absence. Now, a final decision has to be made on whether to risk bringing him out of the refrigerator.

When he worked as Enron's chief accounting officer in the years before the company's December 2001 collapse into bankruptcy, Richard Causey's easygoing manner and soft features earned him his nickname. His accounting skills made him a key figure in some of the former energy giant's most complex and controversial financial transactions which are at the center of the alleged conspiracy and fraud case against Messrs. Lay and Skilling. Mr. Causey had been a co-defendant in the current criminal case until December, when he pleaded guilty to one count of securities fraud and admitted that he had "conspired with members of Enron's senior management to make false and misleading statements" about the company.

During three months of testimony here, Mr. Causey's name has been brought up repeatedly by both prosecution and defense -- with the former claiming he had been part of some of the company's most corrupt transactions and the latter contending that Messrs. Lay and Skilling had honestly relied on his assurances that all was well with Enron's accounting. Indeed, defense lawyers in the case have talked about calling Mr. Causey to help corroborate their claims that the company's activities were legal and proper.

Now, as the trial heads toward its conclusion, with jury deliberations expected to begin later this month, it looks as if neither side is likely to call Mr. Causey to the stand -- although a final list of prosecution witnesses is due to be filed today.”

"Enron Trial to Start Its Final Chapter:  Defense and Prosecution Rest Without Calling New Experts; Closing to Start Next Week," by Gary McWilliams, The Wall Street Journal, May 9, 2006; Page C5 --- http://online.wsj.com/article/SB114709862484846620.html?mod=todays_us_money_and_investing

With 52 days of sometimes teary, sometimes bitter testimonies completed, the conspiracy-and-fraud trial of two former top Enron Corp. executives is set to move into its final phase next week.

Yesterday, the defense and prosecution unexpectedly rested without calling further experts, paving the way for closing arguments to begin Monday. The eight-woman, four-man jury thereafter will consider six counts against former Enron Chairman Kenneth Lay and 28 counts against former President Jeffrey Skilling.

The prosecution has sought to paint the two men as using guile and bluff to improperly pad profits and deceive investors on the state of key Enron operations from 1999 through the company's collapse in 2001. The two men insist that they did nothing wrong, blaming a market panic for toppling the onetime energy giant.

U.S. District Judge Sim Lake again yesterday denied defense motions for acquittal and for immunity for former Enron executives who have refused to testify without it. The latter motion asked the judge to bar the prosecution from arguing that Mr. Skilling's version of events was contradicted by numerous government witnesses.

Allowing the prosecution's closing argument to cite the government witnesses, "would increase the unfair prejudice" that resulted from the government's refusal to offer immunity, according to Mr. Skilling's attorneys. The motion seemed designed to buttress any appeal.

The defense rested after hearing from two final defense witnesses, including a former Enron manager who contracted with a small Internet company that Messrs. Lay and Skilling had invested in personally. The prosecution had used the pair's investments in PhotoFete.com Inc. to attack their credibility, arguing they failed to comply with Enron's code of conduct.

Margaret Nadasky, a former Enron branding manager, testified she hired PhotoFete.com without knowledge of the investments. She testified that although Mr. Lay's office in September 2001 asked her to explain why she was then ending the PhotoFete.com contract, she never heard any further from Mr. Lay or his office.

The prosecution's last witness was an employee with former Enron-owned utility Portland General Electric Co. who testified that she was stunned when Enron in the fall of 2001 reported a $1 billion charge to earnings and a $1.2 billion reduction in stockholder equity. Patti Klein said the report seemed to contradict Mr. Lay's assurances that Enron would hit its earnings targets for the quarter. Enron bought the utility in 1997 and spun it off to creditors last month.

She said the disclosure wasn't what she expected from his public comments. "He promised us he would be forthcoming with information and very transparent," said Ms. Klein. Under questioning by the defense, she conceded she wasn't aware of what information Mr. Lay was receiving. Mr. Lay has maintained he was repeating information given to him by advisers and subordinates.

Meanwhile, Mr. Lay's lead defense attorney appeared in the courtroom for the first time since late March, when he underwent the first of two surgeries to clear arterial blockages. Attorney Michael Ramsey said he expects to share closing arguments with others on the defense team next week.

Yet another Enron chapter
Jurors on Wednesday rendered a split verdict in the retrial of two former executives from Enron Corp.'s defunct broadband unit, convicting one while acquitting the other of all charges. Former broadband unit finance chief Kevin Howard was found guilty on five counts of fraud, conspiracy and falsifying records. Former in-house accountant Michael Krautz was acquitted of the same charges, concluding a month-long retrial after their original case ended with a hung jury last year.
Kristen Hays, "Jury Splits in Enron Case Retrial:  Ex-Broadband Finance Chief Guilty; Ex-Accountant Acquitted," The Washington Post, May 31, 2006 --- Click Here

Benston & Hartgraves versus Rush & Arnold

In the testimony below, defense witnesses for Skilling and Lay (Walter Rush and Jerry Arnold) "attribute Enron's descent into bankruptcy proceedings to a combination of bad publicity and lost market confidence" rather than accounting fraud. This places the Professor Arnold's opinion in conflict with that of Professors Hartgraves and Benston earlier analyses based upon the lengthy Powers Report commissioned by the former Chairman of the Board of Enron.

The 208 Page February 2, 2002 Special Investigative Committee of the Board of Directors (Powers) Report--- http://news.findlaw.com/hdocs/docs/enron/sicreport/ 
Alternative 2:  http://nytimes.com/images/2002/02/03/business/03powers.pdf 
Alternative 3:  http://i.cnn.net/cnn/2002/LAW/02/02/enron.report/powers.report.pdf 
Alternative 4:  Part One | Part Two | Part Three | Part Four

Hartgraves and Benston are come to much more negative conclusions than Jerry Arnold who was paid $1 million by the defense team to express an opinion below: "Accountants: Enron Financials Correct."

You can read the Hartgraves and Benston harsh criticisms of Enron's accounting and Andersen's auditing at

Here’s a summary just released by SmartPros. I hate the title "Accountants: Enron Financials Correct" and the inferences made that Enron’s accounting was above board. There was accounting fraud at Enron and auditing fraud at Andersen. Both the Chief Accounting Officer (Causey) and the Chief Financial Officer (Fastow) have confessed to accounting fraud and are now serving time in prison. To imply that Enron’s financial statements were “correct” is very deceiving.

In any event, Andersen does not appear to have applied the GAAP requirement to recognize asset impairment (FAS 121). From our reading of the Powers Report, the put-options written by the SPEs that, presumably, offset Enron's losses on its merchant investment, were not collectible, because the SPEs did not have sufficient net assets.
"ENRON: what happened and what we can learn from it," by George J. Benston and Al L. Hartgraves, Journal of Accounting and Public Policy, 2002, pp. 125-137:

3.3 Independent public accountants (CPAs)

The highly respected firm of Arthur Andersen audited and unqualifiedly signed Enron's financial statements since 1985.  According to the Powers Report, Andersen was consulted on and participated with Fastow in setting up the SPEs described above.  Together, they crafted the SPEs to conform to the letter of the GAAP requirement that the ownership of outside, presumably independent, investors must be at least 3% of the SPE assets.  At this time, it is very difficult to understand why they determined that Fastow was an independent investor.  Kopper's independence also is questionable, because he worked for Fastow.  In any event, Andersen appears, at best, to have accepted as sufficient Enron's conformance with the minimum specified requirements of codified GAAP.  They do not appear to have realized or been concerned that the substance of GAAP was violated, particularly with respect to the independence of the SPEs that permitted their activities to be excluded from Enron's financial statements and the recording of mark-to-market-based gains on assets and sales that could not be supported with trustworthy numbers (because these did not exist).  They either did not examine or were not concerned that the put obligations from the SPEs that presumably offset declines in Enron's investments (e.g., Rhythms) were of no or little economic value.  Nor did they require Enron to record as a liability or reveal as a contingent liability its guarantees made by or though SPEs. Andersen also violated the letter of GAAP and GAAS by allowing Enron to record issuance of its stock for other than cash as an increase in equity.  Andersen also did not have Enron adequately report, as required, related-party dealings with Fastow, an executive officer of Enron, and the consequences to stockholders of his conflict of interest.

4.1 GAAP

We believe that two important shortcomings have been revealed.  First, the US model of specifying rules that must be followed appears to have allowed or required Andersen to accept procedures that accord with the letter of the rules, even though they violate the basic objectives of GAAP accounting.  Whereas most of the SPEs in question appeared to have the minimum-required 3% of assets of independent ownership, the evidence outlined above indicates that Enron in fact bore most of the risk.  In several important situations, Enron very quickly transferred funds in the form of fees that permitted the 3% independent owners to retrieve their investments, and Enron guaranteed the SPEs liabilities.  Second, the fair-value requirement for financial instruments adopted by the FASB permitted Enron to increase its reported assets and net income and thereby, to hide losses.  Andersen appears to have accepted these valuations (which, rather quickly, proved to be substantially incorrect), because Enron was following the specific GAAP rules.

Andersen, though, appears to have violated some important GAAP and GAAS requirements.  There is no doubt that Andersen knew that the SPEs were managed by a senior officer of Enron, Fastow, and that he profited from his management and partial ownership of the SPEs he structured.  On that basis alone, it seems that Andersen should have required Enron to consolidate the Fastow SPEs with its financial statements and eliminate the financial transactions between those entities and Enron.  Furthermore, it seems that the SPEs established by Fastow were unlikely to be able to fulfill the role of closing put options written to offset losses in Enron's merchant investments.  If this were the purpose, the options should and would have been purchased from an existing institution that could meet its obligations.

Andersen also seems to have allowed Enron to violate the requirement specified in FASB Statement 5 that guarantees of indebtedness and other loss contingencies that in substance have the same characteristics, should be disclosed even if the possibility of loss is remote.  The disclosure shall include the nature and the amount of the guarantee.  Even if Andersen were correct in following the letter, if not the spirit of GAAP in allowing Enron to not consolidate those SPEs in which independent parties held equity equal to at least 3% of assets, Enron's contingent liabilities resulting from its loan guarantees should have been disclosed and described.

In any event, Andersen does not appear to have applied the GAAP requirement to recognize asset impairment (FAS 121).  From our reading of the Powers Report, the put-options written by the SPEs that, presumably, offset Enron's losses on its merchant investment, were not collectible, because the SPEs did not have sufficient net assets.  (Details on the SPEs' financial situations should have been available to Andersen.)  GAAP (FAS 5) also requires a liability to be recorded when it is probable that an obligation has been incurred and the amount of the related loss can reasonable be estimated.  The information presently available indicates that Enron's guarantees on the SPEs and Kopper's debt had become liabilities to Enron.  It does not appear that they were reported as such.

GAAP (FAS 57) specifies that relationships with related parties "cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions be competitive, free-market dealings may not exist".  As Executive Vice President and CFO, Fastow clearly was a "related party".  SEC Regulation S-K (Reg. §229.404. Item 404) requires disclosure of details of transactions with management, including the amount and remuneration of the managers from the transactions.  Andersen does not appear to have required Enron to meet this obligation.  Perhaps more importantly, Andersen did not reveal the extent to which Fastow profited at the expense of Enron's shareholders, who could only have obtained this information if Andersen had insisted on its inclusion in Enron's financial statements.

4.2 GAAS

SAS 85 warns auditors not to rely on management representations about onset values, liabilities, and related-party transactions, among other important items.  Appendix B to SAS 85 illustrates the information that should be obtained by the auditor to review how management determined the fair values of significant assets that do not have readily determined market values.  We do not have access to Andersen's working papers to examine whether or not they followed this GAAS requirement.  In the light of the Wall Street Journal report presented above of Enron's recording a fair value for the Braveheart project with Blockbuster Inc., though, we find it difficult to believe that Andersen followed the spirit and possibly not even the letter of this GAAS requirement.

SAS 45 and AICPA, Professional Standards, vol. 1, AU sec. 334 specify audit requirements and disclosures for transactions with related parties.  As indicated above, this requirement does not appear to have been followed.

An additional lesson that should be derived from the Enron debacle is that auditors should be aware of the ability of opportunistic managers to use financial engineering methods, to get around the requirements of GAAP.  For example, derivatives used as hedges can be structured to have gains on one side recorded at market or fair values while offsetting losses are not recorded, because they do not qualify for restatement to fair-value.  Another example is a loan disguised as a sale of a corporation's stock with guaranteed repurchase from the buyer at a higher price.  If this subterfuge were not discovered, liabilities and interest expense would be understated.  Thus, as auditors have learned to become familiar with computer systems, they must become aware of the means by which modern finance techniques can be used to subvert GAAP.


The above findings from the Powers Report appear to be inconsistent with the testimony of four years later.

"Accountants: Enron Financials Correct ," by Michael Graczyk (Associated Press Writer), SmartPros, May 4, 2006 --- http://accounting.smartpros.com/x52873.xml 

May 4, 2006 (Associated Press) — Last-minute changes to quarterly earnings reports prosecutors contend were ordered by Enron Corp. Chief Executive Jeffrey Skilling to improve the company's reputation on Wall Street were accurate, and not the result of improper tapping of company reserves, a defense expert testified Wednesday.

"The whole process of financial reporting, in a company as large as Enron, to get financial statements out ... is an enormous undertaking," said Walter Rush, an accounting expert hired by Skilling. "And people are scrambling, trying to get these estimates put together.

"There are changes going on up to the very last second. It is universal. Every company goes through this."

Rush was the second consecutive accounting expert to take the stand, following University of Southern California professor Jerry Arnold, who testified for Enron founder and former CEO Kenneth Lay.

They are among the last defense witnesses, as lawyers for the two top chiefs at Enron expect to conclude their case early next week, the 15th week of their federal fraud trial.

Mark Koenig, former head of investor relations at Enron, testified early in the trial that he believed top Enron executives were so bent on meeting or beating earnings expectations to keep analysts bullish on the company's stock that they made or knew of overnight changes to estimates. Paula Rieker, Koenig's former top lieutenant, said Koenig told her Skilling ordered abrupt last-minute changes to two quarterly earnings reports to please analysts and investors.

"They could have just had a bad number," Rush said, referring to Koenig's and Rieker's testimony about a late-night change in a fourth-quarter 1999 report that boosted earnings per share from 30 cents to 31 cents.

Arthur Andersen, Enron's outside accounting firm, already had the 31-cent number days earlier, Rush said.

"They could have been a couple steps behind the way the process was evolving," he said of Koenig and Rieker.

In addition, Rush said the intention to "beat the street," a phrase attributed to Skilling, was typical in business.

"Companies set goals and forecasts for themselves all the time," Rush said.

Prosecutors also contend Enron achieved its rosy earnings by drawing improperly from reserves. But Rush, responding specifically to second-quarter earnings in 2000, said a transfer from one reserve was not material since Enron had another, underreported reserve.

"That number had the effect of understating Enron's profits," he said.

He also disputed government contentions Enron executives improperly moved parts of the company's retail operation into its highly profitable wholesale business unit to hide financial problems under the guise of an accounting process called "resegmentation."

"I do believe it was properly disclosed and properly accounted for," Rush said, adding that he believed Enron went beyond the rules in disclosing particulars about the resegmentation.

"The rules only require we tell we have made a resegmentation. You just merely need to alert the reader there has been a change."

