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Think straight, Talk straight

Enron is in the news again, and Dr. Westgard has been studying their failings - and the ethics that they really practiced. What he finds is that our compliance mentality bears a considerable resemblance to the Enron accounting mentality. Really. (Preview)

January 2004

Do what's right, and Do it right!

Today’s world is oriented to money and the bottom line, and we are seeing the impact of this business orientation in healthcare as well. By making healthcare into a business, we have also tapped into the pervading business ethics, or the lack thereof. Healthcare and its surrounding industries have also become focused first on making money and secondly on providing quality treatments and services for our patients. If you doubt that statement, just look at the similarities between the fraudulent activities of HealthSouth and Enron. Officers of both corporations are under indictment and prosecution.

I have been fascinated with the story of Enron, the 7th largest company in the United States, the darling of the Wall Street in the nineties, the vanguard of new business practices, the “coolest company in the world” according to its employees, and the largest bankruptcy ever when it filed for Chapter 11 protection on December 2, 2001. Most of my pleasure reading is devoted to mysteries, but I have found myself reading books on Enron [1-3] and its co-conspirators such as Arthur Andersen [4-5]. These books are mysteries in their own right – real-life mysteries that are much more complex and intriguing than fiction.

Mysterious profits

I’m sure this discussion is an over-simplification of what happened at Enron, but after all my reading here are some of the smoking guns.

Enron never was on sound financial footing once it launched its power trading operation with its mark-to-market accounting. That was the way Jeffery Skilling built the company in the mid to late 1990s. Skilling went on to become CEO of Enron and changed the company from “hard assets” to “light assets”, meaning intellectual capital instead of owning gas supplies, gas lines, and physical assets. Skilling resigned a few months before Enron collapsed and to this day professes there was nothing wrong with the company when he left.

While I don’t pretend to understand mark-to-market accounting, I do know that when you make a long-term contract you don’t have any money until the contract is implemented and executed. Enron’s power deals went 15 to 20 years into the future, but they booked all the income the day the contract was signed. That looked good on the income statements, which of course looked good to the Wall Street analysts who then hyped the price of the stock, which increased the value of the company. The guys who did the deals were paid bonuses immediately based on those expected long-term profits. Making deals was how to make money; delivering on the deals was never a priority.

So the deal-makers made big money, millions in bonuses and millions in stock options. Likewise, the company executives made big money, millions in bonuses and millions in stock options. And the banks made big money and the accountants made big money and the stock analysts made big money and Wall Street was happy and the stock price continued to increase!

The employees who had to implement the deals didn’t make big money, but they bought Enron stock and would have made good money if the price of the stock hadn’t tanked. However, some of the employees were unhappy that they weren’t getting the bonuses made by the deal-makers. One happened to be Andrew Fastow, who at the time of this writing just agreed to a plea bargain.

January 15, 2004 HOUSTON (AP) – Andrew Fastow, chief architect of the off-the books deals that brought down Enron, pleaded guilty along with his wife Wednesday in a deal that could take prosecutors to the top of the corporate ladder at the scandal-ridden company.

“The former finance chief agreed to a 10-year prison sentence and will help prosecutors build a case against the executives who once occupied the most opulent offices on the company’s top floor: former chairman Kenneth Lay and former CEO Jeffrey Skilling.

‘I and other members of Enron senior management fraudulently manipulated Enron’s publicly reported financial results,’ Fastow said in a statement filed with the plea agreement, adding that the purpose was to mislead investors and inflate the company’s stock price and credit rating.”


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