EnRon Case 9IntroductionOnce upon a time, there was a gleami.docx

EnRon Case 9
Introduction
Once upon a time, there was a gleaming office tower in
Houston, Texas. In front of that gleaming tower was a giant
“E,” slowly revolving, flashing in the hot Texas sun. But in
2001, the Enron Corporation, which once ranked among the top
Fortune 500 companies, would collapse under a mountain of
debt that had been concealed through a complex scheme of off-
balance-sheet partnerships. Forced to declare bankruptcy, the
energy firm laid off 4,000 employees; thousands more lost their
retirement savings, which had been invested in Enron stock. The
company's shareholders lost tens of billions of dollars after the
stock price plummeted. The scandal surrounding Enron's demise
engendered a global loss of confidence in corporate integrity
that continues to plague markets today, and eventually it
triggered tough new scrutiny of financial reporting practices. In
an attempt to understand what went wrong, this case will
examine the history, culture, and major players in the Enron
scandal.
Enron's History
The Enron Corporation was created out of the merger of two
major gas pipeline companies in 1985. Through its subsidiaries
and numerous affiliates, the company provided goods and
services related to natural gas, electricity, and communications
for its wholesale and retail customers. Enron transported natural
gas through pipelines to customers all over the United States. It
generated, transmitted, and distributed electricity to the
northwestern United States, and marketed natural gas,
electricity, and other commodities globally. It was also involved
in the development, construction, and operation of power plants,
pipelines, and other energy-related projects all over the world,

including the delivery and management of energy to retail
customers in both the industrial and commercial business
sectors.
Throughout the 1990s, Chairman Ken Lay, CEO Jeffrey
Skilling, and CFO Andrew Fastow transformed Enron from an
old-style electricity and gas company into a $150 billion energy
company and Wall Street favorite that traded power contracts in
the investment markets. From 1998 to 2000 alone, Enron's
revenues grew from about $31 billion to more than $100 billion,
making it the seventh-largest company in the Fortune 500.
Enron's wholesale energy income represented about 93 percent
of 2000 revenues, with another 4 percent derived from natural
gas and electricity. The remaining 3 percent came from
broadband services and exploration. However, a bankruptcy
examiner later reported that although Enron had claimed a net
income of $979 million in that year, it had really earned just
$42 million. Moreover, the examiner found that despite Enron's
claim of $3 billion in cash flow in 2000, the company actually
had a cash flow of negative $154 million.
Enron's Corporate Culture
When describing the corporate culture of Enron, people like to
use the word “arrogant,” perhaps justifiably. A large banner in
the lobby at corporate headquarters proclaimed Enron “The
World's Leading Company,” and Enron executives believed that
competitors had no chance against it. Jeffrey Skilling even went
so far as to tell utility executives at a conference that he was
going to “eat their lunch.” This overwhelming aura of pride was
based on a deep-seated belief that Enron's employees could
handle increased risk without danger. Enron's corporate culture
reportedly encouraged flouting the rules in pursuit of profit.
And Enron's executive compensation plans seemed less
concerned with generating profits for shareholders than with
enriching officer wealth.
Skilling appears to be the executive who created the system
whereby Enron's employees were rated every six months, with

those ranked in the bottom 20 percent forced out. This “rank
and yank” system helped create a fierce environment in which
employees competed against rivals not only outside the
company but also at the next desk. The “rank and yank” system
is still used at other companies. Delivering bad news could
result in the “death” of the messenger, so problems in the
trading operation, for example, were covered up rather than
being communicated to management.
Ken Lay once said that he felt that one of the great successes at
Enron was the creation of a corporate culture in which people
could reach their full potential. He said that he wanted it to be a
highly moral and ethical culture and that he tried to ensure that
people honored the values of respect, integrity, and excellence.
On his desk was an Enron paperweight with the slogan “Vision
and Values.” Despite such good intentions, however, ethical
behavior was not put into practice. Instead, integrity was pushed
aside at Enron, particularly by top managers. Some employees
at the company believed that nearly anything could be turned
into a financial product and, with the aid of complex statistical
modeling, traded for profit. Short on assets and heavily reliant
on intellectual capital, Enron's corporate culture rewarded
innovation and punished employees deemed weak.
Enron's Accounting Problems
Enron's bankruptcy in 2001 was the largest in U.S. corporate
history at the time. The bankruptcy filing came after a series of
revelations that the giant energy trader had been using
partnerships, called “special-purpose entities” or SPEs, to
conceal losses. In a meeting with Enron's lawyers in August
2001, the company's then-CFO Fastow stated that Enron had
established the SPEs to move assets and debt off its balance
sheet and to increase cash flow by showing that funds were
flowing through its books when it sold assets. Although these
practices produced a very favorable financial picture, outside