Earlier Wednesday, Arnold repeated his sentiment that Lay did not mislead investors about the company's financial health in the weeks before it filed for bankruptcy protection in December 2001.

Arnold said third-quarter 2001 financial statements cited by Lay in discussions with investors complied with Securities and Exchange Commission rules.

"That is my view," he said, answering repeated questions about the quarter when Enron reported $638 million in losses and a $1.2 billion reduction in shareholder equity.

The government contends Lay knew many Enron assets were overvalued and that losses were coming and misrepresented this to the public.

Several former high-ranking Enron executives have testified Lay misled investors when he said the losses were one-time events.

"I disagree with their interpretation," Arnold said, who noted his company had been paid $1 million for his work on the Enron defense.

Only 10 minutes into his testimony Wednesday, U.S. District Judge Sim Lake grew impatient when Arnold and prosecutor Andrew Stolter repeatedly went round and round on the same question.

"I'm not going to have sparring over minor, uncontroverted issues," a clearly irritated Lake barked.

Skilling, who testified earlier, and Lay, who wrapped up six days on the witness stand Tuesday, are accused of repeatedly lying to investors and employees about Enron when prosecutors say they knew the company's success stemmed from accounting tricks.

Skilling faces 28 counts of fraud, conspiracy, insider trading and lying to auditors, while Lay faces six counts of fraud and conspiracy.

The two men counter no fraud occurred at Enron other than that committed by a few executives, like Fastow, who stole money through secret side deals. They attribute Enron's descent into bankruptcy proceedings to a combination of bad publicity and lost market confidence.

"An Enron Factor at Top Business Schools," AccountingWeb, May 5, 2006 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=102122

The Enron scandal factors in a current report on America’s leading undergraduate business schools as identified in a BusinessWeek survey, and that bane of the accounting profession is also part of the thinking at some of those top schools.

In its first ever ranking of undergraduate business schools, based on criteria that include academic standards and intangible qualities like the learning atmosphere on campus, and the value that their graduates command in the job market, BusinessWeek ranks the University of Pennsylvania’s Wharton School number one, followed by the University of Virginia’s McIntire School, Notre Dame University’s Mendoza, and the Sloan School at the Massachusetts Institute of Technology. For a full list visit http://bwnt.businessweek.com/bschools/undergraduate/06rankings.

In discussing the significance of the rankings, the report notes that in the face of the job market’s strong demand for business professionals, students considering business school typically choose programs based on the academic reputation of the entire university but may overlook just how the institutes’ business schools compare. It also notes that the market for financial professionals is being fueled by factors that include: Sarbanes-Oxley law of 2002, enacted in the wake of the Enron scandal, a backlash against offshoring jobs, and companies making up for a lag in hiring after the terrorist attacks in 2001.

Daniel Short, dean of the number 33-ranked Neeley School of Business at Texas Christian University, seconded the thought about the accounting scandals’ impact. “Thanks to Enron, one of the most popular majors these days is accounting. Students have realized there are great opportunities, that they can go into an organization with an accounting degree and make a difference,” he says in an interview with the Dallas Morning News.

“Kids have made the leadership connection – that if the accounting is not done correctly, you wind up with the 'Enrons' of the world,” he adds. Indeed, the BusinessWeek report includes discussion of the top business schools' ability to cultivate leaders and to get students involved in business processes.

At the number nine ranked Marriott School of Business at Brigham Young University, Steven Albrecht, an associate dean, said that his school has been acting to make students “more pro active in the (accounting) profession” because of the increased demand for audit services created by Enron and the Sarbanes-Oxley law. He commented in a survey conducted last year by the accounting profession marketing and research firm, Bay Street Group.

The Bay Street Group survey found that a high percentage of business school leaders felt that shortcomings in how their schools teach ethics and real world business matters may have contributed to Enron and the other scandals. That study last year also found that business schools have been expanding their courses and extracurricular offerings to make students more aware of some of the issues that Enron brought to the surface.

The BusinessWeek survey concurs, noting, “Under increased pressure from students and recruiters, business schools have revamped their offerings, putting more emphasis on specialized classes, real-world experience, and soft skills such as leadership. Once a refuge for students with poor grades and modest ambitions, many undergraduate business programs now get MBA-like respect.”

CEOs Often Make Poor Witnesses

"Did Ken Lay Demonstrate Credibility?" by Alexei Barrionuevo, The New York Times, May 3, 2006 --- http://www.nytimes.com/2006/05/03/business/businessspecial3/03enron.html

Before he took the stand, legal analysts gave Mr. Lay better odds of an acquittal than his co-defendant, Jeffrey K. Skilling, the former Enron chief executive who forced Mr. Lay back into service after he resigned in August 2001. Mr. Skilling is charged with conspiracy and fraud, as well as insider trading violations.

But Mr. Lay's often-testy, sometimes hostile performance on the stand has many legal specialists questioning whether he increased his chances of being convicted of charges that he conspired to defraud Enron investors. When a defendant testifies in a fraud case, guilt or innocence often boils down to credibility.

By trying to resurrect his reputation rather than counter the charges against him, Mr. Lay, 64, put front and center the question of whether he bore responsibility for mismanaging Enron.

Yet he steadfastly refused to accept responsibility for any decision that might have contributed to the fall of Enron. Instead, he liberally sprinkled blame on a market panic caused by short-sellers, The Wall Street Journal, the bursting of the technology boom, the terrorist attacks of Sept. 11 and, most of all, the schemes hatched by the former chief financial officer, Andrew S. Fastow.

"Sir, you have a long list of people to blame for Enron's collapse, and it gets longer and longer as you testify," said the prosecutor, John Hueston, for whom Mr. Lay showed open contempt in four days of combative cross-examination. "Your list of people to blame and events to blame did not include yourself, did it, sir?"

Mr. Lay responded: "I did everything I could humanly do during this time. Did I make mistakes? I'm sure I did, Mr. Hueston. I had to make real-time decisions based on the information I had at the time."

Jamie Wareham, the global chairman of litigation for Paul, Hastings, Janofsky & Walker, said that chief executives often make difficult witnesses for lawyers defending them. The same qualities of toughness, charisma and confidence that propelled them to the top translate poorly in the courtroom.

Continued in article

"Prosecutor Zeroes In on Ex-Enron Chief's Finances," by Barrionevo, The New York Times, May 2, 2006 --- http://www.nytimes.com/2006/05/02/business/businessspecial3/02enron.html

Having $100 million in personal debt did not stop Kenneth L. Lay from spending $200,000 on a birthday cruise for his wife and holding onto some $30 million in real estate, even as banks were demanding repayment.

Instead, Mr. Lay, the founder and former chief executive of Enron, used financial deals with the company to maintain his lifestyle. As banks demanded payments, Mr. Lay sold shares back to Enron to meet margins calls, selling $77.5 million in 2001. At one stretch, from July 26 to Sept. 4, 2001, he sold $24 million in shares back to Enron.

Mr. Lay had claimed that the sales were his only recourse, but on Monday, a prosecutor challenged that contention, showing evidence in the fraud trial that Mr. Lay had tens of millions of dollars in real estate, separate credit lines and non-Enron stock available in the month's before Enron collapsed in December 2001.

Mr. Lay grudgingly conceded on his fifth day on the stand that those options were not pursued because, he insisted, the Enron credit line was the most efficient way to meet the margin calls, which were becoming increasingly urgent as Enron's shares were plummeting. But his lifestyle did not suffer despite his indebtedness.

"We had realized the American dream and were living a very expensive lifestyle," Mr. Lay said, adding it was "the type of lifestyle where it is difficult to turn off the spigot."

Mr. Lay's sale of Enron shares to meet bank calls was long thought to be his best defense against charges that he conspired to defraud the company, which collapsed in December 2001. Mr. Lay argued on Monday that he went to great lengths to hang onto his Enron shares, even as the debacle unfolded. He acknowledged that he maintained a risky trading position, pledging virtually his entire portfolio of liquid assets, nearly 90 percent of which was in Enron stock, as collateral against loans used to make other investments.

But his insistence on being portrayed as the proverbial captain willing to go down with his ship has become a vulnerability for him in the trial. A prosecutor, John Hueston, doggedly sought to show on Monday that Mr. Lay did not do everything he could to hold onto his Enron shares.

Mr. Lay's claim that he sold only when forced is crucial to buttressing his defense that he was telling the truth when he made rosy assessments of Enron's performance in the five months after he reassumed the chief executive post after the August 2001 resignation of Jeffrey K. Skilling, Mr. Lay's co-defendant. Mr. Skilling is charged with conspiracy, fraud and insider trading.

While the government has not charged Mr. Lay with insider trading, Mr. Hueston has used Mr. Lay's stock sales to raise questions about his credibility and truthfulness when he was encouraging employees to buy Enron shares in the late summer of 2001, even as he was unloading his.

Despite Mr. Lay's claims that he wanted to tell the "whole truth" in trial, Mr. Hueston suggested that Mr. Lay had told "Enron employees a half-truth."

On Monday, Mr. Hueston's second day of extensive questioning on the issue, the prosecutor showed, that Mr. Lay chose to meet a $483,426 margin call on July 26, 2001, with his Enron line of credit. That was despite having more than $11 million available in separate secured and unsecured credit lines separate from the Enron line. He also had $6.3 million in stocks in Compaq, Eli Lilly and a TCW stock fund, at least some of which, Mr. Hueston showed, was available for trading.

Continued in article
 

Lay Defends Family's Role In Selling Shares
Mr. Lay was also asked about his alleged 2001 comment to company colleagues that The Wall Street Journal had a "hate on" for Enron in connection with a series of articles looking at Mr. Fastow and his partnership operation. "I might have used that term," Mr. Lay acknowledged, adding that the Journal was "trying to paint a very negative image of Enron." (As previously reported, the Journal said it stands by the accuracy of its coverage.)
"Lay Defends Family's Role In Selling Shares:  Enron Ex-Chairman Says He Tried to Minimize Sales To Meet Margin Calls," by Gary McWilliams and John R. Emshwiller, The Wall Street Journal, May 2, 2006; Page C3 --- http://online.wsj.com/article/SB114649255583240444.html?mod=todays_us_money_and_investing
See Question 22 at http://www.trinity.edu/rjensen/FraudEnronQuiz.htm

"At the Enron Trial, Strange Stumbles Mar Lay's Defense:  Team Seems Caught Off Guard At Times and Ex-Chairman Gets Testy, Even to Counsel 'You Guys Are Pretty Thorough'," by John R. Emshwiller and Gary McWilliams, The Wall Street Journal, May 1, 2006; Page A1 --- http://online.wsj.com/article/SB114644932245140165.html?mod=todays_us_page_one

Kenneth Lay was known as one of the corporate world's smoothest executives as he presided over Enron Corp.'s growth into an energy-trading powerhouse. But on the witness stand, with his freedom on the line, he has faced manifold problems.

He's been uncharacteristically irascible at times. After health problems sidelined his lead lawyer, he's been left with an attorney with whom he has less rapport. His defense has sometimes seemed caught off guard by bombs lobbed by the prosecutors. And finally, the relative simplicity of the case against Mr. Lay has, oddly, seemed to work against him by leaving prosecutors freer to zero in on his credibility.

They've pummeled Mr. Lay on that front, alleging he tampered with witnesses and filed massively misleading reports about his stockholdings. Despite two years of trial preparation and millions spent on his defense, Mr. Lay at times last week seemed uncomfortable, ill-prepared and even suspicious of his own lawyer, George Secrest. "And where are you going with this, Mr. Secrest?" Mr. Lay said in response to one question. Mr. Secrest started to explain, then gave up.

When Mr. Lay was indicted in 2004 on federal conspiracy and fraud charges, many believed the case against him was weaker than that against his protege and co-defendant Jeffrey Skilling. The indictment identified Mr. Skilling, the 52-year-old former Enron president and chief executive, as the leader of the alleged scheme to cook Enron's books and lie to the public about its health.

Mr. Lay faced fewer counts, covering a shorter period, mostly the four months when he returned as CEO between Mr. Skilling's surprise August 2001 resignation and Enron's bankruptcy filing that December. The affable Mr. Lay was well known for his political skills and a Horatio Alger life story that many thought could stand him in good stead with a jury.

Instead, the prosecution has kept the 64-year-old Mr. Lay on the defensive by largely avoiding Enron's financial labyrinth and challenging him on easier-to-understand matters.

For example, the defense has blamed short-selling "vultures" -- seeking to profit from a decline in Enron shares -- for driving down the stock in 2001 and helping spark a market panic that killed the company. That line blew up in their face on Thursday when prosecutor John Hueston showed embarrassing evidence that Mr. Lay's own son, Mark, had sold the stock short in March 2001.

Continued in article

Jensen Comment
Ken Lay's controversial sales of Enron shares brought in $184,494.426 --- http://www.trinity.edu/rjensen/FraudEnron.htm#StockSales
Of course Lou Pai will never serve time for his Enron stock sales of $270,276,065  http://www.trinity.edu/rjensen/FraudEnron.htm#StockSales
 

Who are the two richest Enron executives to emerge unscathed by Enron's scandal?
See Question 2 at http://www.trinity.edu/rjensen/FraudEnronQuiz.htm
 

"Lay on Defensive at Enron Trial: Prosecutors Argue Ex-Chairman Misled Investors on Stock Sales And Retail Energy Unit's Health," by John R. Emswiller and Gary McWilliams, The Wall Street Journal, April 28, 2006; Page C1 --- http://online.wsj.com/article/SB114614886688337636.html?mod=todays_us_money_and_investing

Federal prosecutors hammered at former Enron Corp. Chairman Kenneth Lay's credibility by showing he made a series of inaccurate stockholding reports that failed to disclose large sales of his Enron shares in the months before the company's December 2001 bankruptcy filing.

Mr. Lay, who faces federal conspiracy and fraud charges in connection with Enron's collapse, appeared taken aback by the assault during his first full day of cross-examination in court here, which followed two hours of tense exchanges with prosecutor John Hueston on Wednesday afternoon. Mr. Lay hasn't been charged with improper sales of stock.

At times yesterday, he stuttered in response to accusations. Other times, he accused Mr. Hueston of twisting his words or harping on irrelevant points.

Mr. Lay said repeatedly that he relied on advice from company attorneys who told him he wasn't required to disclose the disputed stock sales except once a year, since they involved turning the shares back to the company in return for cash rather than sales on the open market. He said that his Securities and Exchange Commission filings complied with the law even though they inflated the picture of his Enron holdings. In 2001, Mr. Lay obtained $70 million through these stock transactions with Enron. (Testimony excerpts)

Mr. Hueston even sought to use Mr. Lay's son against him.

Mr. Lay and his co-defendant, former Enron President Jeffrey Skilling, have consistently claimed that a concerted attack by short-sellers helped drive down Enron's share price, and contributed to the company's 2001 collapse. (Short-sellers are traders who, using borrowed shares, make profits when a stock goes down.) Mr. Hueston noted that Mr. Lay's lead attorney, Michael Ramsey, referred to short-sellers as "vultures."

Mr. Hueston then introduced evidence that Mr. Lay's son, Mark, had executed four short sales on Enron stock in March 2001. Was he a vulture? asked the prosecutor.

"I don't think he's a vulture," said Mr. Lay in a subdued voice, adding that he wasn't aware of his son's stock transactions.

As for Mr. Lay's SEC filings about his stockholdings, Mr. Hueston showed that the Enron chairman didn't include his company stock transactions in those filings.

