Managing Your Cash Flow
Former Enron CFO suggests fraud is now ten times worse
3 min read
02 July 2015
In the FT's Camp Alphaville 2015 event, former Enron CFO Andrew Fastow delivered a speech holding a trophy for being finance director of the Year in 2000 in his right hand, and his prison ID card in his left. He was given both items for the same reason, he admitted.
Enron has repeatedly been hailed as one of the world’s greatest corporate tragedies, with Fastow having had quite a large role to play in its demise. It was Fastow who designed “off-balance sheet” companies that allowed Enron to hide its true financial condition from investors.
Yet that hasn’t stopped him from addressing a room filled with accountants by saying: “Several people have told me that their organisation has grown dramatically over the past ten years, and they thank me for it. They said no other individual has been more responsible for the growth of this industry than me. So: you’re welcome.”
Those were his opening lines when he offered some biting advice at a Corporate Risk Management conference in the US. There, he gave an honest look at how he exploited loopholes in corporate governance, which ultimately led him to serve more than five years in prison.
Fastow said he was prosecuted “for not technically complying with certain securities rules” – but that wasn’t “the important reason why” he was guilty. The “most egregious reason”, he said, was that the transactions he spearheaded “intentionally created a false appearance of what Enron was – it made Enron look healthy when it really wasn’t”.
He explained that accounting rules, regulations, securities laws and regulation were often vague. The key problem, he once told more than 1,000 students at Leeds School of Business, was that when rules are vague and complex it creates “a business opportunity“. That was what Enron was doing, Fastow claimed, with the approval of the board of directors.
“I thought we were freakin’ geniuses,” he said.
At Camp Alphaville, Fastow suggested that corporate executives are still falling into the same trap he did, concentrating on the letter and not the spirit of the rules. In fact, he said fraud today is “ten times worse” than it was in the Enron era.
Fastow continued: “The things that Enron did, and that I did, are still being done today. And in many cases they’re being done in such a manner that makes me blush – and I was the CFO of Enron.”
He pointed to modern-day examples of companies skirting the burdensome, yet ambiguous, corporate tax law. He suggested that General Motors went bankrupt because of unfunded pension and health care. He added that Apple had avoided paying taxes on non-US income by having its global headquarters in Ireland.
“Good deal? Pretty good deal for Apple shareholders, right?” he said. However, he asked why Apple’s legal avoidance of taxes was viewed as acceptable, where cases such as his, where he found a loophole in how he structured the finance of the company, was viewed as unethical?
“I would suggest it’s because we’re very selective in what we want to consider ethical and unethical, depending on what we want the answers to be,” he said.