observers believed they constituted fraudulent financial
reporting because they did not accurately represent the
company's true financial condition. Most of the SPEs were
entities in name only, and Enron funded them with its own stock
and maintained control over them. When one of these
partnerships was unable to meet its obligations, Enron covered
the debt with its own stock. This arrangement worked as long as
Enron's stock price was high, but when the stock price fell, cash
was needed to meet the shortfall.
After Enron restated its financial statements for fiscal year 2000
and the first nine months of 2001, its cash flow from operations
went from a positive $127 million in 2000 to a negative $753
million in 2001. With its stock price falling, Enron faced a
critical cash shortage. In October 2001, after it was forced to
cover some large shortfalls for its partnerships, Enron's
stockholder equity fell by $1.2 billion. Already shaken by
questions about lack of disclosure in Enron's financial
statements and by reports that executives had profited
personally from the partnership deals, investor confidence
collapsed, taking Enron's stock price with it.
For a time, it appeared that Dynegy might save the day by
providing $1.5 billion in cash, secured by Enron's premier
pipeline Northern Natural Gas, and then purchasing Enron for
about $10 billion. However, when Standard & Poor's
downgraded Enron's debt to below investment grade on
November 28, 2001, some $4 billion in off-balance-sheet debt
came due, and Enron did not have the resources to pay. Dynegy
terminated the deal. On December 2, 2001, Enron filed for
bankruptcy. Enron now faced 22,000 claims totaling about $400
billion.
he Whistle-Blower
Assigned to work directly with Andrew Fastow in June 2001,
Enron vice president Sherron Watkins, an eight-year Enron
veteran, was given the task of finding some assets to sell off.
With the high-tech bubble bursting and Enron's stock price

slipping, Watkins was troubled to find unclear, off-the-books
arrangements backed only by Enron's deflating stock. No one
seemed to be able to explain to her what was going on. Knowing
she faced difficult consequences if she confronted then-CEO
Jeffrey Skilling, she began looking for another job, planning to
confront Skilling just as she left for a new position. Skilling,
however, suddenly quit on August 14, saying he wanted to
spend more time with his family. Chair Ken Lay stepped back in
as CEO and began inviting employees to express their concerns
and put them into a box for later collection. Watkins prepared
an anonymous memo and placed it into the box. When Lay held
a companywide meeting shortly thereafter and did not mention
her memo, however, she arranged a personal meeting with him.
On August 22, 2001, Watkins handed Lay a seven-page letter
she had prepared outlining her concerns. She told him that
Enron would “implode in a wave of accounting scandals” if
nothing was done. Lay arranged to have Enron's law firm,
Vinson & Elkins, and accounting firm Arthur Andersen look
into the questionable deals, although Watkins advised against
having a third party investigate that might be compromised by
its own involvement in Enron's conduct. Lay maintained that
both the law firm and accounting firm did not find merit in
Watkins's accusations. Near the end of September, Lay sold
some $1.5 million of personal stock options, while telling Enron
employees that the company had never been stronger. By the
middle of October, Enron was reporting a third-quarter loss of
$618 million and a $1.2 billion write-off tied to the partnerships
about which Watkins had warned Lay.
For her trouble, Watkins had her computer hard drive
confiscated and was moved from her plush executive office
suite on the top floor of the Houston headquarters tower to a
sparse office on a lower level. Her new metal desk was no
longer filled with the high-level projects that had once taken her
all over the world on Enron business. Instead, now a vice
president in name only, she faced meaningless “make work”
projects. It is important to note that Watkins stayed in the