In 2001, Mr. Lay's monthly SEC stock-ownership filings through October showed his Enron holdings hovering around 2.7 million shares.

Yet his actual holdings had declined to some 991,000 shares because of the sales back to the company, according to evidence presented by Mr. Hueston.

Mr. Lay was quietly selling off a large chunk of his holdings while telling employees and investors the shares were a "bargain," prosecutors contend. As late as September 2001, he was telling employees that he was buying stock without telling them of his far larger sales back to the company. Mr. Lay argued that his stock transactions with Enron were done to raise cash to pay pressing margin calls on personal loans. He said he didn't feel the need to report such "forced" stock sales to Enron employees or others. He added that he held on to as many Enron shares as he could because he felt the stock was undervalued.

By showing that Mr. Lay wasn't fully forthcoming about his stock sales, the government clearly hoped to buttress its contention that the former top executive was illegally hiding from the public a range of bad news about the company's finances and business operations.

Mr. Hueston also attacked Mr. Lay on his bullish remarks in 2001 about Enron's high-profile retail energy unit, which government witnesses have testified was struggling with problem contracts and large hidden losses. The prosecutor noted that up until September 2001 Mr. Lay and other executives had been highlighting the rapid growth of the unit's service contracts, predicting the total would hit $30 billion in 2001.

However, Mr. Hueston presented evidence from an Oct. 8, 2001, Enron board meeting showing that the company expected to fall short of that target by about $4.5 billion.

About a week later, Mr. Lay told securities analysts that Enron would no longer report total contract values because it was no longer a valid measure. He didn't mention anything about falling short of the previously announced $30 billion target, Mr. Hueston said.

Was the prospect of falling short of the contract target and then dropping it as a growth measure "pure coincidence?" the prosecutor asked.

"I don't know if it was pure coincidence," Mr. Lay said, adding that executives of the retail unit "convinced me and others" that there were better measures. Repeatedly yesterday, Mr. Lay said he relied heavily on others for the information and descriptions he provided to investors. Mr. Hueston pushed back that Mr. Lay, as chief executive, had the option to make the final decisions about what he and the company would tell the public.

From The Wall Street Journal Accounting Week in Review on April 27, 2006

TITLE: Lay Says 'Classic Run on Bank' Ruined Enron
REPORTER: John R. Emshwiller and Gary McWilliams
DATE: Apr 25, 2006
PAGE: C1
LINK: http://online.wsj.com/article/SB114588472143834040.html 
TOPICS: Accounting

SUMMARY: Ken Lay's testimony is reviewed in this article. Questions relate to defining a 'run-on-the-bank' and the factors that Lay's argues led up to it. Reference to a related article questions use of outside attorneys to assess corporate transactions.

QUESTIONS:
1.) Describe the events leading up to the demise of Enron Corp and the trials that are currently underway against its former leaders Kenneth Lay and Jeffrey Skilling.

2.) What is a "run on the bank"? Why does Former Enron chief executive Kenneth Lay argue that this phenomenon explains the demise of Enron? What factors does he cite in leading up to this phenomenon?

3.) Refer to the related article. When do corporations seek advice of outside counsel rather than in-house lawyers? For what transactions did Enron seek advice from its outside lawyers, Vinson & Elkins, and accountants, Arthur Andersen and Co?

4.) Why does the law firm of Vinson & Elkins now face significant risk from class action law suits related to its work with Enron? In your answer, define who is filing these class-action lawsuits.

5.) Refer again to the related article and the reliance Enron placed on opinions expressed by its outside auditors, Arthur Andersen. How does Andersen's demise leave the law firm of Vinson & Elkins at greater business risk from their work with Enron?

Reviewed By: Judy Beckman, University of Rhode Island

--- RELATED ARTICLES ---
TITLE: Energy Firm's Outside Counsel Sits in the Crosshairs of Lerach, Securities Class-Action Kingpin
REPORTER: Nathan Koppel
PAGE: C1
ISSUE: Apr 26, 2006
LINK: http://online.wsj.com/article/SB114592536742234763.html

"Lay Says 'Classic Run on Bank' Ruined Enron:   Ex-Chairman Uses Debut on Stand To Depict Charges as 'Ludicrous,' Blames Fastow, Media, Traders," by John R. Emswhiller and Gary McWilliams, The Wall Street Journal,  April 25, 2006; Page C1 --- http://online.wsj.com/article/SB114588472143834040.html?mod=todays_us_money_and_investing

Making the most important public appearance of a long public life, former Enron Corp. Chairman Kenneth Lay took the witness stand at his criminal trial, where he admitted to mistakes but firmly denied any wrongdoing in running the energy giant.

He blamed Enron's December 2001 collapse on deceitful underlings, hostile stock traders and damaging news coverage by The Wall Street Journal. Those forces collided to provoke what he called a "classic run on the bank" that set the stage for the company's bankruptcy filing. He also portrayed himself as a man still somewhat stunned by his fall from a pinnacle where he used to rub shoulders with world leaders and other corporate titans. Of all the things he had speculated about in his life, being a criminal defendant "was nowhere in any of them," he said.

Whether the jury accepts Mr. Lay's version of events could go a long way toward determining whether he and former Enron President Jeffrey Skilling are convicted in their federal conspiracy and fraud trial here. A string of government witnesses, including several former Enron executives, have testified that the defendants knew about manipulations of the company's finances and lied to the public about its condition.

Mr. Skilling completed eight days of testimony last week, in the first phase of what is viewed as the crucial period of the two men's joint defense strategy. If anything, Mr. Lay's performance is even more important, though it is expected to be only about half as long. He is Enron's best-known figure and is widely considered a more affable, and potentially more likable, figure to jurors than the more-intense Mr. Skilling. A major part of Mr. Lay's responsibilities in Enron's last years was to serve as the company's public face.

Shortly after court began yesterday morning, the 64-year-old Mr. Lay strode to the witness box, stopping to raise his right hand well above his head as Judge Sim Lake administered the witness oath. When asked if he promised to tell the truth, he answered with a clear, almost resounding "I do."

Continued in article

"Skilling Defends Enron, Himself: In First Testimony, Ex-President Denies Plot to Defraud Investors; 'I Will Fight' Until 'Day I Die'," by John r. Emshwiller and Gary McWilliams, The Wall Street Journal, April 11, 2006; Page C1 --- http://online.wsj.com/article/SB114467495953621753.html?mod=todays_us_money_and_investing

Mr. Skilling Monday dived straight into an aggressive defense of both himself and Enron that contrasted with its public image as a symbol of corporate scandal. Mr. Skilling talked of his pride in Enron's growth and the quality of its employees, even the excitement he felt walking each day into Enron's gleaming headquarters tower here. "We were making the world better," Mr. Skilling said.

Challenging claims made by several government witnesses, Mr. Skilling said he never told any of his subordinates at Enron to lie or in any way manipulate the company's financial statements. However, he also described several of the key witnesses as honest men. The defense argues that these witnesses succumbed to government pressure and pleaded guilty to crimes that they didn't commit.

He insisted that Enron was a successful and vibrant company that was undermined by a market panic partly sparked by several Wall Street Journal articles in October 2001. Monday, Paul E. Steiger, the Journal's managing editor, said the paper's reporters "were leaders in uncovering the accounting scandal at Enron. We are proud of our work."

Continued in article

"Enron Prosecutor Attacks Theory of 2001 Collapse," by Alexei Barrionuevo and Simon Romero, The New York Times, April 27, 2006 --- Click Here

A prosecutor sought Thursday to undercut Kenneth L. Lay's assertion that short sellers were part of a "conspiracy" that caused Enron's downfall, showing that one of Mr. Lay's own sons had bet that the company's stock would decline.

Under cross-examination by the prosecutor, John C. Hueston, Mr. Lay expressed surprise and became flustered when confronted with brokerage records showing that Mark Lay, his son, had sold Enron stock before its bankruptcy filing in December 2001. Mr. Lay said he did not know until Thursday that his son had been selling Enron stock during that time.

Mark Lay, a former Enron executive, left the company in 2001 to enter a local Baptist seminary.

In a day of testy exchanges, the prosecutor relentlessly attacked Mr. Lay's explanation for Enron's collapse. He also suggested Mr. Lay lied about Enron's plans to pursue a water business so he could avoid a potentially fatal credit downgrade.

And Mr. Hueston suggested Mr. Lay should have been more forthcoming with investors about tens of millions of dollars in Enron stock he was selling to meet bank demands to repay loans — even as he portrayed himself as bullish on the stock.

Mr. Lay, Enron's former chief executive, took the stand for a fourth day in his criminal fraud trial in federal court. He and Jeffrey K. Skilling, his co-defendant and also a former Enron chief executive, are accused of conspiring to defraud Enron's investors, in large part by not disclosing serious problems at the company. Lawyers in the case, which concluded its 13th week, said they expected Mr. Lay to be on the stand at least through Monday.

On Thursday Mr. Hueston challenged the defense's claims that short sellers, financial journalists and a small number of deceptive Enron executives were responsible for hysteria in 2001 that produced the chaotic collapse of the company.

Mr. Hueston asked Mr. Lay if he would describe his son as a "vulture," a term Michael W. Ramsey, a Lay lawyer, used in his opening statement to describe short sellers.

"I don't think he's a vulture, no," Mr. Lay said. But he clearly seemed pained when Mr. Hueston displayed an Oct. 26, 2001, e-mail message sent by Mark Lay to Mark Palmer, Enron's former head of media relations. In it, Mark Lay said that the "shorts are trumpeting all of the insider sales" and suggested that the company disclose insider selling more frequently, perhaps monthly.

While Mr. Lay offered no explanation for his son's actions, he said that in late 2001 Enron was "being attacked very viciously." He said that a group of hedge funds met in Florida in January 2001 and agreed to act together to push down Enron's stock price. In the weeks after the Sept. 11, 2001, terrorist attacks, Mr. Lay said, he felt that Enron was "under siege" by hostile investors and The Wall Street Journal.

Mr. Lay, 64, began the day appearing fatigued but calmer than on Wednesday afternoon, when he sparred with Mr. Hueston after testifying about his use of millions of dollars of Enron credit lines to shore up his personal finances. But when Mr. Hueston picked up that issue again, seeking to show Mr. Lay misled investors by not disclosing he had sold $77.5 million in Enron shares while buying $4 million worth, Mr. Lay's blood pressure seemed to rise again.

While Mr. Lay is not charged with insider trading, prosecutors are suggesting he chose not to disclose his large stock sales in 2001 because he knew of deep-seated problems at Enron. Mr. Lay let others represent him as bullish on Enron stock, and he urged Enron employees to purchase shares in 2001, promoting the declining stock as a "bargain."

Despite suggestions by Mr. Hueston that he had intentionally not disclosed his stock sales, Mr. Lay insisted that he had complied with reporting requirements, that he was forced to sell the shares to meet demands to repay loans and that he used a $10 million Enron bonus to pay down his Enron credit line rather than deposit the money in the bank.

"I separated the optional discretionary decisions I was making from those that were forced," he said. Disclosing his sales to Enron employees "was not required and I did not see that it was necessary," he added.

Mr. Hueston spent much of the afternoon attacking Mr. Lay on one of the government's strongest charges against him: that he misled investors and Enron's auditor, Arthur Andersen, into thinking Enron planned to use a British water company, Wessex, to pursue a growth strategy in the water business.

Prosecutors charge that Mr. Lay told David B. Duncan, the former lead Andersen partner on the Enron account, in an Oct. 12 meeting that there was a growth strategy, only to head off a credit downgrade that would result if Enron had to take a good-will charge of as much as $700 million on Wessex.

Mr. Hueston challenged Mr. Lay's denials that he discussed a water strategy at that meeting, showing that efforts were under way within the company to find a way to justify not taking the good-will charge.

Mr. Lay said those efforts were premature, since Arthur Andersen had yet to decide how much of a charge had to be taken. He belittled the work going on inside Enron to solve the impairment issue — saying it made "no business sense" — and denied knowing anything about it.

Tales from the Enron trial got you down? Like Andrew Fastow's testimony of how he laundered $10,000 as a tax-free gift to his own sons? So after work you stumble home, seeking refuge from the workaday sludge in the stark competitive world of Sports Illustrated, which this week is awash in the details of the doping case against Barry Bonds, an Icarus, legend has it, who flew toward baseball heaven on wax wings made from human growth hormone. For perspective on the Bonds myth, I called Gary Wadler, a physician who has seen it all as a member of the World Anti-Doping Agency. "Bonds and Fastow were both into cooking," Dr. Wadler offered. "Bonds cooked the record books and Fastow cooked the financial books."
Daniel Henninger, "Barry Bonds, Meet Andrew Fastow, The Wall Street Journal, March 17, 2006 --- http://www.opinionjournal.com/columnists/dhenninger/?id=110008100

From NPR
Profiles of the Enron Suspects and Other Key Players
"Enron: On the Prosecution's List," NPR, March 8, 2006 --- http://www.npr.org/templates/story/story.php?storyId=5249786

 

Skilling's Appearance Riles Former Enron Employees (with audio)
Former Enron CEO Jeffrey Skilling faces cross-examination by the prosecution as his trial resumes Monday. His appearance on the stand has revived bitter feelings among many of Enron's former employees.
Wade Goodwyn, "Skilling's Appearance Riles Former Enron Employees (with audio)," NPR, April 16, 2006 --- http://www.npr.org/templates/story/story.php?storyId=5344829

"Enron Prosecutor Questions Skilling's Story," by Vikas Bajaj and Alexei Barrionuevo, The New York Times, April 17, 2006 --- Click Here

A prosecutor tried to poke holes in the testimony of Jeffrey K. Skilling, the former Enron chief executive, today by boring in on stock sales he made in the months after he left the company and before the energy company declared bankruptcy.

In his first day cross-examining Mr. Skilling, Sean M. Berkowitz, the prosecutor, accused Mr. Skilling of selling shares because he knew the company was under an accounting investigation and faced grave problems.

Mr. Skilling, who is charged with conspiracy, fraud and insider trading, steadfastly denied the accusations, saying that he sold stock in September 2001 because he was worried about the economy after the terrorists attacks and meant to diversify his stock holdings, which were concentrated in Enron stock.

"Sir, Sept. 11 was not the only reason that you sold Enron shares on Sept. 17, was it?" Mr. Berkowitz asked.

"The only reason I sold the 500,000 shares on Sept. 17, the only reason, was Sept. 11," Mr. Skilling responded, his voice cracking slightly.

The cross-examination of Mr. Skilling, who is a co-defendant with Kenneth L. Lay, the former Enron chairman and chief executive, could be a critical turning point in the trial, which is now in its 12th week. Mr. Lay faces fraud and conspiracy charges and is expected to take the stand later in the trial.

In the long exchange over stock trades this morning, Mr. Berkowitz focused extensively on a call Mr. Skilling placed to his broker on Sept. 6 to sell 200,000 shares, less than a month after he left the company. The trade was never completed because Mr. Skilling needed to send a letter to the broker from Enron stating that he was no longer an executive and was not restricted from selling his shares.

Mr. Skilling has said before that he does not recall that specific trade and Mr. Berkowitz sought to highlight those past remarks to raise doubt about Mr. Skilling's motivations for selling stock.

"Its your testimony that you don't have a specific recollection of Sept. 6 trade and you have gone back and tried to piece it together with evidence?" Mr. Berkowitz asked.

