Convicted felon behind Enron's off-balance sheet entities discusses how we rationalize unethical behavior
There’s nothing like a cautionary tale from the dark side to set a room full of governance professionals on the edge of their seats. That was the atmosphere in Montreal last Tuesday as attendees at the Canadian Society of Corporate Secretaries’ (CSCS) annual conference gathered for a keynote address by Andrew Fastow, Enron’s former CFO, who went to prison for six years for his role in helping the energy company hide huge losses through off-balance sheet special purpose entities.
This would have been the first time Fastow had spoken in Canada ‒ except he didn’t make it across the border. He was denied entry for being a convicted felon under Canada’s strict border laws. Instead, he spoke to the CSCS crowd via live video feed from Houston.
As usual, the CSCS conference offered some very thoughtful programming this year, but some of the folks I spoke with after Fastow’s session said they could have listened to his stories and insights about governance gone wrong all day long. For me, nothing he said was more striking than when he held up the trophy he received from CFO Magazine in 2000 as CFO of the Year and his prison ID card, both ‘for doing the same thing,’ he said. ‘Everything I did at Enron was approved’ by all the gatekeepers, from the accounting department and the outside auditors to Enron’s board.
Fastow wasn’t in any way blaming anyone else. He takes full responsibility for what he did. He was making the point that it’s possible to follow the rules while looking for every loophole to exploit in the name of helping your company meet its financial objectives and maximize returns for shareholders. The very ambiguity of accounting rules and securities and tax laws ‘made it easier to meet [Enron’s financial] objectives,’ he said.
He enumerated some of the many ways that SEC and FASB rules compel companies toward accounting choices that distort asset values and mislead investors. One example is requiring that oil and natural gas reserves be valued at an average price of $95 per barrel even while oil trades for less than $50 per barrel for an extended period of time. GAAP states that if you’re following the rules, you can’t be misleading investors, he said.
Beyond the ambiguity of the rules, Fastow’s deeper point was that ‘I never asked myself whether what I was doing was ethical or not.’ He admitted that was mostly due to his own character flaws, but added that it was also because at the time such questions weren’t emphasized in business school.
The one question boards should ask about any business decision they’re making when trying to weigh it from a corporate governance perspective is this: ‘If this company were privately owned and I were leaving it to my grandchildren, would I do this?’
‘If that question were overlaid on everything, you’d get a fundamentally different attitude in the boardroom,’ Fastow declared. He told the CSCS crowd he wanted us to understand what was going through his head as he did what he did at Enron without ever considering it could count as securities fraud. He wants business people to appreciate the slippery slope, to understand how following the rule can morph into taking advantage of the rule and eventually into abusing the rule. It’s a rationalization that more of us are capable of than we’d like to acknowledge, and one reason people were on the edge of their seats as they listened yesterday.