company after warning Lay about the risks and did not become
a public whistle-blower during this time. In February 2002, she
testified before Congress about Enron's partnerships and
resigned from Enron in November of that year.
The Chief Financial Officer
In 2002, the U.S. Justice Department indicted CFO Andrew
Fastow—who had won the “CFO of the Year” award two years
earlier from CFO Magazine—on 98 counts for his alleged
efforts to inflate Enron's profits. The charges included fraud,
money laundering, conspiracy, and one count of obstruction of
justice. Fastow faced up to 140 years in jail and millions of
dollars in fines if convicted on all counts. Federal officials
attempted to recover all of the money Fastow had earned
illegally, and seized some $37 million.
Federal prosecutors argued that Enron's case was not about
exotic accounting practices but about fraud and theft. They
contended that Fastow was the brain behind the partnerships
used to conceal some $1 billion in Enron debt and that this debt
led directly to Enron's bankruptcy. The federal complaints
alleged that Fastow had defrauded Enron and its shareholders
through off-balance-sheet partnerships that made Enron appear
to be more profitable than it actually was. They also alleged
that Fastow made about $30 million both by using these
partnerships to get kickbacks that were disguised as gifts from
family members, and by taking income himself that should have
gone to other entities.
Fastow initially denied any wrongdoing and maintained that he
was hired to arrange the off-balance-sheet financing and that
Enron's board of directors, chair, and CEO had directed and
praised his work. He also claimed that both lawyers and
accountants had reviewed his work and approved what was
being done, and that “at no time did he do anything he believed
was a crime.” Skilling, COO from 1997 to 2000 before
becoming CEO, had reportedly championed Fastow's rise at
Enron and supported his efforts to keep up Enron's stock prices.

Fastow eventually pleaded guilty to two counts of conspiracy,
admitting to orchestrating myriad schemes to hide Enron debt
and inflate profits while enriching himself with millions. He
surrendered nearly $30 million in cash and property, and agreed
to serve up to 10 years in prison once prosecutors no longer
needed his cooperation. He was a key government witness
against Lay and Skilling. His wife Lea Fastow, former assistant
treasurer, quit Enron in 1997 and pleaded guilty to a felony tax
crime, admitting to helping hide ill-gotten gains from her
husband's schemes from the government. She later withdrew her
plea, and then pleaded guilty to a newly filed misdemeanor tax
crime. In 2005, she was released from a year-long prison
sentence, and then had a year of supervised release.
In the end, Fastow received a lighter sentence than he otherwise
might have because of his willingness to cooperate with
investigators. In 2006, Fastow gave an eight-and-a-half-day
deposition in his role as government witness. He helped to
illuminate how Enron had managed to get away with what it did,
including detailing how many major banks were complicit in
helping Enron manipulate its financials to help it look better to
investors. In exchange for his deposition, Fastow's sentence was
lowered to six years from ten. Fastow has also stated that Enron
did not have to go out of business if there had been better
financial decisions made at the end.
The case against Fastow had been largely based on information
provided by Michael Kopper, the company's managing director
and a key player in the establishment and operation of several
of the off-balance-sheet partnerships and the first Enron
executive to plead guilty to a crime. Kopper, a chief aide to
Fastow, pleaded guilty to money laundering and wire fraud. He
faced up to 15 years in prison and agreed to surrender $12
million earned from illegal dealings with the partnerships.
However, Kopper only had to serve three years and one month
of jail time because of the crucial role he played in providing
prosecutors with information. After his high-powered days at
Enron, Kopper's next job was as a salaried grant writer for