"Yes," Mr. Skilling said.

Mr. Berkowitz built up to that exchange after earlier using questions to try to demonstrate that Mr. Skilling had spent the last four and a half years preparing and "tailoring" his testimony with all the available notes, documents and other evidence being used in the case.

"I have nothing to hide, Mr. Berkowitz, so I don't think it's a question of tailoring your testimony," Mr. Skilling said. "I will respond to your questions to the best of my ability."

As he spoke and flipped through large binders of evidence, Mr. Skilling would periodically put on and take off reading glasses. He responded calmly to Mr. Berkowitz's questions, usually with short answers.

Before the proceedings began this morning, Daniel Petrocelli, Mr. Skilling's lawyer, wished Mr. Berkowitz well in front of a group of reporters standing in the hallway of the courtroom.

"Hey Sean, lawyer to lawyer, have a good day," Mr. Petrocelli said.

"Thanks, Dan," Mr. Berkowitz responded.

Earlier in the trial, prosecutors built their case against Mr. Skilling and Mr. Lay with the testimony of a parade of former Enron executives who testified that the top officers knew of, authorized and encouraged the use of improper accounting and financial transactions to artificially boost the earnings the company reported to investors.

Defense lawyers for Mr. Skilling and Mr. Lay have tried to undercut the credibility of those witnesses and have argued that there were no major crimes committed at Enron. They contend that Mr. Skilling and Mr. Lay were kept in the dark on certain illicit transactions by a group of finance executives.

"Skilling's Temper Drawn Out on Stand:  Prosecutor Focuses on What Former Enron CEO Says He Doesn't Remember," by Carrie Johnson, The Washington Post, April 19, 2006 --- Click Here

Known within the company for his impatience, Skilling for the first time lost his cool Tuesday afternoon, asserting that prosecutors misunderstood a technical issue. As Berkowitz raised his voice and sought to proceed, the witness responded, "Let's not move on."

Defense lawyer Daniel M. Petrocelli took the unusual step of interjecting to defuse the situation. "Is there a pending question?" he asked.

Skilling apologized, only to lash out again at the prosecutor.

"I know it is difficult for you to sit here and answer questions, Mr. Skilling, and I know at times you overreact to people who are critical of the company," Berkowitz said as Skilling shook his head, his face reddened.

Skilling regained his composure and finished out the day.

Continued in article

April 18, 2006 message from Richard Campbell [campbell@RIO.EDU]

Could Jeff Skilling’s funding of his ex-girlfriend’s photo company with Enron’s money be a violation of Enron’s Code of Ethics?

See the description below:

http://blogs.wsj.com/law/ 

Richard J. Campbell

"Prosecutor and Skilling Spar Over Enron's Finances," by Alexei Barriouevo, The New York Times, April 18, 2006 --- http://www.nytimes.com/2006/04/18/business/18cnd-enron.html

Mr. Berkowitz pressed Mr. Skilling over whether he had participated in manipulating the company's quarterly earnings to meet or exceed analysts' expectations. Witnesses testified earlier in the trial that Enron pulled money from reserves in the fourth quarter of 1999 and then in the second quarter of 2000 to generate more earnings.

Mr. Skilling denied to Mr. Berkowitz that he knew anything about the change in 1999, testifying today that "there is a good chance it did not occur." And he said a conversation between two Enron investor relations executives, Paula Rieker and Mark Koenig, that Ms. Rieker testified about earlier, did not happen.

In the second quarter of 2000, acting on an expressed desire by Mr. Skilling to beat analysts' estimates, Enron accountants pulled $14 million from a reserve account to push the company's quarterly earnings up to 34 cents a share from 32 cents, witnesses testified in the trial.

Mr. Skilling testified last week that when he arrived back from a vacation in Africa he learned that the quarter was "coming in hot" and told Enron's chief accounting officer, Richard A. Causey, to "shoot for 34" cents. Mr. Berkowitz suggested today that Mr. Skilling had acted improperly by suggesting that. Mr. Skilling responded that the reserves from which Enron pulled the money "are not typically locked until right before the end of the quarter.'

Mr. Berkowitz today played an audiotape of Mr. Skilling's previous testimony before the Securities and Exchange Commission where Mr. Skilling said he never gave any instruction that caused quarterly earnings to change. "I would comment by saying something like, 'oh, wow, or gee, that's interesting,' " Mr. Skilling testified to the S.E.C.

"That was a lie, wasn't it, sir?" Mr. Berkowitz asked.

"No, that was absolutely correct," Mr. Skilling said. "Did I ever give anyone any instruction to change the results of the quarter? I did not."

Earlier, the prosecutor spent an extended period questioning Mr. Skilling about meetings and internal company memos from 2000 that, he argued, were meant to provide detail about the troubles that Enron was facing in a group of "merchant assets," which included power plants and other businesses.

"This is like looking at the baseball rankings and saying, 'Let's look at the bottom two teams,' " Mr. Skilling protested at one point when Mr. Berkowitz showed the courtroom an internal presentation.

"Let's not talk about baseball, Mr. Skilling," Mr. Berkowitz retorted. "Let's talk about Enron."

"This is a misrepresentation of what was going on," said Mr. Skilling, who noted that the presentation was incomplete because it did not show the assets that were performing well.

A little while later, Mr. Berkowitz tried to undercut that argument by displaying documents that showed 55 percent of the company's merchant assets were not living up to expectations. Mr. Skilling responded that a 50 percent success rate was not just acceptable but a sign that the business was doing well, asserting that venture capital investments fail 90 percent of the time.

"They were telling you in 2000 in June, in September and November that excessive earnings pressure resulted in bad deals and risky deals being done?" Mr. Berkowitz asked.

"No," Mr. Skilling said with slight chuckle.

"Well, O.K., the documents will tell us that," Mr. Berkowitz said.

"I guess so," Mr. Skilling, 52, said.

The questioning today appears to be aimed at bolstering the prosecution's case that Mr. Skilling and Mr. Lay authorized and encouraged the use of improper accounting and financial transactions to cover up troubles at Enron and artificially increase the company's reported earnings. After trying to show that Mr. Skilling was aware of the problems with its assets, Mr. Berkowitz questioned Mr. Skilling about sales of assets to off-the-books partnerships that Enron officials created with third-party investors.

Many of Enron's underperforming merchant assets and international power plants were sold to in part or in full to those partnerships, which were generically referred to as "raptors."

"It was your understanding that these assets would go down in value?" Mr. Berkowitz said referring to the assets sold to the partnerships.

"No," Mr. Skilling responded.

"You understand that the only reasons the sophisticated investors were interested in investing into the raptors was because they were guaranteed to receive their money back?" Mr. Berkowitz asked, suggesting that Enron told its partners that it would make them whole if the value of the assets went down.

"They looked at the overall transaction, the incubation phase and the hedging phase and must have decided that was something they were interested in doing," Mr. Skilling said.

Lawyers defending Mr. Skilling and Mr. Lay, who is expected to take the stand later in the trial, have argued that their clients did not commit any crimes at Enron, and that any wrongdoing was confined to certain illicit transactions involving a cadre of finance executives led by the company's onetime chief financial officer, Andrew S. Fastow. 

 

Fastow Leaves Stand Insisting Lay and Skilling Knew
Andrew S. Fastow, Enron's former chief financial officer, ended his testimony on Monday, still insisting that Jeffrey K. Skilling and Kenneth L. Lay joined him in telling investors that Enron was profitable and healthy when all of them knew otherwise . . . Mr. Fastow struggled to further corroborate his testimony about the so-called Global Galactic list of illicit side deals he said he made with one of the former chiefs, Mr. Skilling, to guarantee profits. Mr. Fastow also tried to buttress his claims that he warned Mr. Lay, Enron's founder, in a private meeting that Enron was in desperate need of a "massive restructuring."
Alexei Barrionuevo, "Fastow Leaves Stand Insisting Lay and Skilling Knew," The New York Times, March 14, 2006 --- http://www.nytimes.com/2006/03/14/business/businessspecial3/14enron.html 

"Lesser Known Enron Executive Is Key Witness:  Imprisoned Ex-Treasurer Glisan Brings 'Boy Scout' Reputation To Testimony on Financial Deals," by John R. Emshwiller, The Wall Street Journal, March 20, 2006; Page C1 --- http://online.wsj.com/article/SB114281177496502519.html?mod=todays_us_money_and_investing 

Although he lacks the star power of some who have preceded him, Ben Glisan Jr. could become the most important witness in the government's effort to convict former Enron Corp. executives Jeffrey Skilling and Kenneth Lay of conspiracy and fraud.

Prosecutors hope the 40-year-old Mr. Glisan, Enron's former treasurer, will provide jurors with convincing support for allegations made by prior witnesses in the trial. Unlike some of those prior witnesses, Mr. Glisan was high enough up the corporate ladder to have regular contact with Messrs. Skilling and Lay, including

A trained accountant, Mr. Glisan helped design some of the financial transactions that are a major part of the alleged fraud at Enron -- and, thus, he should be able to discuss those transactions with an authority that some previous witnesses lacked. Unlike other witnesses who are cooperating with the government in hopes of reducing their sentences, Mr. Glisan simply pled guilty to an Enron-related crime to settle a 26-count indictment and is serving his five-year prison term -- potentially boosting his credibility to jurors.

Mr. Glisan was a protégé of one of the alleged fraud's central figures, former Enron Chief Financial Officer Andrew Fastow, who recently completed four days of often-contentious testimony. While privy to Mr. Fastow's thinking and actions at Enron, Mr. Glisan doesn't carry all the negatives of his former boss, who was feared and disliked by many at Enron and has admitted to stealing millions from the company.

By contrast, the affable Mr. Glisan was a generally popular figure. Even Mr. Skilling, interviewed by Enron investigators shortly after the company's December 2001 collapse into bankruptcy court, was quoted as describing Mr. Glisan as having the reputation of a "boy scout."

Defense attorneys won't be singing Mr. Glisan any campfire tunes when they cross-examine him. They are expected to portray the former treasurer as a liar who betrayed the trust of Messrs. Skilling and Lay by sharing in the booty that Mr. Fastow stole. Mr. Glisan has acknowledged reaping $1 million from a $5,000 investment with a Fastow partnership -- with the profit coming from money that Mr. Fastow admitted filching from Enron and some of his other partners. Defense attorneys hope to bring out contradictions between what Mr. Glisan and Mr. Fastow have told federal officials.

Continued in article

Also see http://www.nytimes.com/2006/03/20/business/businessspecial3/20enron.html?_r=1&oref=slogin

"Former Enron Treasurer Details His View of Internal Operations," by Gary McWilliams and John R. Emswiller, The Wall Street Journal, March 22, 2006; Page C3 --- Click Here 

He testified the company's senior executives were "manufacturing" earnings and misleading investors in 2001 to cover shortfalls and prop up the energy firm's falling stock price.

As of mid-August 2001, Messrs. Lay and Skilling knew that the company was struggling financially, yet falsely told investors it was in excellent shape, he alleged. Mr. Glisan said that in the succeeding months Enron's condition became "significantly worse," yet Mr. Lay continued to assure investors to the contrary.

Among the problems he said were "billions of dollars of embedded losses" in Enron's international assets. The prosecution introduced an Enron chart that indicated Mr. Skilling estimated the company's international businesses carried a value of $4.5 billion less than the value shown on Enron's books. Mr. Glisan said the company didn't write down the assets because it would have required "a larger loss than we could have stomached" and have serious repercussions for Enron in financial markets.

"Enron's Fastow Testifies Skilling Approved Fraud:  Ex-Executive Says Company Used Deals to Hide Losses, Chokes Up Over Lie to Wife," by John R. Emshwiller and Gary McWilliams, The Wall Street Journal,  March 8, 2006; Page A1 --- http://online.wsj.com/article/SB114174265177191437.html?mod=todays_us_page_one

"We misled Lea (Fastow's wife)," Mr. Fastow said. "She would not, in my opinion, have signed a fraudulent tax return. She did it because [the subordinate] Michael Kopper and I conspired. ... I led her to believe that."

But for most of the day, Mr. Fastow was cool and in control as he described the alleged wrongdoing at Enron. His principal target was Mr. Skilling, who helped bring him to Enron in 1990. In 1998, after Mr. Skilling became Enron's president, he tapped Mr. Fastow, then in his late-30s, as chief financial officer.

The prosecution's initial questioning focused on dealings between Enron and the LJM partnerships, which drew their initials from the first names of Mr. Fastow's wife and their two sons. Before its 2001 bankruptcy filing, Enron had routinely reported dealings with LJM and Mr. Fastow in filings with the Securities and Exchange Commission, and Enron contended that the LJM relationship was proper and that because of Mr. Fastow's familiarity with the company, Enron could do deals, such as selling assets, faster and at lower transaction costs.

But the government, in its indictment of Mr. Skilling and Mr. Lay on multiple counts of conspiracy and fraud, contends that LJM was a crucial part of the Enron fraud. Prosecutors allege that by taking money-losing investments off Enron's books and by doing other deals to produce bogus earnings, the LJM operation helped the company mask its deepening financial problems.

Mr. Fastow testified that he came up with the idea for the partnerships in 1999 as a way to help Enron manage its earnings and to enrich himself. As the partnerships' general partner, he said, he was guaranteed hundreds of thousands of dollars in annual fees from LJM1 and millions in fees from LJM2 -- with potentially even larger sums from partnership profits.

Mr. Fastow said Mr. Skilling and others were concerned about how the obvious conflict of interest between his roles as Enron's finance chief and the head of the partnerships would look to investors. "We all agreed it was a rather unusual arrangement," he said. But, he added, Mr. Skilling was enthusiastic about using LJM funds to help manipulate Enron's earnings.

The Enron president said "give me all the juice you can" from the LJMs, Mr. Fastow told the court. Mr. Fastow raised $15 million in investment capital for LJM1 and nearly $400 million for LJM2 from outside parties, many of them banks and investment banks that did business with Enron.

Mr. Fastow said the partnerships were willing to do deals that Enron "just couldn't do with others" because they were too risky or simply didn't make economic sense.

One deal involved an Enron power-plant project in Brazil. In 1999, Mr. Fastow said, Mr. Skilling asked him to have LJM buy an interest in the plant so that Enron could book income and hit its earnings target for the quarter. Mr. Fastow said he used an expletive to describe the power plant. "I told him it was a piece of s-. No one would buy it," he told jurors.

Continued in article

You can read more about Andy Fastow and Michael Kopper at http://www.trinity.edu/rjensen/FraudEnronQuiz.htm

Long-time subscribers to the AECM may remember my quips (years ago) about Michael Kopper ---
These inspired AECMers to write their own quips about Enron and about accounting in general.
You can read some of these AECM originals at http://www.trinity.edu/rjensen/FraudEnron.htm#Humor

Possible headlines on the Enron saga following the guilty plea of Michael J. Kopper:
  • Kopper Wired to the Top Brass (with reference to secret conspiracies with Andy Fastow)
  • The Coppers Got Kopper
  • Kopper Cops a Plea
  • Kopper’s Finish is Tarnished
  • Kopper Caper
  • Kopper Flopper
  • Kopper in the Kettle
  • A Kopper Whopper

These are Jensen originals, although I probably shouldn’t admit it.

