Scenario: When Gatekeepers Fail
(Kirk Kardashian, October 2012)
Andrew Fastow had achieved the pinnacle of success and fame that could be expected of a chief financial officer. At the age of 36, he had been appointed the CFO of Enron, the hundred-billion dollar energy company. When Enron imploded, causing $40 billion in market value to disappear along with the pensions of thousands of people, Fastow fell much further than he had risen. Some called him the most hated person in America. Fastow served more than five years in federal prison for securities fraud, and now hopes his journey will serve as a warning to others.
Fastow’s story is a perfect example of the blurry line between genius problem-solving and fraud. The same much-lauded “off-balance-sheet” strategies that Fastow innovated to make Enron seem financially healthy were the ones that, upon closer review, landed him in jail. Fastow says his main mistake was ignoring the principles behind the rules he creatively circumvented, and using loopholes in the rules to get around them.
And, Fastow did not act alone. According to him, every sketchy deal he made was approved by accountants, attorneys, and the Enron board—the usual gatekeepers who guard again illegal action. The lesson here is that gatekeepers can sometimes act as enablers. Lawyers, instead of warning about fraudulent statements, can craft disclosures that are “technically legal” but completely incomprehensible. Auditors and consultants can help shape the numbers to comply with generally accepted accounting principles, instead of raising red flags as they should.
Fastow says that a series of minor indiscretions can slowly accrete into a major crime. It’s possible to go astray not with one shocking act of fraud, but by degrees.
How do we prevent another Enron-scale disaster, in a business environment where firms still employ legions of people to dream up ways to get around laws?