Legacy, a Houston-based clinic that provides services to HIV-
positive and other chronically ill patients.
Today Andy Fastow has been released from prison and works as
a document-review clerk at a law firm. He also speaks about
business ethics at many different forums, including Leeds
Business School at the University of Colorado, the University
of New Mexico, the University of Texas at Austin, and the
Association of Certified Fraud Examiners global conference.
During his speaking engagements, Fastow has emphasized that a
major problem companies encounter in business ethics is not
using principles and overly relying on rules. He claims that laws
and regulations technically allowed the risky transactions he
made at Enron. He also cited General Motors, IBM, and the
nation of Greece as more recent examples of companies (or
nations) that faced hardship and/or bankruptcy because they
took actions that were highly risky but technically allowable by
law.
The main idea that Fastow tries to communicate in his lectures
is that it is not enough to simply obey rules and regulations. It
is also easy to rationalize questionable behaviors. Fastow claims
that ethical decisions are rarely black-and-white, and sometimes
unethical decisions seem more or less unethical depending upon
the situation. For instance, he used Apple's tax evasion as an
example of an action that seemed less unethical because it was
less pronounced than what often occurs in other cases. There are
always murky areas where regulations can be exploited. Instead,
businesspeople must be able to recognize when issues are going
too far and stop them before they snowball into an Enron-esque
crisis. Fastow recommends that the best way to deal with
questionable situations is to construct and examine a worst-case
scenario analysis and look at the risks of questionable deals
with more scrutiny.
The Chief Executive Officer
Former CEO Jeffrey Skilling, generally perceived as Enron's
mastermind, was the most difficult to prosecute. At the time of

the trial, he was so confident that he waived his right to avoid
self-incrimination and testified before Congress, saying, “I was
not aware of any inappropriate financial arrangements.”
However, Jeffrey McMahon, who took over as Enron's president
and COO in February 2002, told a congressional subcommittee
that he had informed Skilling about the company's off-balance-
sheet partnerships in 2000, when he was Enron's treasurer.
McMahon said that Skilling had told him that “he would remedy
the situation.”
Calling the Enron collapse a “run on the bank” and a “liquidity
crisis,” Skilling said that he did not understand how Enron had
gone bankrupt so quickly. He also said that the off-balance-
sheet partnerships were Fastow's creation. However, the judge
dealt a blow to Lay and Skilling when he instructed the jury that
it could find the defendants guilty of consciously avoiding
knowing about wrongdoing at the company.
Many former Enron employees refused to testify because they
were not guaranteed that their testimony would not be used
against them in future trials, and therefore questions about the
company's accounting fraud remain. Skilling was found guilty
of honest services fraud and sentenced to 24 years in prison,
which he has been serving in Colorado. He maintains his
innocence and has appealed his conviction. After his release
from prison, Andy Fastow was quoted as saying that the
bankruptcy of Enron was not Skilling's fault. In 2008, a panel of
judges from the Fifth Circuit Court of Appeals in New Orleans
rejected his request to overturn the convictions of fraud,
conspiracy, misrepresentation, and insider trading. However,
the judges did grant Skilling one concession. The three-judge
panel determined that the original judge had applied flawed
sentencing guidelines in determining Skilling's sentence. The
Court ordered that Skilling be resentenced. The matter was
taken to the Supreme Court.
In June 2010, the U.S. Supreme Court ruled that the honest
services law could not be used to convict Skilling because the
honest services law applies to bribes and kickbacks, not to

conduct that is ambiguous or vague. The Supreme Court's
decision did not suggest that there had been no misconduct,
only that Skilling's conduct was not in violation of a criminal
fraud law. The court's decision did not overturn the conviction
and sent the case back to a lower court for evaluation.
The Chair
Ken Lay became chair and CEO of the company that was to
become Enron in 1986. A decade later, Lay promoted Jeffrey
Skilling to president and chief operating officer, and then, as
expected, Lay stepped down as CEO in 2001 to make way for
Skilling. Lay remained as chair of the board. When Skilling
resigned later that year, Lay resumed the role of CEO.
Lay, who held a doctorate in economics from the University of
Houston, contended that he knew little of what was going on,
even though he had participated in the board meetings that
allowed the off-balance-sheet partnerships to be created. Lay
said he believed the transactions were legal because attorneys
and accountants had approved them. Only months before the
bankruptcy in 2001, he reassured employees and investors that
all was well at Enron, based on strong wholesale sales and
physical volume delivered through the marketing channel. He
had already been informed that there were problems with some
of the investments that could eventually cost Enron hundreds of
millions of dollars. In 2002, on the advice of his attorney, Lay
invoked his Fifth Amendment right not to answer questions that
could be incriminating.
Lay was expected to be charged with insider trading, and
prosecutors investigated why he had begun selling about $80
million of his own stock beginning in late 2000, even as he
encouraged employees to buy more shares of the company. It
appears that Lay drew down his $4 million Enron credit line
repeatedly and then repaid the company with Enron shares.
These transactions, unlike usual stock sales, do not have to be
reported to investors. Lay says that he sold the stock because of