 

At last we here from the master criminal himself --- Andy Fastow
"Excerpts from Testimony By Former Enron CFO Fastow," The Wall Street Journal, March 8, 2006 --- http://online.wsj.com/article/SB114174916581991546.html?mod=todays_us_money_and_investing 

Former Enron CFO Andy Fastow, the prosecution's star witness, testified at the Lay-Skilling trial that he ran financial partnerships designed to help Enron meet earnings targets and mask huge losses. Mr. Fastow, who hasn't spoken publicly since October 2001, is among the most highly anticipated witnesses in this trial. Following are excerpts from his testimony.

Wednesday, March 8 LAY KNEW: Fastow testified that former chairman Ken Lay was at a meeting in August 2001 in which he heard about a "hole in earnings" at Enron, just days before he gave a BusinessWeek interview claiming Enron was in its "best shape" ever. Fastow said of the Lay interview, "I think most of the statements in there are false."

* * * ON GREED: In a heated cross-examination by Skilling lawyer Daniel Petrocelli, Fastow admitted, "I believe I was extremely greedy, and that I lost my moral compass, and I've done terrible things that I very much regret."

INSIDE-OUT: Steady growth and bright prospects "was the outside view of Enron," Fastow testified. "The inside view of Enron was very different."

* * * RECURRING DREAM: Lay opted to characterize a loss on an investment in the third quarter of 2001 as "nonrecurring," even though a gain on the same holding was earlier characterized as "recurring," Fastow testified, adding, "I thought that was an incorrect accounting treatment."

* * * DEATH SPIRAL: By October 2001, Enron's suppliers refused to trade with the company and Fastow testified that he feared the company would collapse and that he and an aide went to Lay to warn him. "I said I thought this was a death spiral, a serious risk of bankruptcy. I said the majority of trades being done were to unwind positions."

* * * MORE HEROICS: "Within the culture of corruption Enron had, a culture that rewarded financial reporting rather than rewarding economic value, I believed I was being a hero. I was not. It was not a good thing. That's why I'm here today."

Tuesday, March 7 THE PROFIT PROBLEM: One of Enron's off-balance-sheet partnerships, LJM1, was designed to help the company "solve a problem," Fastow testified. "We were doing this to inflate our earnings, and I don't think we wanted to show people what we were doing.''

* * * MORE DEALS: Fastow quoted Skilling as saying, " 'Get me as much of that juice as you can,' '' after Fastow informed him that more money would need to be raised to continue making deals like LJM1. In such deals, these so-called outside entities would purchase underperforming assets from Enron to get debt off its balance sheet and boost earnings.

* * * RISKY BUSINESS: Fastow testified that partnerships like the LJMs were willing to do deals that Enron "just couldn't do with others" because they were too risky or didn't make economic sense.

* * * SKILLING'S WORD: Fastow testified about pressure from Skilling to have one of the LJMs buy a minority stake in a Brazilian power plant owned by Enron because Enron's South American unit was struggling to meet its earnings target. "I told him it was a piece of s--t, and no one would buy it,'' Fastow said, adding that he relented, in part, because Skilling assured him he wouldn't lose money on the deal. Fastow testified that there were many more "bear-hug" guarantees like this from Skilling in mid-2000.

* * * BREAKING THE LAW: Fastow testified that the LJMs were legal and did many legal deals, but "certain things I did as general partner of LJM were illegal."

* * * BELIEVE IT OR NOT: In his first day of testimony, Fastow repeatedly said that he thought he was "a hero for Enron," for coming up with these unique business deals to help the company meet Wall Street targets even when it was financially in trouble. "I thought the foundation was crumbling and we were doing everything we could to prop it up as long as we could … We were in pretty bad shape."

* * * WORRIES ABOUT PUBLICITY: Skilling was concerned, Fastow testified, that off-balance-sheet deals like the LJMs would "attract attention, and if dissected, people would see what the purpose of the partnership was, which was to mask potentially hundreds of millions of dollars of losses."

* * * FALSE TAX RETURN: Fastow tearfully admitted that he "misled" his wife about some of the money the couple earned from Enron-related deals. "She would not, in my opinion, have signed a fraudulent tax return," Fastow said. Lea Fastow served one year in federal prison for filing a false tax return.

* * * A FAMILY AFFAIR: Fastow also admitted that he had one of his top aides send $10,000 checks to each of his sons. The checks were portrayed as gifts to the boys, but really they were proceeds from a business deal. "I shouldn't have. It was the wrong thing to do."

Jensen Comment
It comes as some relief to accountants that Fastow has not yet mentioned collusion with the Andersen Auditors led by David Duncan. CFO Fastow worked in secrecy ripping off Enron itself. CAO Rick Causey worked more closely with Duncan to issue false financial statements. Rick Causey's fine for filing false Enron financial statements was $1,250,000.

You can read more details about Fastow, Causey, Duncan, and the others at
http://www.trinity.edu/rjensen/FraudEnronQuiz.htm

What is "The Wall Street Journal" Risk?
Under questioning from the prosecutor, John Hueston, Mr. Fastow said Enron's board and top two executives discussed the questionable nature of the partnerships, but ultimately approved them because they would help the company hide hundreds of millions dollars in losses. At one board meeting, a director wondered out loud about the "scrutiny and great problems" Enron could face if information about the partnerships became public, describing it as "The Wall Street Journal risk," testified Mr. Fastow, 44, who reached a plea bargain with prosecutors on charges against him.
Alexy Barrionuevo and Vikas, Bajaj, "Fastow Says Enron Executives Approved Deals to Hide Losses," The New York Times, March 7, 2006 --- Click Here 

Under questioning from the prosecutor, John Hueston, Mr. Fastow said Enron's board and top two executives discussed the questionable nature of the partnerships, but ultimately approved them because they would help the company hide hundreds of millions dollars in losses.

At one board meeting, a director wondered out loud about the "scrutiny and great problems" Enron could face if information about the partnerships became public, describing it as "The Wall Street Journal risk," testified Mr. Fastow, 44, who reached a plea bargain with prosecutors on charges against him.

At the same meeting, another director raised questions about the propriety of Mr. Fastow's personally profiting from LJM1; he was guaranteed $800,000 a year from the partnership regardless of how it performed financially. But Mr. Fastow asserted that Mr. Skilling came to his defense, saying, "Andy Fastow has put $1 million into the game. He should get profits because he has skin in the game."

Nonetheless, the board approved LJM1, which also had $15 million from outside investors, in early 1999. Later that year, Mr. Fastow testified, Mr. Skilling encouraged him in his efforts to create LJM2, for which he would eventually raise a total of $386 million. Mr. Fastow earned $8 million in fees from the second partnership and was entitled to 20 percent of the entity's profits.

"Get me as much juice as you can," Mr. Fastow recalled Mr. Skilling saying.

"We were using the equity to juice Enron's earnings," Mr. Fastow added, "to report as much earnings as we wanted."

Mr. Fastow follows a parade of former Enron executives who, under questioning from the prosecution, have presented critical and damaging testimony against the two former top executives, particularly Mr. Skilling. In its sixth week, the trial is the culmination of a four-year federal investigation into the failure of and fraud at Enron and is widely believed to be one of the most significant white-collar criminal prosecution ever undertaken.

Mr. Fastow spoke in a strong, clear voice with his trademark lisp, and he sipped coffee and water during his testimony. At one point he asked Mr. Hueston for some water.

Mr. Skilling bobbed his head from side to side as Mr. Fastow spoke; Mr. Lay seemed to be looking off to the side.

Before the testimony, Mr. Skilling appeared calm and chatted with a reporter about trips to Argentina.

Some legal experts had recently suggested that given the government's success thus far, they should have considered not calling Mr. Fastow as a witness, because he was so closely involved in the fraud at Enron and personally benefited from the off-balance-sheet partnerships.

A central tenet of Mr. Lay's and Mr. Skilling's defense is that Mr. Fastow masterminded most of the wrongdoing at Enron and misled his bosses about his activities. Defense lawyers intend to vigorously attack Mr. Fastow's credibility and the deal he reached with prosecutors, in which he has pleaded guilty and agreed to a prison sentence that could total 10 years.

Continued in article

 

Forwarded by Bob Overn

Question:
Did Enron's chairman ever meet with the president?

Answer: Yes,

A. Enron's chairman did meet with the president and the vice president in the Oval Office.

B. Enron gave $420,000 to the president's party over three years.

C. It donated $100,000 to the president's inauguration festivities.

D. The Enron chairman stayed at the White House 11 times.

E. The corporation had access to the administration at its highest level and even enlisted the Commerce and State Departments to grease deals for it.

F. The taxpayer-supported Export-Import Bank subsidized Enron for more than $600 million in just one transaction. Scandalous!!

G. BUT...the president under whom all this happened WASN'T George W. Bush.

SURPRISE ... It was Bill Clinton!

"Warning on Enron Recounted," by Alexei Barrionuevo, The New York Times, March 16, 2006 --- http://www.nytimes.com/2006/03/16/business/businessspecial3/16enron.html?_r=1&oref=slogin

Ms. Watkins, 46, attracted national attention after testifying before Congress in February 2002 about Enron's collapse two months earlier. She was named one of Time magazine's people of the year in 2002 for raising red flags about the company's accounting while still working there. She has since written a book with a Houston journalist about Enron's fall, and formed a consulting practice that advises companies on governance issues.

Defense lawyers, during combative cross-examination, tried to paint Ms. Watkins as an opinionated fame-seeker who had profited from the Enron scandal on the lecture circuit. The defense lawyers also suggested that Ms. Watkins was never charged with insider trading for selling Enron shares because she was wrong in believing that the Raptors were fraudulent.

Prosecutors contend that the partnerships and hedges Ms. Watkins testified about were part of a broad effort by Mr. Skilling and Mr. Lay to manipulate earnings and hide debt. The former chief executives are accused of overseeing a conspiracy to deceive investors about Enron's finances so they could profit by selling Enron shares at inflated prices.

Defense lawyers contend that prosecutors are seeking to criminalize normal business practices and that the Enron executives were the victims of thieving subordinates like Andrew S. Fastow, the former chief financial officer.

Ms. Watkins's appearance on the stand came as the government neared the end of its case. Judge Simeon T. Lake III said Wednesday that he estimated that the case could be wrapped up by the end of April.

Ben F. Glisan Jr., a former Enron treasurer, is scheduled to take the stand next week. Mr. Glisan pleaded guilty to conspiracy and is currently serving a five-year prison term.

In often-colorful testimony, Ms. Watkins recounted how she became concerned around June 2001 that about a dozen Enron assets were being hedged, or guaranteed against loss, by the Raptors vehicles, which she soon learned contained only Enron stock. The Raptors were intertwined with partnerships run by Mr. Fastow, who became Ms. Watkins's boss that summer. The value of the assets, she said, "had tanked," dragged down by Enron's plummeting share price.

After doing some investigation, she wrote an anonymous letter about her concerns, then on Aug. 22, 2001, she met with Mr. Lay to discuss them. The meeting came about a week after Mr. Lay had stepped back into the role of chief executive after the resignation of Mr. Skilling.

At the meeting, they discussed a letter of hers in which she had said that she was "incredibly nervous that Enron would implode in a wave of accounting scandals." She also noted to Mr. Lay that employees were talking about a "handshake deal" that Mr. Fastow had with Mr. Skilling that ensured that Mr. Fastow would not lose money on transactions done with the LJM partnership, which Mr. Fastow was running.

Mr. Lay seemed to take her seriously, Ms. Watkins testified.

Days after the meeting, she learned that Vinson & Elkins, the law firm that had originally approved the Raptors, was doing the internal investigation into the partnerships. The firm, after consulting with Arthur Andersen, Enron's auditor, issued a report saying that while the "optics" or appearances were bad, the accounting was appropriate.

Ms. Watkins said she remained adamant that Andersen, which had received several high-profile setbacks, should not be trusted.

"I thought this was bogus," she said of the investigation.

Concerned that Enron was manipulating its financial statements, Ms. Watkins stepped up efforts to leave the company, which she had begun shortly after she concluded the Raptors could be fraudulent. She did not leave until after the bankruptcy.

Ultimately, Mr. Lay decided to unwind the Raptors and take a write-off in a single quarter rather than restate the accounting of Enron's financial statements. Ms. Watkins, under questioning from Chip B. Lewis, a lawyer for Mr. Lay, conceded that while that was not her preference, "continuing the fraud would have been worse."

Defense lawyers sparred with Ms. Watkins from the outset. Mr. Lewis placed a copy of Ms. Watkins's book, "Power Failure," in front of her, calling it a "housewarming present."

Ms. Watkins acknowledged that she could not explain why prosecutors did not charge her with insider trading for selling Enron shares.

Continued in article

 

Special Report on the Fall of Enron  --- http://www.chron.com/news/specials/enron/
 

Master Chefs at Enron Cook the Books
Enron Corp. dipped into reserve accounts to illegally pad earnings in 2000 and improperly delayed reporting large losses in a retail energy operation the following year, former accountants testified yesterday. The testimony began the fifth week in the criminal conspiracy-and-fraud trial of former Enron Chairman Kenneth Lay and former President Jeffrey Skilling. The testimony provided new support for the Justice Department's accusations that the two top executives manipulated results at the company. Wesley Colwell, former accounting chief of Enron's wholesale energy unit, alleged he shifted a total of $14 million in July 2000 to create a two-cents-a-share boost to the company's second-quarter results. He testified that an Enron finance executive told him that month that Mr. Skilling was looking to "beat the Street" estimate of its second-quarter earnings. Mr. Colwell, who is testifying under a cooperation agreement with the government, paid a $500,000 fine to settle allegations by the Securities and Exchange Commission that he manipulated earnings. His agreement with the Justice Department requires that he testify to avoid criminal prosecution. Three previous government witnesses, all former Enron executives, pleaded guilty to crimes related to the energy giant. Mr. Colwell, who is testifying under a cooperation agreement with the government, paid a $500,000 fine to settle allegations by the Securities and Exchange Commission that he manipulated earnings. His agreement with the Justice Department requires that he testify to avoid criminal prosecution. Three previous government witnesses, all former Enron executives, pleaded guilty to crimes related to the energy giant.
Gary McWilliams and John R. Emshwiller, "Accountant Says Enron Dipped Into Reserves to Pad Earnings," The Wall Street Journal, February 28, 2006; Page C3 ---
http://online.wsj.com/article/SB114105814931084345.html?mod=todays_us_money_and_investing

"Testimony Links Skilling, Lay To Alleged Effort to Hide Losses," by John R. Emshwiller and Gary McWilliams, The Wall Street Journal, March 1, 2006; Page C2 ---
http://online.wsj.com/article/SB114114167255385382.html?mod=todays_us_money_and_investing

The former head of Enron Corp.'s retail-energy unit tied former President Jeffrey Skilling and former Chairman Kenneth Lay in testimony to an alleged effort to improperly hide hundreds of millions of dollars of losses in the division.

The testimony yesterday by David Delainey, who headed Enron Energy Services, or EES, was some of the most specific yet linking Messrs. Lay and Skilling to alleged wrongdoing. The former Enron president and chairman are in the fifth week of their federal fraud and conspiracy trial. Mr. Delainey has pleaded guilty to one count of insider trading and agreed to pay nearly $8 million in penalties. Like four previous witnesses, he is testifying for the government as part of a cooperation agreement.

