Enron and Arthur Andersen: Beyond the Debacles
During the last decade of the 20th
century, Enron Corp. became a
major player in the energy sector of
the economy and a growing force in
other businesses, with total revenues
across all businesses of US$101
billion in 2000. Even with the
company’s expansion into non-
energy commodities, energy
represented Enron’s primary
business venture. On November 9,
2001, the merger of Enron and
Dynegy Corp. was announced. The
merger soon unraveled as Enron’s
questionable accounting practices
and financial dealings—in particular,
highly irregular partnership
arrangements—were discovered.
Enron, with recorded revenues of
approximately $140 billion during the
first three quarters of 2001,
experienced a catastrophic collapse
in the market value of its stock.
The merger was called off. Enron
sued Dynegy and Dynegy
countersued Enron, with each
accusing the other of wrongdoing. In
early December 2001, Enron filed for
bankruptcy. Just days before this
filing, 500 of the company’s
employees were paid $55.7 million in
bonuses. More than 4,000 Enron
employees were fired at the time of
the bankruptcy filing. Moreover,
numerous companies around the
world suffered significant losses as a
result of the Enron debacle.
The Demise of Arthur Andersen
In mid-December 2001, the U.S.
Congress initiated hearings on the
Enron debacle. Executives from
Arthur Andersen, Enron’s auditor,
testified about possible illegal acts
and violations of securities laws by
Enron officials as well as about
Andersen’s role in the situation. In
January 2002, the U.S. Justice
Department initiated a criminal
investigation into the debacle. This
investigation uncovered evidence of
destruction by Andersen employees
of documents related to Enron’s
questionable activities. David
Duncan, head of Andersen’s audit
team for Enron, was fired and later
admitted to ordering the shredding of
Enron-related documents shortly
after learning of the Justice
Department’s investigation. Enron
fired Andersen as its auditor.
Subsequently, Andersen was
charged with obstruction of justice,
stood trial, and was found guilty.
Numerous auditing clients severed
ties with Arthur Andersen, and the
accounting firm was virtually
destroyed. An appeal to the Fifth
U.S. Court of Appeals was pending
at the time of writing this case
update.
The Bankruptcy Aftermath at
Enron
Meanwhile, bizarre events related to
Enron continued to unfold. A former
Enron executive committed suicide,
apparently in remorse over the
Enron debacle. The Powers Report,
prepared by a special committee of
Enron’s board of directors, blamed
Enron executives as well as the
auditors, lawyers, and board
members for the improper
partnerships. In testimony before
Congress, key Enron executives
either denied responsibility for what
had happened or asserted Fifth
Amendment privilege against self-
incrimination. Jeffrey Skilling, former
Enron CEO, testified that the
company was in “great shape” when
he left his position. He also asserted
that he was the victim of “outrageous
lies” and insisted that he was not
responsible in any way for Enron’s
collapse. Kenneth Lay, Enron’s
former chairman, asserted his Fifth
Amendment rights shortly resigning
from Enron’s board of directors.
Sherron Watkins, Enron’s vice
president of corporate development,
was one of the few beacons of
proper behavior in carrying out her
responsibilities. Being aware of the
questionable partnerships and the
off-balance-sheet accounting,
Watkins sensed the doom Enron
was facing. She told her boss,
Kenneth Lay, and a friend at Arthur
Andersen, who then told Andersen’s
head Enron auditor, David Duncan.
In testimony before Congress,
Watkins said she believed that Lay
was probably duped by Skilling and
others.
In the ensuing months, several
Enron executives were charged with
various criminal acts, including fraud,
money laundering, and insider
trading. Former Enron executive
David Delainey, closely connected to
former CEO Jeff Skilling, pled guilty
to one count of insider trading and
paid almost $8 million in fines. He
also agreed to cooperate in the
government’s Enron investigations.
Lea Fastow, former assistant
treasurer at Enron and the wife of
Andrew Fastow, Enron’s former chief
financial officer, was charged with six
criminal counts, including conspiracy
to commit wire fraud, money
laundering, and four counts of filing
false tax returns. When a plea
bargain agreement fell through, she
pled not guilty to all counts.