margin calls on loans he had secured with Enron stock and that
he had no other source of liquidity. According to Lay, he was
largely unaware of the ethical situation within the firm. He had
relied on lawyers, accountants, and senior executives to inform
him of issues such as misconduct. He felt that he had been
protected from certain knowledge that would have been
beneficial and would have enabled him to engage in early
correction of the misconduct. Lay claims that all decisions he
made related to financial transactions were approved by the
company's lawyers and the Enron board of directors. Lynn
Brewer, a former Enron executive, states that Lay was not
informed about alleged misconduct in her division.
Additionally, Mike Ramsey, the lead attorney for Lay's defense,
claimed that he was not aware of most of the items in the
indictment. In the end Lay was convicted on 19 counts of fraud,
conspiracy, and insider trading. However, the verdict was
thrown out after he died of heart failure at his home in Colorado
in 2006. The ruling protected some $43.5 million of Lay's estate
that the prosecution had claimed Lay stole from Enron.
The Lawyers
Enron was Houston law firm Vinson & Elkins's top client,
accounting for about 7 percent of its $450 million in revenue.
Enron's general counsel and a number of members of Enron's
legal department came from Vinson & Elkins. Vinson & Elkins
seems to have dismissed Sherron Watkins's allegations of
accounting fraud after making some inquiries, but this does not
appear to leave the firm open to civil or criminal liability. Of
greater concern are allegations that Vinson & Elkins helped
structure some of Enron's special-purpose partnerships. In her
letter to Lay, Watkins had indicated that the firm had written
opinion letters supporting the legality of the deals. In fact,
Enron could not have done many of the transactions without
such opinion letters. The firm did not admit liability, but agreed
to pay $30 million to Enron to settle claims that Vinson &
Elkins had contributed to the firm's collapse.

Merrill Lynch
The brokerage and investment-banking firm Merrill Lynch also
faced scrutiny by federal prosecutors and the SEC for its role in
Enron's 1999 sale of Nigerian barges. The sale allowed Enron to
improperly record about $12 million in earnings and thereby
meet its earnings' goals at the end of 1999. Merrill Lynch
allegedly bought the barges for $28 million, of which Enron
financed $21 million. Fastow gave his word that Enron would
buy Merrill Lynch's investment out in six months with a 15
percent guaranteed rate of return. Merrill Lynch went ahead
with the deal despite an internal document that suggested that
the transaction might be construed as aiding and abetting
Enron's fraudulent manipulation of its income statement. Merrill
Lynch denies that the transaction was a sham and said that it
never knowingly helped Enron to falsify its financial reports.
There are also allegations that Merrill Lynch replaced a
research analyst after his coverage of Enron displeased Enron
executives. Enron reportedly threatened to exclude Merrill
Lynch from an upcoming $750 million stock offering in
retaliation. The replacement analyst is reported to have then
upgraded his report on Enron's stock rating. Merrill Lynch
maintains that it did nothing improper in its dealings with
Enron. However, the firm agreed to pay $80 million to settle
SEC charges related to the questionable Nigerian barge deal.
Merrill Lynch continued to use risky investment practices,
which contributed to severe financial losses for the company as
the economy entered a recession in 2008. In 2008, Bank of
America agreed to purchase the company for $50 billion,
possibly after pressure from the federal government.
Arthur Andersen LLP
In its role as Enron's auditor, Arthur Andersen was responsible
for ensuring the accuracy of Enron's financial statements and
internal bookkeeping. Investors used Andersen's reports to