Mr. Delainey took over the retail unit in early 2001 after having headed the company's profitable wholesale-energy trading operation. While Enron at the time was publicly portraying the retail unit as profitable and growing, Mr. Delainey contended yesterday that he found a problem-ridden unit burdened by hundreds of millions of dollars of losses. He said another senior executive had told him the unit's financial problems "could potentially bankrupt Enron."

At a March 29, 2001, meeting led by Mr. Skilling, Mr. Delainey testified, a decision was made to hide some of the big EES losses. Mr. Delainey said he argued the action, which involved moving some retail operations to the profitable wholesale unit, "lacked integrity" and shouldn't be done.

Continued in article

Bob Jensen's Enron Quiz is at http://www.trinity.edu/rjensen/FraudEnronQuiz.htm

 

Enron Update February 18, 2006
Enron Corp. dipped into reserve accounts to illegally pad earnings in 2000 and improperly delayed reporting large losses in a retail energy operation the following year, former accountants testified yesterday. The testimony began the fifth week in the criminal conspiracy-and-fraud trial of former Enron Chairman Kenneth Lay and former President Jeffrey Skilling. The testimony provided new support for the Justice Department's accusations that the two top executives manipulated results at the company. Wesley Colwell, former accounting chief of Enron's wholesale energy unit, alleged he shifted a total of $14 million in July 2000 to create a two-cents-a-share boost to the company's second-quarter results. He testified that an Enron finance executive told him that month that Mr. Skilling was looking to "beat the Street" estimate of its second-quarter earnings. Mr. Colwell, who is testifying under a cooperation agreement with the government, paid a $500,000 fine to settle allegations by the Securities and Exchange Commission that he manipulated earnings. His agreement with the Justice Department requires that he testify to avoid criminal prosecution. Three previous government witnesses, all former Enron executives, pleaded guilty to crimes related to the energy giant. Mr. Colwell, who is testifying under a cooperation agreement with the government, paid a $500,000 fine to settle allegations by the Securities and Exchange Commission that he manipulated earnings. His agreement with the Justice Department requires that he testify to avoid criminal prosecution. Three previous government witnesses, all former Enron executives, pleaded guilty to crimes related to the energy giant.
Gary McWilliams and John R. Emshwiller, "Accountant Says Enron Dipped Into Reserves to Pad Earnings," The Wall Street Journal, February 28, 2006; Page C3 ---
http://online.wsj.com/article/SB114105814931084345.html?mod=todays_us_money_and_investing
 

Will  Phil and Wendy Gramm forever go unpunished in the Enron scandal?
Enron trial unfolds, it's depressing that Phil and Wendy Gramm, the company's political enablers, are going unpunished and uncriticized.
Robert Scheer, "Enron's Enablers " The Nation, February 1, 2006 ---
http://www.thenation.com/doc/20060213/scheer0201

Back in 1993, when Enron was an upstart energy trader and Wendy Gramm occupied the position of chair of the CFTC, she granted the company, the biggest contributor to her husband's political campaigns, a very valuable ruling exempting its trading in futures contracts from federal government regulation.

She resigned her position six days later, not surprising given that she was a political appointee and Bill Clinton had just defeated her boss, the first President Bush. Five weeks after her resignation, she was appointed to Enron's board of directors, where she served on the delinquent audit committee until the collapse of the company.

There was perfect quid pro quo symmetry to Wendy Gramm's lucrative career: Bush appoints her to a government position where she secures Enron's profit margin; Lay, a close friend and political contributor to Bush, then takes care of her nicely once she leaves her government post.

Although she holds a doctorate in economics and often is cited as an expert on the deregulation policies she so ardently champions, Gramm insists that while serving on the audit committee she was ignorant of the corporation's accounting machinations. Despite her myopia, or because of it, she was rewarded with more than $1 million in compensation.

A similar claim of ignorance of Enron's shenanigans is the defense of her husband, who received $260,000 in campaign contributions from Enron before he pushed through legislation exempting companies like Enron from energy trading regulation.

"This act," Public Citizen noted, "allowed Enron to operate an unregulated power auction--EnronOnline--that quickly gained control over a significant share of California's electricity and natural gas market."

The gaming of the California market, documented in grotesque detail in the e-mails of Enron traders, led to stalled elevators, hospitals without power and an enormous debt inflicted on the state's taxpayers. It was only after the uproar over California's rolling blackouts, which Enron helped engineer, that the Federal Energy Regulatory Commission finally re-imposed regulatory control--and thereby began the ultimate unraveling of Enron's massive pyramid of fraud.

Jensen Comment
I've always been a bit harsh on Wendy Gramm because of the way she significantly helped Enron deregulate energy markets while she worked for the Government and later joined Enron's Board of Directors. In fairness, however, I must point out that while serving on the Board of Directors of Enron, Wendy Gramm's stock sales were exceedingly modest compared with the big winners --- http://www.trinity.edu/rjensen/FraudEnron.htm#StockSales

Bob Jensen's updates on frauds are at http://www.trinity.edu/rjensen/FraudUpdates.htm

Question
Would you like to sift through millions of Enron email messages?

"Science Puts Enron E-Mail to Use," by Ryan Singel, Wired News, January 30, 2006 ---

In March 2001, just a few months before Enron CEO Jeffrey Skilling resigned, an employee e-mailed him a joke about a policeman pulling over a speeding driver, whose wife subsequently rats him out to the cop for other offenses, including being drunk.

Skilling and Enron chairman Ken Lay, whose federal trial on multiple felony fraud charges starts Monday, might not see the irony that, like the driver's wife, their e-mails will soon be testifying against them, both in court and in public opinion.

Enron's inbox first hit the internet in March 2003 when the Federal Energy Regulatory Commission made public more than 1.5 million e-mails from 176 Enron employees as part of its investigation of the company's manipulation of California energy markets in 2000.

Journalists quickly scoured the e-mail for embarrassing moments and incriminating missives. Among the finds: Lay family members' thoughts about finding the perfect wedding photographer (someone who did one of the Kennedy's weddings), Enron executives angling for ambassadorships and positions in the Bush administration, instructions from Tom DeLay's staff to Lay and Skilling on how to handle $100,000 contributions and messages from Lay's secretary bemoaning the fact that she could not get tech support to fix Lay's phone, which would disconnect if answered before the third ring.

All this among countless jokes about Texas, sex, nuns, women, Latinos and priests. Other tasteful tidbits include an offensive booty-call contract and a fashion critique of government lawyers investigating Enron.

The e-mails drew the attention of more than just Californians looking for some payback for the rolling blackouts and astronomical energy bills. InBoxer, an antispam company, turned to the archive to help test its newest product, which scans company e-mails in real time for objectionable content or confidential information, according to CEO Roger Matus.

For an accurate test, Matus needed a sample of corporate e-mail in all its raw, unadulterated drama and glory. He was unsure of how useful the Enron e-mails would be, until he loaded the database and looked at the first message.

The e-mail read in whole: "So you were looking for a one-night stand, after all?"

"That was the moment I knew we had a good testing corpus," Matus said.

Of the 500,000 e-mails InBoxer included in the database, the company's algorithms identified 10,275 with offensive words and another 71,268 that included potentially inappropriate messages, such as sexual innuendos or lists of employee Social Security numbers.

"Enron had an extreme culture of people who worked hard and played hard," Matus said.

Company engineers also found some great jokes, including one about how to feed a pill to a cat, inspiring InBoxer to make the e-mails searchable inside a demo of the new product, called the Anti-Risk Appliance.

While searching through the e-mails for more on the Raptor subterfuge, visitors can also try to win Apple iPod shuffles given away to those who dig up the funniest joke, the most fireable e-mail, and the most regrettable message sent.

Commercial outfits aren't the only ones exploiting the Enron e-mail dump.

 

"10 Enron Players: Where They Landed After the Fall," The New York Times, January 29, 2006 --- http://www.nytimes.com/2006/01/29/business/businessspecial3/29profiles.html

Bob Jensen's Enron Quiz is at http://www.trinity.edu/rjensen/FraudEnronQuiz.htm

Ex-Enron Broadband Engineer Recounts Chaos
An engineer hired to fix problems in Enron Corp.'s broadband unit testified Thursday that the division suffered from overall disarray and that his corrective efforts were met with internal resistance. John Bloomer, who had previously spent 18 years with General Electric Co., told jurors in the trial of five former executives of the broadband unit that he found some "disturbing things" when he "peeked under the covers" after arriving at Enron Broadband Services in 1999.
Associated Press, "Ex-Enron Broadband Engineer Recounts Chaos," The Washington Post, May 5, 2005 --- http://www.washingtonpost.com/wp-dyn/content/article/2005/05/05/AR2005050502014.html

J.P. Morgan Chase & Co. agreed to pay $2.2 billion to settle a lawsuit filed by investors in Enron
J.P. Morgan Chase & Co. agreed to pay $2.2 billion to settle a lawsuit filed by investors in Enron, according to the Associated Press. The decision by the third largest bank in the United States comes just four days after Citigroup said it would pay $2 billion to settle the claims against it in the shareholder lawsuit, which is led by the University of California’s Board of Regents.
"Another Enron Settlement," Inside Higher Ed, June 15, 2005 --- http://www.insidehighered.com/news/2005/06/15/qt

That's Enron-tainment:  Positive review on the new Enron movie
Alex Gibney's freewheeling -- and terrifically entertaining -- documentary, newly entered into national release, puts faces and voices to the men and women who've become household names since the scandal broke four years ago. Some of these former executives have already enjoyed (or endured) extensive face time on TV. But now they're characters in the context of a film that's been adapted from the book of the same name by Bethany McLean and Peter Elkind, and the big screen lends new immediacy to their appearance. That's not to say Mr. Gibney's documentary turns its characters into real people. Given the scale of the human and economic damage, of the deception and very possibly the pathological self-deception, there may not be any real people behind those scrupulously straight faces. Still, "The Smartest Guys in the Room" gives us the same sort of perverse pleasure that's been a staple of "60 Minutes" over the years -- watching world-class crooks tell world-class lies.
"That's Enron-tainment: Company's Chief Cheats Give 'Smartest Guys' Energy:  Documentary Tracing Firm's Fall Is Provocative, Proudly Partisan; 'Machuca': Classy Class Drama," The Wall Street Journal, April 29, 2005; Page W1 ---
http://online.wsj.com/article/0,,SB111473473039520299,00.html?mod=todays_us_weekend_journal

You can download Enron's Infamous Home Video
Although it has nothing to do with the above professional movie, Jim Borden sent me a copy of the amateur video recording of Rich Kinder's departure from Enron (Kinder preceded Skilling as President of Enron).  This 1996 video features nearly half an hour of absurd skits, songs and testimonials by company executives.  It features CEO Jeff Skilling proposing Hypothetical Future Value (HPV) accounting with in retrospect is too true to be funny during the subsequent melt down of Enron.  George W. Bush (then Texas Governor Bush and his father) appear in the video.  You can download parts of it at  http://www.cs.trinity.edu/~rjensen/video/windowsmedia/enron3.wmv
Warning:  The above video is in avi format and takes a very long time to download.  It probably dovetails nicely into Alex Gibney's new Hollywood movie.

As far as partying accountants go, let's never forget Rich Kinder's Enron Departure Party before the meltdown of Enron (it features Jeff Skilling in the flesh speaking about Hypothetical Future Value Accounting) --- http://www.cs.trinity.edu/~rjensen/video/windowsmedia/enron3.wmv

Footnote:  Rich Kinder left Enron, formed his own energy company, and became a billionaire --- http://www.mcdep.com/MR11231.PDF
See Question 2 at http://www.trinity.edu/rjensen/FraudEnronQuiz.htm

Tattle Tale Games Lawyers Play:  Skilling Seeks to Name Names
Former Enron Corp. President and CEO Jeffrey Skilling is trying to pull dozens of ex-colleagues and business associates into the public glare of his criminal conspiracy case. The move sheds light on both the breadth of alleged fraud at the fallen energy giant and the legal strategy of Mr. Skilling.

"Lawyers for Enron Ex-President Ask Judge in Case to Make Public List of 114 Alleged Co-Conspirators," by John R. Emshailler, The Wall Street Journal, December 10, 2004, Page C1 --- http://online.wsj.com/article/0,,SB110264771262096639,00.html?mod=home_whats_news_us

Former Enron Corp. President and CEO Jeffrey Skilling is trying to pull dozens of ex-colleagues and business associates into the public glare of his criminal conspiracy case. The move sheds light on both the breadth of alleged fraud at the fallen energy giant and the legal strategy of Mr. Skilling.

Attorneys for Mr. Skilling have asked Houston federal judge Sim Lake to make public the names of 114 people who the government alleges in a sealed document were co-conspirators.

Mr. Skilling and his co-defendants, former Enron Chairman Kenneth Lay and former Chief Accounting Officer Richard Causey, are charged in a wide-ranging federal conspiracy indictment stemming from Enron's collapse into bankruptcy proceedings in December 2001. Prosecutors allege that Mr. Skilling, indicted earlier this year, "spearheaded" the conspiracy. All three have pleaded not guilty; a trial date hasn't been set.

Mr. Skilling's attorneys, who like the other defense attorneys have a copy of the list, say it includes former Enron officials -- likely including former Chief Financial Officer Andrew Fastow and others who already have pleaded guilty to some Enron-related crimes -- and individuals from some of the big financial institutions, law firms and other businesses with which Enron fostered close ties. The majority haven't been charged with any Enron-related crimes.

Prosecutors have cited federal confidentiality rules in keeping the 114 names under seal, in a typical move in such cases. The rationale for the rules is that even individuals accused of participating in a criminal conspiracy have a right to privacy if they haven't been formally charged.

But Mr. Skilling's legal strategy rests partly on broadly defending Enron's business practices while portraying federal prosecutors as overzealously criminalizing commonplace and legitimate business practices.

In a recent court filing, Mr. Skilling's attorneys argued that by keeping sealed 114 names the government hopes to avoid scrutiny of how "inherently implausible" it is to assert that such a large number of successful, law-abiding individuals could "participate in a vast criminal conspiracy."

Continued in the article

Laying it on the Line at Enron (or getting Layed at Enron, Lay It on the Line, Lay's Chip Getting Bagged)

"Enron Inquiry Turns to Sales by Lay's Wife," by Kurt Eichenwald, The New York Times, November 17, 2004

Federal prosecutors are investigating whether the wife of Enron's former chairman, Kenneth L. Lay, engaged in insider trading in a sale of company stock shortly before it collapsed into bankruptcy, people involved in the case said yesterday.

The sale by Mr. Lay's wife, Linda, involved 500,000 shares of Enron stock and was done through a family foundation, according to records and people involved in the case. The proceeds, totaling $1.2 million, did not go to the Lays, but were distributed to charitable organizations, which had already received pledges of contributions from the foundation.

Already, several Enron officers, including Mr. Lay; Jeffrey K. Skilling, a former chief executive; and Richard L. Causey, the former chief accounting officer, have been indicted on fraud charges. Other executives including Andrew S. Fastow, the former chief financial officer, have pleaded guilty to crimes and are serving as government witnesses.

By focusing on the transaction involving Mrs. Lay, the government could be trying to turn up the pressure on her husband in hopes of securing a guilty plea. Prosecutors used such tactics against Mr. Fastow, by starting an investigation into a comparatively minor tax violation committed by his wife, Lea.

