Internal probe finds massive failures at Enron
Deals for insiders generated millions
By Peter Behr a Nd David S. Hilzenrath, Washington Post, 2/3/2002
Enron Corp.'s collapse last fall was caused by massive
failures by its management, board, and outside advisers
as well as self-enrichment by some employees ''in a culture
that appears to have encouraged pushing the limits,''
according to a report by a special investigating committee of
the company's board of directors.
The 218-page report, filed with a federal bankruptcy court in
New York yesterday, described a corporation whose senior
officers and board of directors made a ''fundamentally flawed''
decision that ultimately led to the collapse of the company,
once ranked as the nation's seventh-largest.
The board, on the recommendation of its chairman, Kenneth
Lay, and chief executive Jeffrey Skilling, waived ethics rules in
1999 and allowed Enron's chief financial officer, Andrew
Fastow, to head private partnerships that would buy and sell
assets with the company, while keeping his Enron position.
The board and top executives then neglected to monitor
Fastow's activities, or even ask how much money he made -
$30 million - until last October, after media reports.
Fastow, who was ousted last October, and a few other
employees ''were enriched by tens of millions of dollars they
never should have received'' and created a web of partnerships
that facilitated the ''manipulation of Enron's financial
statements,'' the report said.
In one transaction in 2000, Fastow turned one partnership
investment of $25,000 into a personal $4.5 million profit in two
months. He also brought two other employees into the deal,
each of whom made $1 million off a $5,800 investment in the
same period.
The report said some of the partnership transactions were
designed to hide huge Enron losses from the investing public
and resulted in nearly $1 billion in overstated profits in just
the 12 months that ended last fall.
That was much more than the $586 million cut in profit over
five years that the once high-flying energy trader reported last
November after revealing accounting errors related to some of
the partnerships. That announcement triggered a dive in
Enron's stock price, costing shareholders and employees
billions of dollars and prompting a dozen congressional and
federal investigations of the Houston company's demise.
The report released yesterday was prepared under the
direction of William Powers Jr., dean of the University of Texas
School of Law, who joined the board Oct. 31 after Enron first
reported its third-quarter loss and appointed a special
investigating committee.
The report cited ''a flawed idea, self-enrichment by employees,
inadequately-designed controls, poor implementation,
inattentive oversight, simple (and not so simple) accounting
mistakes, and overreaching in a culture that appears to have
encouraged pushing the limits.''
It read: ''The tragic consequences'' of mishandling the
partnerships ''were the result of failures at many levels and by
many people:
Enron founder and longtime chief executive Lay was ''the
captain of the ship,'' but did not ensure that those who
reported to him were performing their oversight duties
properly. Lay resigned last month at the insistence of Enron's
creditors.
Skilling urged the board to approve the arrangement with
Fastow, the report said. Other Enron employees accuse
Skilling of approving a partnership transaction in March last
year that was designed to conceal large operating losses from
the board. Skilling denies that charge.
The board of directors waived Enron's conflict of interest rules
to allow Fastow to run the partnerships and set up procedures
to monitor's Fastow's compensation, but never followed up.
Enron's outside auditor, Arthur Andersen LLP, ''did not fulfill
its professional responsibilities'' in its auditing work, the report
said.
The company's outside law firm, Vinson & Elkins, ''should have
brought a stronger, more objective and more critical voice'' to
its review of Enron's required disclosures to investors about the
convoluted partnership transactions and Fastow's role in them.
This story ran on page A10 of the Boston Globe on 2/3/2002.
© Copyright 2002 Globe Newspaper Company.
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