judge Enron's financial soundness and future potential, and
expected that Andersen's certifications of accuracy and
application of proper accounting procedures would be
independent and free of any conflict of interest.
However, Andersen's independence was called into question.
The accounting firm was one of Enron's major business
partners, with more than 100 employees dedicated to its
account, and it sold about $50 million a year in consulting
services to Enron. Some Andersen executives even accepted
jobs with the energy trader. In March 2002, Andersen was found
guilty of obstruction of justice for destroying relevant auditing
documents during an SEC investigation of Enron. As a result,
Andersen was barred from performing audits. The damage to the
firm was such that the company no longer operates, although it
has not been dissolved formally.
It is still not clear why Andersen auditors failed to ask Enron to
better explain its complex partnerships before certifying Enron's
financial statements. Some observers believe that the large
consulting fees Enron paid Andersen unduly influenced the
company's decisions. An Andersen spokesperson said that the
firm looked hard at all available information from Enron at the
time. However, shortly after speaking to Lay Vice President
Sherron Watkins took her concerns to an Andersen audit partner
who reportedly conveyed her questions to senior Andersen
management responsible for the Enron account. It is not clear
what action, if any, Andersen took.
he Fallout
Although Enron executives obviously engaged in misconduct,
some people have questioned the tactics that federal
investigators used against Enron. Many former Enron employees
feel that it was almost impossible to obtain a fair trial for Lay
and Skilling. The defense was informed that 130 of Enron's top
managers, who could have served as witnesses for the defense,
were considered unindicted co-conspirators with Lay and
Skilling. Therefore, the defense could not obtain witnesses from

Enron's top management teams under fear that the prosecution
would indict the witnesses.
Enron's demise caused tens of billions of dollars of investor
losses, triggered a collapse of electricity-trading markets, and
ushered in an era of accounting scandals that precipitated a
global loss of confidence in corporate integrity. Today
companies must defend legitimate but complicated financing
arrangements. Legislation like Sarbanes–Oxley, passed in the
wake of Enron, has placed more restrictions on companies. Four
thousand former Enron employees struggled to find jobs, and
many retirees lost their entire retirement portfolios. One senior
Enron executive committed suicide.
In 2003, Enron announced its intention to restructure and pay
off its creditors. It was estimated that most creditors would
receive between 14.4 and 18.3 cents for each dollar they were
owed—more than most had expected. Under the plan, creditors
would receive about two-thirds of the amount in cash and the
rest in equity in three new companies, none of which would
carry the tainted Enron name. The three companies were
CrossCountry Energy Corporation, Prisma Energy International,
Inc., and Portland General Electric.
CrossCountry Energy Corporation would retain Enron's interests
in three North American natural gas pipelines. In 2004, Enron
announced an agreement to sell CrossCountry Energy to CCE
Holdings LLC for $2.45 billion. The money was to be used for
debt repayment, and represented a substantial increase over a
previous offer. Similarly, Prisma Energy International, Inc.,
which took over Enron's 19 international power and pipeline
holdings, was sold to Ashmore Energy International Ltd. The
proceeds from the sale were given out to creditors through cash
distributions. The third company, Portland General Electric
(PGE), Oregon's largest utility, emerged from bankruptcy as an
independent company through a private stock offering to Enron
creditors.
All remaining assets not related to CrossCountry, Prisma, or
Portland General were liquidated. Although Enron emerged

from Chapter 11 bankruptcy protection in 2004, the company
was wound down once the recovery plan had been carried out.
That year, all of Enron's outstanding common stock and
preferred stock were cancelled. Each record holder of Enron
Corporation stock on the day it was cancelled was allocated an
uncertified, nontransferable interest in one of two trusts that
held new shares of the Enron Corporation.
The Enron Creditors Recovery Corporation was formed to help
Enron creditors. It stated that its mission was “to reorganize and
liquidate the remaining operations and assets of Enron
following one of the largest and most complex bankruptcies in
U.S. history.” In the very unlikely event that the value of
Enron's assets would exceed the amount of its allowed claims,
distributions were to be made to the holders of these trust
interests in the same order of priority of the stock they
previously held.
In addition to trying to repay its shareholders, Enron also had to
pay California for fraudulent activities it committed against the
state's citizens. The company was investigated in California for
allegedly colluding with at least two other power sellers in 2000
to obtain excess profits by submitting false information to the
manager of California's electricity grid. In 2005, Enron agreed
to pay California $47 million for taking advantage of California
consumers during an energy shortage.
Learning from Enron
Enron was the biggest business scandal of its time, and
legislation like the Sarbanes–Oxley Act was passed to prevent
future business fraud. But did the business world truly learn its
lesson from Enron's collapse? Greed and corporate misconduct
continued to be a problem throughout the first decade of the
twenty-first century, culminating in the 2008–2009 global
recession. Corporations praised high performance at any cost,
even when employees cut ethical corners. In the mortgage
market, companies like Countrywide rewarded their sales force
for making risky subprime loans, even going so far as to turn