People involved in the case said that Mr. Fastow was offered the opportunity to prevent his wife from being charged by pleading guilty; at the time he refused. Mr. Fastow did not reverse himself until his wife was indicted; she also pleaded guilty and is serving a prison term.

Andrew Weissmann, head of the Justice Department's Enron Task Force, declined to comment yesterday. A lawyer for the Lays, Michael Ramsey, confirmed the investigation, and criticized it as trying to criminalize innocent behavior to bring pressure against Mr. Lay.

"This is the last gasp of a dying prosecution,'' Mr. Ramsey said. "This is an attempt at extortion. If I tried something like this, I would be indicted.''

He said that the sale was based on information in the market and that the proceeds went to charity. Neither Ken nor Linda Lay sold any personal shares that morning, he said.

The investigation of Mrs. Lay is focusing on Nov. 28, 2001, the day investors realized that Enron was probably heading for bankruptcy.

That morning, Mrs. Lay placed an order for the foundation to sell its Enron shares sometime between 10 and 10:20, people involved in the case said. For days up until that morning, Enron had been negotiating a possible merger with a rival, Dynegy, and details of the talks had been leaking out in media reports.

The evening before, people involved said, Chuck Watson, then chairman and chief executive of Dynegy, told Mr. Lay and others at Enron that he had doubts about the merger. While Mr. Watson agreed to consult with his board and his merger team before reaching a decision, the prospects for a deal were dim.

Records show that Mr. Lay returned home that night and was in the office early the next morning. The government is investigating whether he told his wife about the falling prospects for the merger before she placed the sell order.

Before the market opened that morning, there were already rumors of problems with the deal. The news emerged at about 10:30 a.m., when Standards & Poor's announced that it was cutting its credit rating for Enron. That put Enron on the hook for making good on some $3.9 billion in debt in a matter of months.

The market reacted swiftly, knocking Enron shares down by more than $1.50 a share. Shortly after the market became aware of the downgrade, Enron shares were selling at $2.60 to $2.70, according to a transcript of a CNNfn market news broadcast that morning. Brokerage records from First Union Securities, where the foundation maintained its account, show that the shares were sold at $2.38, for proceeds of about $1.2 million. Enron shares closed at about 60 cents that day.

While the timeline of events is difficult for Mrs. Lay, the case presents numerous hurdles for the government. The largest of those is that the Lays did not profit from the sale; while their charitable group, the Linda and Ken Lay Family Foundation, did not have the assets to meet its pledges, the obligation for those commitments would remain with the foundation, not the family. Records show that, in the months after the sale, the proceeds were given away.

The second difficulty is evidentiary. If Mr. Lay did inform his wife of the imploding merger, such communication is protected as a marital confidence and its disclosure cannot be compelled. That means that the government must find a third-party witness who heard from Mr. or Mrs. Lay about any discussion to prove that she had insider knowledge at the time of the trade.

Continued in article

 

Timeline of Key Enron Events

Key Events in the Enron Saga Up to July 8, 2004
The Wall Street Journal, July 8, 2004, July 8, 2004 --- http://online.wsj.com/article/0,,SB108928566380358408,00.html?mod=home_whats_news_us 

Enron History --- http://en.wikipedia.org/wiki/Enron_scandal

1985: Houston Natural Gas merges with InterNorth to form Enron.

1985-2002 Chronology --- http://fpc.state.gov/documents/organization/9659.pdf

A chronology of New York Times articles is available at http://topics.nytimes.com/top/news/business/companies/enron/index.html?offset=0&s=newest

1994:  Enron Outsources Internal Auditing to External Auditor (Andersen) --- http://www.trinity.edu/rjensen/FraudEnronQuiz.htm#32

1996: Rich Kinder loses his CEO position to Jeff Skilling
         Enron's accounting books got cooked early on under his watch while Andersen's auditors turned a blind eye. 

You can download Enron's Infamous Home Video
Although it has nothing to do with the above professional movie, Jim Borden sent me a copy of the amateur video recording of Rich Kinder's departure from Enron (Kinder preceded Skilling as President of Enron).  This 1996 video features nearly half an hour of absurd skits, songs and testimonials by company executives.  It features CEO Jeff Skilling proposing Hypothetical Future Value (HPV) accounting with in retrospect is too true to be funny during the subsequent melt down of Enron.  George W. Bush (then Texas Governor Bush and his father) appear in the video.  You can download parts of it at  http://www.cs.trinity.edu/~rjensen/video/windowsmedia/enron3.wmv

Footnote:  Rich Kinder left Enron, formed his own energy company, and became a billionaire --- http://www.mcdep.com/MR11231.PDF
See Question 2 at http://www.trinity.edu/rjensen/FraudEnronQuiz.htm

 

January 24, 2000

Professor Lanbein’s testimony at http://www.senate.gov/~gov_affairs/012402langbein.htm 

2001

Oct. 16, 2001: Enron reports $638 million third-quarter loss and discloses $1.2 billion reduction in the value of shareholders' stake in the company, partly related to a web of partnerships run by Chief Financial Officer Andrew Fastow that had helped the company inflate profits and hide debt.

 

Oct. 24: Enron ousts CFO Fastow.

 

Oct. 31: Enron announces SEC inquiry has been upgraded to a formal investigation.

 

Dec. 2: Enron files for Chapter 11 bankruptcy, the largest in U.S. history at the time.

December 18, 2001
Robert Vigil’s testimony --- http://www.happinessonline.org/InfectiousGreed/p20.htm

2002

Jan. 23, 2002: Kenneth Lay resigns as Chairman and CEO.

 

June 15: Andersen convicted of obstruction.

 

Oct. 16: Andersen sentenced to probation and fined $500,000; firm was already banned from auditing public companies.

 

2003

Sept. 10, 2003: Former Enron Treasurer Ben Glisan Jr. pleads guilty to conspiracy, becomes first former Enron executive put behind bars. Glisan is sentenced to five years.

2004

Jan. 14, 2004: Andrew Fastow pleads guilty to conspiracy in a deal that calls for a 10-year sentence and his help in the continuing investigation. Lea Fastow pleads guilty to filing false tax forms in a deal that calls for a five-month sentence.

 

Jan. 22, 2004: Former chief accountant Richard Causey pleads innocent to a six-count indictment including conspiracy and fraud charges.

 

Feb. 19, 2004: Skilling indicted, pleads innocent to 35 counts accusing him of widespread schemes to mislead government regulators and investors about company's earnings.

 

May 6, 2004: Lea Fastow pleads guilty to a reduced charge of filing a false tax form, a misdemeanor, and is sentenced to one year in a federal prison, the maximum sentence.

 

July 8, 2004: Federal prosecutors unseal formal indictment of former Enron CEO Kenneth Lay; SEC to file civil charges.

 

November 18, 2004:  Ken Lay's wife comes under investigation for insider trading on Enron shares as the meltdown commenced.

December 10, 2004:  Former Enron Corp. President and CEO Jeffrey Skilling is trying to pull dozens of ex-colleagues and business associates into the public glare of his criminal conspiracy case. The move sheds light on both the breadth of alleged fraud at the fallen energy giant and the legal strategy of Mr. Skilling.

September 16, 2004:  Bye Bye Birdie
As part of an agreement with the federal government's Pension Benefit Guaranty Corporation (PBGC), beleaguered energy giant Enron Corp. has agreed to place $321 million in an escrow account in order to fully fund four defined-benefit pension plans. The money will come from proceeds of the $2.45 billion sale of the company's U.S. pipeline business. The pipeline business is considered to be Enron's most prized remaining asset.
AccounitngWeb, September 16, 2004 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=99765 

 

2005

June 1, 2005:  The U.S. Supreme Court overturned the conviction of the Arthur Andersen accounting firm for destroying documents related to its Enron account before the energy giant's collapse. The ruling is not based upon guilt or innocence. It is based only on a technicality in the judge's instructions to the jury. The ruling will not lead to a revival of this once great firm that in the years preceding its collapse became known for some terrible audits of firms like Waste Management, Enron, Worldcom and other clients.  For details see http://news.bbc.co.uk/2/hi/business/4596949.stm
Also see http://accounting.smartpros.com/x48441.xml

June 15, 2005:  Following the Citigroup settlement, J.P. Morgan Chase & Co. agreed to pay $2.2 billion to settle a lawsuit filed by investors in Enron J.P. Morgan Chase & Co. agreed to pay $2.2 billion to settle a lawsuit filed by investors in Enron, according to the Associated Press. The decision by the third largest bank in the United States comes just four days after Citigroup said it would pay $2 billion to settle the claims against it in the shareholder lawsuit, which is led by the University of California’s Board of Regents. "Another Enron Settlement," Inside Higher Ed, June 15, 2005 --- http://www.insidehighered.com/news/2005/06/15/qt 

July 15, 2005: 
Enron Former Executive Pleads Guilty to Conspiracy
The guilty plea in Houston federal court yesterday by Christopher Calger, a 39-year-old former vice president in Enron's North American unit, involved a 2000 transaction known as Coyote Springs II in which the company sold some energy assets, including a turbine, to another company. In his guilty plea, Mr. Calger said that he and "others engaged in a scheme to recognize earnings prematurely and improperly" with the help of a private partnership, known as LJM2 that was run and partly owned by Enron's then-chief financial officer, Andrew Fastow. To avoid problems with Enron's outside auditors, company officials were "improperly hiding LJM2's participation in this transaction," according to Mr. Calger's plea.
John Emshjwiller, "Enron Former Executive Pleads Guilty to Conspiracy," The Wall Street Journal, July 15, 2005; Page B2 --- http://online.wsj.com/article/0,,SB112139210586786521,00.html?mod=todays_us_marketplace

August 15, 2005
"J.P. Morgan to Settle Enron 'Megaclaims' Suit," The New York Times, August 16, 2005 --- http://www.nytimes.com/aponline/business/AP-Enron-Megaclaims.html 

Two More Banks Settle Enron Claims J.P. Morgan Chase & Co. and Toronto-Dominion Bank will pay Enron a total of $480 million to settle allegations that they helped the once-mighty energy giant hide debt and inflate earnings. The settlement stems from a lawsuit filed by Enron against 10 banks. The suit contends the banks could have prevented the company's 2001 collapse if they hadn't “aided and abetted fraud,” the Houston Chronicle reported. "Two More Banks Settle Enron Claims," AccountingWeb, August 18, 2005 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=101212  

2006

May 25, 2006
Top Enron Executives are now convicted felons
"Lay, Skilling Are Convicted of Fraud:  Jurors Reject Defense Claim That Enron Was Clean; Question of Credibility Two 'Very Controlling People'," by John R. Emshwiller, Gary McWilliams, and Ann Davis, The Wall Street Journal, May 26, 2006; Page A1 ---  http://www.trinity.edu/rjensen/FraudEnron.htm#EnronUpdates

May 31, 2006
Yet another Enron chapter
Jurors on Wednesday rendered a split verdict in the retrial of two former executives from Enron Corp.'s defunct broadband unit, convicting one while acquitting the other of all charges. Former broadband unit finance chief Kevin Howard was found guilty on five counts of fraud, conspiracy and falsifying records. Former in-house accountant Michael Krautz was acquitted of the same charges, concluding a month-long retrial after their original case ended with a hung jury last year.
Kristen Hays, "Jury Splits in Enron Case Retrial:  Ex-Broadband Finance Chief Guilty; Ex-Accountant Acquitted," The Washington Post, May 31, 2006 --- Click Here

July 5, 2006
Prior to sentencing, Ken Lay died of a heart attack.

August 14, 2006
Federal prosecutors want former Enron Corp. CEO Jeffrey Skilling to turn over nearly $183 million for helping perpetuate one of the biggest business frauds in U.S. history - his alleged share and that of his late co-defendant, company founder Kenneth Lay. Federal prosecutors say Jeffrey K. Skilling, the former Enron chief executive, is liable not only for his own ill-gotten gains but also for those of the late Kenneth L. Lay --- Click Here

October 27, 2006
Skilling Sentenced to 24 Years plus Four Months: Club Fed is Easier Than State Prison, But Very Early Paroles Are Less Likely
Oct-27-2006 - Former Enron Chief Executive Officer (CEO) Jeffrey Skilling was sentenced last Monday to 24 years and four months in prison for his role in the corporate accounting scandal that gave its name to an era. The Securities and Exchange Commission (SEC) announced that it would begin distributions to Worldcom investors from the Fair Fund. And while the Enron and Worldcom corporate accounting scandals set the stage for congressional action and passage of the Sarbanes-Oxley Act (SOX) in 2004, criminal prosecutions in these cases have not lessened the SEC’s work load. The current stock options backdating scandal threatens to keep the SEC occupied for years. U.S. District Court Judge Sim Lake denied bond while Skilling appeals his sentence and ordered him to home confinement with an ankle monitor, the Associated Press reports. Judge Lake has recommended that Skilling be sent to a federal facility in Butner, North Carolina. There is no parole in federal sentencing, but like Bernie Ebbers, former Chief Executive Officer of Worldcom who is serving a 25-year sentence, Skilling could get two months a year taken off for good behavior.
AcountingWeb, October 27, 2006 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=102732

November 9, 2006
Enron Investors and Their Lawyers Aiming at Deep Investment Banking Pockets
Andersen Coughs Up $72.5 More Millions for Enron's Investors
Lawyers representing Enron investors have already won settlements for $7.3 billion of the $40 billion shareholders claim they lost in Enron’s 2001 collapse. On Nov. 1, the latest settlement — an agreement by Arthur Andersen, Enron’s former accounting firm, to pay $72.5 million — was disclosed. But it is far from clear whether the testimony of Mr. Fastow, a convicted felon who masterminded some of the fraudulent transactions that hid the company’s poor financial health, will be enough to push the seven banks that have not settled to the negotiating table.
Lexei Barrionuevo, "Fastow Gets His Moment in the Sun," The New York Times, November 10, 2006 --- Click Here 

November 16, 2006
Of all the Enron accounting executives (Fastow was the CFO who knew epsilon about accounting) I wanted Rick Causey sent up river. Causey was the Chief Accounting Officer who worked out most of the accounting fraud and was the closest conspirator with David Duncan, Andersen's manager of the less-than-independent audit. Causey mysteriously was not called on to testify in the trials of Lay and Skilling, purportedly because he was "not a rat." It appears that he was a bit more of a rat than previously reported.
"Ex-Enron Officer Given 5½ Years in Prison," The New York Times, November 16, 2006 --- http://www.nytimes.com/2006/11/16/business/16enron.html

2007

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March 13, 2007 --- Arthur Andersen to Pay $73M In Enron Deal
A federal judge gave final approval to a $72.5 million settlement between Arthur Andersen and investors who sued the accounting firm over its role in the 2001 collapse of Enron.
"Arthur Andersen to Pay $73M In Enron Deal," SmartPros, March 13, 2007 --- http://accounting.smartpros.com/x56911.xml

The lead plaintiff, University of California Board of Regents, has recovered more than $7.3 billion, including $2 billion or more each from Canadian Imperial Bank of Commerce, J.P. Morgan Chase (NYSE: JPM) and Citigroup (NYSE: C), but Merrill Lynch (NYSE: MER) and Credit Suisse Group (NYSE: CS), who are also named in the lawsuit, have asked a U.S. appeals court in New Orleans to rule that the complaint should not have been certified as a class action.

U.S. District Judge Melinda Harmon signed the final order, effectively ending the now defunct accounting firm's involvement in the $40 billion class-action lawsuit.