Ben Glisan, Enron’s former
treasurer, was charged with two
dozen counts of money laundering,
fraud, and conspiracy. He pled guilty
to one count of conspiracy to commit
fraud in exchange for the other
charges being dropped. Glisan
received a prison term, three years
of post-prison supervision, and
financial penalties of more than a $1
million. Glisan admitted that Enron
was a “house of cards.” Glisan was
a close associate of Andrew Fastow,
former Enron chief financial officer,
who faced almost 100 counts of
money laundering, fraud, and
conspiracy. At the time of writing,
Fastow maintained his innocence.
As of late 2003, Enron was still
struggling to work its way out of
bankruptcy. Enron’s creditors
sought permission from a federal
bankruptcy judge to sue more than
three dozen former Enron
executives, Arthur Andersen, and
three law firms for negligence and
failure to fulfill their duties as
corporate officers. A final report by
Enron’s bankruptcy examiner in late
November 2003 concluded that
Kenneth Lay and Jeffrey Skilling had
breached their fiduciary duties and
might be liable for repaying millions
of dollars to Enron. Lay and Skilling,
of course, disputed the bankruptcy
examiner’s findings.

Culture and Leadership: The
Seeds of Enron’s Demise
Enron’s collapse did not happen
overnight; it was long in the making,
dating from early 1990s. Along with
the company’s rapid growth came
the development of a corporate
culture and leadership that was
obsessed with stock prices,
bonuses, and exotic accounting
practices.
Rich Kinder, Enron’s chief operating
officer (COO) from 1990 to 1996,
was obsessed with stock prices and
earning targets. He focused his
attentions on operations and cash
flow, and would “terrify people if they
didn’t meet their goals.” Then when
Jeff Skilling took over from Kinder,
there was still an obsession with
stock prices but a drastic “flip-flop” in
the method for maintaining Enron’s
favorable stock prices.
Skilling seemingly paid little attention
to expenses or day-to-day
operations, instead delegating those
responsibilities. Skilling was
concerned about expanding both
revenues and profit margins. To
accomplish this, Enron began an
extensive program of buying,
expanding, and launching
businesses in both energy and no-
energy domains. To help run these
businesses, Skilling sought the best
and brightest new hires, ones who
would be “ruthless traders.” Skilling
wanted people who could prosper in
a “go-go, high-achievement
environment.” Unfortunately, there
was insufficient monitoring of these
new hires to ensure that they learned
the fundamentals of god
management.
Under Skilling, a very rigorous and
threatening evaluation process was
instituted for all Enron employees.
Known as “rank and yank,” Enron’s
employees annually ranked their
fellow employees on a 1 (best) to 5
(worst) scale. Each of the
company’s divisions was arbitrarily
forced to give the lowest ranking to
one-fifth of its employees. These
employees were then fired.
Employees often downgraded their
peers in order to enhance their own
positions in the company.
Enron’s bonus program was another
major contributor to the company’s
demise. “Those who closed major
deals were paid up to 3 percent of
the value of the entire deal, payable
when it was struck, not when the
project actually began earning
money.” The bonus program
encouraged the use of non-standard
accounting practices and the inflation
of deals on the company’s books.
Deal inflation within the company
became sufficiently widespread that
“more effort was put into hiding the
consequences than owning up to the
problem.” In fact, four partnerships
were created solely for the purpose
of hiding losses.
The company was very
decentralized and de-emphasized
teamwork—each division and
business unit was kept separate
from the other businesses.
Consequently, very few people in the
Enron organization knew much of
what was going on in the company
from a “big picture” perspective.
Basically, people heading their
divisions and business units knew
what was happening in their part of
the company but not throughout the
company. Fostering this
decentralized operation, which also
lacked sufficient operational and
financial controls, was “a distracted,
hands-off chairman, a compliant
board of directors and an impotent
staff of accountants, auditors and
lawyers.”
Into the Future
The Enron and Arthur Andersen
debacles have destroyed businesses
m your own research efforts.
and many people’s lives—and most
likely will continue to do so for some
time in the future. The ethical
failures of both Enron and Arthur
Andersen have sent shock waves
through the global business
community, among employees of
both small and large corporations,
and among private citizens. After a
two-year ride on a “roller coaster of
volatility,” the discovery of ethically
bizarre decisions and actions seem
all too frequent and commonplace.
All of these events should leave us
wondering: “What enduring lessons
for humanity will these debacles end
up providing?