their back on loans that they knew contained falsified
information in order to make a quick profit. Other companies
traded in risky financial instruments like credit default swaps
(CDSs) when they knew that buyers did not have a clear
understanding of the risks of such instruments. Although they
promised to insure against default of these instruments, the
companies did not have enough funds to cover the losses after
the housing bubble burst. The resulting recession affected the
entire world, bankrupting such established companies as
Lehman Brothers and requiring government intervention in the
amount of nearly $1 trillion in Troubled Asset Referendum
Program (TARP) funds to salvage numerous financial firms.
The economic meltdown inspired a new wave of legislation
designed to prevent corporate misconduct, including the Dodd–
Frank Wall Street Reform and Consumer Protection Act.
It is unfortunate that the Enron scandal did not hinder corporate
misconduct. However, Enron still has lessons to teach us. Along
with the business scandals of the financial crisis, Enron
demonstrates that, first, regulatory agencies must be improved
so as to better detect corporate misconduct. Second, companies
and regulatory authorities should pay attention to the warnings
of concerned employees and “whistle-blowers.” Third,
executives should understand the risks and rewards of the
financial instruments their companies use and maintain a
thorough knowledge of the inner workings of their companies
(something that Ken Lay claimed he did not have). These
conditions are crucial to preventing similar business frauds in
the future.
Conclusion
The example of Enron shows how an aggressive corporate
culture that rewards high performance and gets rid of the “weak
links” can backfire. Enron's culture encouraged intense
competition, not only among employees from rival firms but
also among Enron employees themselves. Such behavior creates

a culture where loyalty and ethics are cast aside in favor of high
performance. The arrogant tactics of Jeffrey Skilling and the
apparent ignorance of Ken Lay further contributed to an
unhealthy corporate culture that encouraged cutting corners and
falsifying information to inflate earnings.
The allegations surrounding Merrill Lynch's and Arthur
Andersen's involvement in the debacle demonstrate that rarely
does any scandal of such magnitude involve only one company.
Whether a company or regulatory body participates directly in a
scandal or whether it refuses to act by looking the other way,
the result can be further perpetuation of fraud. This fact was
emphasized during the 2008–2009 financial crisis, in which the
misconduct of several major companies and the failure of
monitoring efforts by regulatory bodies contributed to the worst
financial crisis since the Great Depression. With the country
recovering from widespread corporate corruption, the story of
Enron is once again at the forefront of people's minds. Andy
Fastow has stated that businesspeople are falling into the same
trap as he fell into at Enron and believes fraud is “ten times
worse” today than it was during Enron's time.
The Enron scandal has become legendary. In 2005, four years
after the scandal, a movie was made about the collapse of Enron
called Enron: The Smartest Guys in the Room. To this day,
Jeffrey Skilling continues to maintain his innocence and appeal
his case. In April of 2012, the Supreme Court denied his appeal,
claiming that any errors made in the trial were negligible.
However, the following year a federal judge reduced Skilling's
sentence to 14 years. Enron's auditor, Arthur Andersen, faced
over 40 shareholder lawsuits claiming damages of more than
$32 billion. In 2009, the defunct company agreed to pay $16
million to Enron creditors. Enron itself faced many civil
actions, and a number of Enron executives faced federal
investigations, criminal actions, and civil lawsuits. As for the
giant tilted “E” logo so proudly displayed outside of corporate
headquarters, it was auctioned off for $44,000.

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