At one time Enron was one of the world’s largest producers of natural gas, oil, and electricity. It also appeared to be one of the most profitable companies, taking shareholders from $19. 10 in 1999 to $90. 80 by the end of 2000. Enron’s top management answered to a Board of Directors whose responsibility was to question and challenge new partnerships, ventures, and decisions within the company.
On several occasions, Andrew Fastow, the company’s Chief Financial Officer approached the board of directors with new investment partnerships which the board approved with very little questioning. Some of these partnerships created a conflict of interest due to the fact that Fastow was not only managing the partnerships, but he was also an investor in an outside entity that took part in buying and sellingassets with Enron.Fastow was able to create and manage several of these partnerships while still maintaining his role as CFO of Enron. This was due to the rule set in place by the Financial Accounting Standards Board (FASB) which states, “if an outside investor puts in 3 percent or more of the capital in a partnership, the corporation, even if it provides the other 97 percent, does not have to declare the partnership as a subsidiary.
Therefore, assets and debt in the partnership can be withheld from the corporation’s balance sheet.With this rule and the many partnerships Fastow created, Enron did not have to declare the assets and debts from these partnerships, therefore hiding hundreds of millions of dollars in losses and debt. The board of directors however did not consider Fastow’s interaction with the partnerships to be a serious problem due to the fact that the financial gain potential to Enron was great.
In fact Enron had a 65 page code of ethics that was given to all employees. Enron’s auditor has also been accused of conducting business in an unethical manner in its attempt to retain the loyalty of Enron executives.Current laws and SEC regulations in USA allow firms like Arthur Andersen to provided consulting services to a company and then turn around and provide the audited report about the financial results of these consulting activities; therefore making an “independent audit” by Arthur Andersen independent in name only. The US legal system allows companies like Enron to manage their own employee pension funds, producing a conflict of interest because the company has an incentive to use these funds in ways that benefit the company even when they negatively affect employees.