Arthur Andersen was convicted in June 2002 of obstruction of justice for its role in the Enron saga. The U.S. Supreme Court later overturned the conviction, but the accounting firm is now virtually out of business.

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April 2, 2007 --- "Enron Pays Out $1.47B to Creditors," SmartPros, April 3, 2007 ---
http://accounting.smartpros.com/x57146.xml

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June 18, 2007
Remember the Enron Executive whose desk was a motorcycle in his tower office?
Kenneth Rice, who turned government witness and testified in the trial of former Enron CEO Jeffrey Skilling and company founder Kenneth Lay, was sentenced Monday to 27 months in prison.
"Ex-Enron Broadband Head Sentenced," The New York Times, June 18, 2007 ---
http://www.nytimes.com/aponline/business/AP-Enron-Broadband.html?ref=business

"Last of 15 Enron Defendants Sentenced:  Former Broadband Chief Gets Lesser Prison Term After Aiding Prosecutors," by Carrie Johnson, The Washington Post, June 19, 2007 --- Click Here

The former chief of Enron's Internet business unit was sentenced to 27 months in prison yesterday, closing what could be the final chapter in the Houston energy trader's downfall.

Kenneth D. Rice, 48, is the 15th and final Enron official to face punishment for his role in the company's bankruptcy more than five years ago. Under federal guidelines, he must serve nearly two years, or 85 percent, of the sentence handed down by U.S. District Judge Vanessa D. Gilmore yesterday in a Houston courtroom.

Kenneth D. Rice, shown with daughter Kirsten Rice, got a 27-month sentence. His testimony helped win the conviction of Enron's top two executives. (By F. Carter Smith -- Bloomberg News)

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"What got me here is, I lied over about a two-year period, on a number of occasions, to the investing community," Rice said yesterday, according to Bloomberg News. "I wasn't raised that way, and I'm ashamed of that."

Rice told the jury in last year's criminal trial of Enron's two top executives that he and others misrepresented the financial health of Enron Broadband Services, a highly touted division that posted billions of dollars in losses. His testimony helped prosecutors win the conviction of former chief executive Jeffrey K. Skilling, who is serving a prison term of 24 1/3 years. Company founder Kenneth L. Lay died in July 2006 before he could be sentenced.

Rice faced as much as a decade in prison and agreed to forfeit cash, sports cars and jewelry worth $14.7 million under the terms of his 2004 plea agreement. Between February 2000 and June 2001, Rice sold $53 million worth of Enron stock, some at a time when he later said he had access to secret information about its high debt burdens.

Once among Skilling's closest confidants and companions on off-road adventure tours, Rice ultimately turned against him. Rice was known within Enron's gleaming office towers as a risk taker who collected motorcycles and fast cars, including a Ferrari and a Shelby he turned over to the government as part of his plea deal.

Federal prosecutors Ben Campbell and Jonathan E. Lopez argued that Rice should receive a reduced prison term in exchange for his testimony against his former colleagues.

"Mr. Skilling would simply say . . . 'this is the number, this is what the number is going to be,' " Rice told jurors in February 2006 about the process of generating financial projections.

October 2007

Then how come Merrill Lynch is on the verge of escaping the wrath of investors because of its involvement in some of Enron's corporate and accounting frauds? The Securities and Exchange Commission lays out the facts in various documents such as Litigation Release No. 20159 and Accounting and Auditing Enforcement Release No. 2619, and in the related Complaint in the U.S. District Court.
"The Accounting Cycle:  The Merrill Lynch-Enron-Government Conspiracy," by: J. Edward Ketz, SmartPros, October 2007 --- http://accounting.smartpros.com/x59129.xml 

2008

January 20, 2008

Employees and creditors lost hope of more settlements when the U.S. Supreme Court let investment banks off the hook on January 20, 2008 --- http://www.nytimes.com/2008/01/23/business/23enron.html 

January 29, 2008

The Justice Racer Cannot Beat a Snail:  Andersen's David Duncan Finally Has Closure

"Andersen Figure Settles Charges: Former Head of Enron Team Barred From Some Professional Duties," by Kristen Hays, SmartPros, January 29, 2008 --- http://accounting.smartpros.com/x60631.xml 

The former head of one-time Big Five auditing firm Arthur Andersen's Enron accounting team has settled civil charges that he recklessly failed to recognize that the risky yet lucrative client cooked its books.

David Duncan, who testified against his former employer after Andersen cast him aside as a rogue accountant, didn't admit or deny wrongdoing in a settlement with the Securities and Exchange Commission announced Monday.

The SEC said in the settlement that he violated securities laws and barred him from ever practicing as an accountant in a role that involves signing a public company's financial statements, such as a chief accounting officer. But he could be a company director or another kind of officer and was not assessed any fines or otherwise sanctioned.

Three other former partners at the firm have been temporarily prohibited from acting as accountants before the SEC in separate settlements unveiled Monday.

Andersen crumbled amid the Enron scandal after the accounting firm was indicted, tried and found guilty -- a conviction that eventually was overturned on appeal.

The settlements came six years after Andersen came under fire for approving fudged financial statements while collecting tens of millions of dollars in fees from Enron each year.

Greg Faragasso, an assistant director of enforcement for the SEC, said Monday that the agency focused on wrongdoers at Enron first and moved on to gatekeepers accused of allowing fraud to thrive at the company.

"When auditors of public companies fail to do their jobs properly, investors can get hurt, as happened quite dramatically in the Enron matter," he said.

Barry Flynn, Duncan's longtime lawyer, said his client has made "every effort" to cooperate with authorities and take responsibility for his role as Andersen's head Enron auditor.

That included pleading guilty to obstruction of justice in April 2002, testifying against his former employer and waiting for years to be sentenced until he withdrew his plea with no opposition from prosecutors.

"After six years of government investigations and assertions, surrounding his and Andersen's activities, it was decided that it was time to get these matters behind him," Flynn said.

Duncan, 48, has worked as a consultant in recent years.

He was a chief target in the early days of the government's Enron investigation as head of a team of 100 auditors who oversaw Enron's books. In the fall of 2001, he and his staff shredded and destroyed tons of Enron-related paper and electronic audit documents as the SEC began asking questions about Enron's finances.

Andersen fired Duncan in January 2002, saying he led "an expedited effort to destroy documents" after learning that the SEC had asked Enron for information about financial accounting and reporting.

The firm also disciplined several other partners, including the three at the center of the other settlements announced Monday. They are Thomas Bauer, 54, who oversaw the books of Enron's trading franchise; Michael Odom, 65, former practice director of the Gulf region for Andersen; and Michael Lowther, 51, the former partner in charge of Andersen's energy audit division.

Their settlement agreements said that they weren't skeptical enough of risky Enron transactions that skirted accounting rules. Odom and Lowther were barred from accounting before the SEC for two years, and Bauer for three years. None was fined.

Their lawyer, Jim Farrell, declined to comment Monday.

Duncan's firing and the other disciplinary moves were part of Andersen's failed effort to avoid prosecution. But the firm was indicted on charges of obstruction of justice in March 2002, and Duncan later pleaded guilty to the same charge.

In Andersen's trial, Duncan recalled how he advised his staff to follow a little-known company policy that required retention of final audit documents and destruction of drafts and other extraneous paper.

That meeting came 11 days after Nancy Temple, a former in-house lawyer for Andersen, had sent an e-mail to Odom advising that "it would be helpful" that the staff be reminded of the policy.

Duncan testified that he didn't believe their actions were illegal at the time, but after months of meetings with investigators, he decided he had committed a crime.

Bauer and Temple invoked their 5th Amendment rights not to testify in the Andersen trial. However, Bauer testified against former Enron Chairman Ken Lay and CEO Jeff Skilling in their 2006 fraud and conspiracy trial.

Andersen insisted that the document destruction took place as required by policy and wasn't criminal, but the firm was convicted in June 2002.

Three years later the U.S. Supreme Court unanimously overturned the conviction because U.S. District Judge Melinda Harmon in Houston gave jurors an instruction that allowed them to convict without having to find that the firm had criminal intent.

That ruling paved the way for Duncan -- the only individual at Andersen charged with a crime -- to withdraw his guilty plea in December 2005.

In his plea, he said he instructed his staff to comply with Andersen's document policy, knowing the destroyed documents would be unavailable to the SEC. But he didn't say he knew he was acting wrongfully.

I draw some conclusions about David Duncan (they're not pretty) at http://www.trinity.edu/rjensen/FraudEnronQuiz.htm

February 2008

British Ex-Bankers Sentenced For Their Roles in Enron Fraud
Three former U.K. bank executives who pleaded guilty for their roles in a fraudulent scheme with former Enron Corp. Chief Financial Officer Andrew Fastow have been sentenced to a little over three years in prison. A federal judge Friday sentenced David Bermingham, Giles Darby and Gary Mulgrew to 37 months each. In November, the three men, who had worked at Greenwich NatWest, a unit of Royal Bank of Scotland Group PLC, each pleaded guilty to one count of wire fraud as part of a plea agreement. They had initially said they were not guilty of colluding with Mr. Fastow in a secret financial scam in 2000 to enrich themselves at their employer's expense. Their sentences matched the recommendation of federal prosecutors. All three also have agreed to pay their former employer more than $13 million. The trio became a cause célèbre in the U.K. throughout extradition proceedings that lasted two years. They were dubbed the "NatWest Three." Their attorneys have said they would work with prosecutors to see if the bankers can serve part of their sentences in the U.K.
The Wall Street Journal, February 25, 2008; Page B6 --- http://online.wsj.com/article/SB120389540579389219.html?mod=todays_us_marketplace 

June 3, 2008

Enron Recovery Rate Hits 50 Percent
Enron Creditors Recovery Corp. said Monday that with the latest distributions, creditors of the former Enron Corp. had received 50.3 cents on the dollar and creditors of Enron North America Corp. had gotten back 50 cents on the dollar. Both figures excluded gains, interest and dividends. John J. Ray III, president and chairman of the recovery corporation, said creditors had received "significantly more than originally was anticipated under the plan." The recovery corporation said it made a distribution Monday totaling about $4.17 billion to holders of unsecured and guaranty claims and distributed $1.87 billion on May 13 to newly allowed unsecured and guaranty claims that resulted from a settlement with Citigroup.
SmartPros, June 3, 2008 --- http://accounting.smartpros.com/x62107.xml

September 10, 2008

"Billions to Be Shared By Enron Shareholders," SmartPros, September 10, 2008 --- http://accounting.smartpros.com/x63157.xml

A federal judge has approved a plan to distribute more than $7.2 billion recovered as part of a lawsuit by Enron Corp. shareholders and investors in connection with the company's collapse.

U.S. District Judge Melinda Harmon also approved $688 million in attorneys fees, the largest ever in a securities fraud case.

About 1.5 million individuals and entities will be eligible to share in the distribution under the settlement plan. The plan was part of a $40 billion lawsuit claiming financial institutions participated in the accounting fraud that led to Enron's downfall.

The $7.2 billion comes mostly from settlements made with such financial institutions as Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc.

No mention is made of a penny to the 10,000 employees who lost their jobs and pensions.

October 15, 2008

"Former Enron Exec Pleads Guilty," USA Today, October 15, 2008 ---
http://blogs.usatoday.com/ondeadline/2008/10/ex-enron-execut.html?loc=interstitialskip

The former chief executive of Enron Broadband Services pleaded guilty today to one felony count of wire fraud rather than risk a second jury trial.

Joseph Hirko, 52, of Portland, Ore., will serve no more than 16 months in prison and must pay $8.7 million in restitution for Enron victims. He also agreed to cooperate in other broadband prosecutions. Sentencing is set for March 3.

Hirko admitted to allowing press releases to be distributed in 2000 that said a groundbreaking operating system had been embedded in Enron's broadband network that would allow users to pay only for bandwidth they used instead of a flat monthly fee. The operating system was still being developed, however, and never materialized.

In accepting the plea deal, U.S. District Judge Vanessa Gilmore issued a stern, civics reminder to Hirko, the Houston Chronicle said.

''Mr. Hirko, let me remind you that as a convicted felon, you may not vote in the upcoming election,'' Gilmore said. ''Don't make that mistake.''

March 2009
All outstanding lawsuits against Enron are dismissed ---
http://www.trinity.edu/rjensen/FraudEnron2009Notice.pdf

A long listing of Enron Updates is available at http://www.trinity.edu/rjensen/FraudEnron.htm#EnronUpdates

Bob Jensen's Enron Quiz is at http://www.trinity.edu/rjensen/FraudEnronQuiz.htm

The Famous Enron Video on Hypothetical Future Value (HFV) Accounting 

The video shot at Rich Kinder's retirement party at Enron features CEO Jeff Skilling proposing Hypothetical Future Value (HPV) accounting with in retrospect is too true to be funny during the subsequent melt down of Enron.

The people in this video are playing themselves and you can actually see CEO Jeff Skilling, Chief Accounting Officer Richard Causey, and others proposing cooking the books.  You can download my rendering of a Windows Media Player version of the video from http://www.cs.trinity.edu/~rjensen/video/windowsmedia/enron3.wmv 
You may have to turn the audio up full blast in Windows Media Player to hear the music and dialog.

"Feds Want To See Enron Videotape President Bush Also Takes Part In Skit," Click2Houston.com, December 16, 2002 --- http://www.click2houston.com/money/1840050/detail.html 

Skits and jokes by a few former Enron Corp. executives at a party six years ago were funny then, but now border on bad taste in light of the events of the past year.

VIDEO Feds Want To See Controversial Enron Videotape Watch Clips From Enron Retirement Tape INTERACTIVES The End Of Enron What's The Future Of Enron? 

A videotape of a January 1997 going-away party for former Enron President Rich Kinder features nearly half an hour of absurd skits, songs and testimonials by company executives and prominent Houstonians, the Houston Chronicle reported in its Monday editions.

The collection is all meant in good fun, but some of the comments are ironic in the current climate of corporate scandal.

In one skit, former Administrative Executive Peggy Menchaca played the part of Kinder as he received a budget report from then-President Jeff Skilling, who played himself, and Financial Planning Executive Tod Lindholm.

When the pretend Kinder expressed doubt that Skilling could pull off 600 percent revenue growth for the coming year, Skilling revealed how it could be done.

"We're going to move from mark-to-market accounting to something I call HFV, or hypothetical future value accounting," Skilling joked as he read from a script. "If we do that, we can add a kazillion dollars to the bottom line."

Richard Causey, the former chief accounting officer who was embroiled in many of the business deals named in the indictments of other Enron executives, made an unfortunate joke later on the tape.

"I've been on the job for a week managing earnings, and it's easier than I thought it would be," Causey said, referring to a practice that is frowned upon by securities regulators. "I can't even count fast enough with the earnings rolling in."

Joe Sutton and Rebecca Mark, the two executives credited with leading Enron on an international buying spree, did a painfully awkward rap for Kinder, while former Enron Broadband Services President Ken Rice recounted a basketball game where employees from Enron Capital & Trade beat Kinder's Enron Corp. team, 98-50.

"I know you never forget a number, Rich," Rice said.

President George W. Bush, who then was governor of Texas, also took part in the skit, as did his father.

At the party, the younger Bush pleaded with Kinder: "Don't leave Texas. You're too good a man."

The governor's father also offered a send-off to Kinder, thanking him for helping his son reach the