I spoke recently to a Dallas Society of CPAS conference focusing on fraud, speaking on ethics and fraud and the financial crisis. However, the speaker after me addressed the audience on Rules vs. Principles, and his presentation is worthy of some discussion.
He started his presentation by holding up two items, in his right hand a trophy he had received for being named CFO of the Year in 2000 by CFO Magazine. In his left hand he held his brightly colored prison ID card. He told the audience that he had received both for doing exactly the same things.
The speaker, Andy Fastow, the former CFO of Enron Corp., was given both those items for exactly the same deals! You remember Enron, the notoriously corrupt company that has been featured in numerous books, film stories and ENRON: The Smartest Guys in the Room doc? In 2001, Enron, then the seventh largest company in the world imploded. In a minute they went from $100 billion in revenues and $1 billion in profit to bankrupt, leaving thousands out of work and with no pension plans as many had invested these back into the company, at the request of management.
Fastow, the 37 year old golden boy, CFO at the time, was finally indicted in 2004, went to jail and served seven of the ten years he’d been given. Of the 78 counts he was indicted for, which included fraud, money laundering and conspiracy, he pled guilty to two counts, wire and securities fraud. While he agreed to the ten year term, by becoming an informant in the prosecution of other Enron execs, he received a reduced sentence.
He claims, “I pleaded guilty. I was guilty. Yet I can never remember an instance where I set out to commit fraud. I didn’t.”
I spoke before Fastow to this audience about fraud I had witnessed. I specifically asked them to symbolically take off their CPA hats for a moment so they could keep an open mind, look at several perspectives, and make up their minds about what was right or not and not as CPA’s. I talked with them about what I had witnessed at Citigroup, what had happened at the other TBTF banks and how a large part of the financial crisis could have been avoided if the banks had followed their own published ethics policies and listened to their own employees who tried to warn them.
I spoke up, as did my friend Sherron Watkins, former VP at Enron, who in August of 2001 started alerting then CEO Kenneth Lay of accounting irregularities in their financial reports. They tried to fire her, but Fastow stayed on. Enron had a 64-page ethics manual.
Citi had vowed to implement a stringent ethics policy, as well. And they did. I was there. We had annual training classes on it. However it had no grit because leadership didn’t follow it. Like Enron, we had a policy with no teeth. I quoted Dan Ariely’s research on this, which shows that regardless of exposure and training in ethics and codes of conduct, if people aren’t really expected to follow them, they won’t.
And as Ariely says, if others like us cheat and get away with it, then we are more likely to cheat as well. Fastow told this CPA audience that he’d disclosed everything to management, his board of directors, and Enron’s consulting firm, Arthur Anderson. He said everything he’d engaged in at Enron had been approved.
Fastow made billions for Enron and tens of millions for himself. Supposedly he neglected some fundamental accounting practices such as reporting the ”cash on hand” and total liabilities. Supposedly he pressured some of the largest investment banks in the country to invest in Enron, from Citi to Merrill Lynch, threatening them with the loss of Enron’s future business if they did not do so.
I asked my audience to consider that fraud may be a narrowly defined term yet it seems that as a society we keep looking for loopholes and ways to get around what is right. If we establish principles that do not condone cheating we set a precedent for not cheating. Bend the rules and human nature follows same. As I said to the group, collusion prevents detection and accountability.
So I said, put your CPA hats back on. Ask yourselves as professionals, when did it become acceptable to engage in transactions that comply with the rules; however there is still a gray area? Can a transaction that follows the rules technically still be considered unethical or even illegal?
Afterward I shook Fastow’s hand, snapped a picture with us both, emailed it to Sherron Watkins, Enron’s Whistleblower, and told her I got the impression that while he said he was guilty, he didn’t really feel he was. And many in the audience also felt that, despite Fastow’s many apologies for fraud he committed, in his own mind he didn’t believe he was guilty.