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Kenneth Lay, former chairman and chief executive officer (CEO) of Enron Corp., claimed to be a
moral and ethical leader and exhorted Enrons officers and employees to be highly ethical in their
decisions and actions. In addition, the Enron Code of Ethics specified that An employee shall not
conduct himself or herself in a manner which directly or indirectly would be detrimental to the
best interests of the Company or in a manner which would bring to the employee financial gain
separately derived as a direct consequence of his or her employment with the Company. Enrons
ethics code was based on the values of respect, integrity, communication, and excellence. Given
this code of conduct and Ken Lays professed commitment to business ethics, one wonders how
Enron could have collapsed so dramatically? The answer to this question seems to be rooted in a
combination of the failure of top leadership, a corporate culture that supported unethical behavior,
and the complicity of the investment banking community.
The failure of Enrons top leadership was evident in the activities of Andrew Fastow, Jeff
Skilling, and Ken Lay, all of whom faced multiple counts of criminal activity with respect to their
decisions and actions at Enron. Included among these criminal charges were money laundering,
wire fraud, securities fraud, conspiracy, making false statements on financial reports, and insider
trading. Some of the activities that led to these criminal charges were: (a) concealing how
extensively Enron was involved in trading in order to support a high market valuation of Enrons
stock; (b) setting up and operating related party transactions, called LJM partnerships, to do
business with Enron; (c) exempting Fastow from the companys ethics code regarding the private
partnerships he set up; and (d) covering up the nature and extent of Enrons problems through
deceptive accounting practices and deliberate misinformation.
Enron has been described as having a culture of arrogance that led people to believe that they
could handle increasingly greater risk without encountering any danger. Enrons unspoken
message was, Make the numbers, make the numbers, make the numbers if you steal, if you
cheat, just dont get caught. If you do, beg for a second chance, and youll get one. Enrons
culture of arrogance can be characterized by an emphasis on decentralization with inadequate
financial and operational controls, a very rigorous and threatening employee performance
evaluation process, and a compensation plan that encouraged people to inflate the value of
contracts and to use non-standard accounting practices.
One of the most sordid aspects of the Enron scandal is the complicity of so many highly
regarded Wall Street firms in enabling Enrons fraud as well as in being partners to it. This
complicity occurred primarily through the use of prepays and related party transactions. Prepays
occurred when Enron booked loans as operating cash flow, and regularly secured new prepays to
pay off existing ones as well as to support rapidly expanding investments in new businesses.

Related party transactions were used by Andrew Fastow to sell an underperforming asset to the
investment bankers, usually at the end of a quarter, and then and then to have the bankers sell it
back to the company at a profit once the quarter was over and the earnings had been booked.
Such transactions were basically smoke and mirrors, reflecting a relationship between the
partnerships and the banks wherein Enron could practically pluck earnings out of thin air.
A follow-up of Enrons major officers speaks to the cover-up and false testimony they paid to
their ethics code and announced values. A grand jury indicted Lay on July 7, 2004 on 11 counts
of securities fraud and related charges. He was found guilty of 10 counts against him on May 25,
2006. A judge dismissed the last count since each count carried a 5 to 10 year maximum prison
sentence. Had he not died of a heart attack on July 5, 2006, he could have served between 20 to
30 years in prison. Skilling is still serving a 24-plus year prison sentence, after he was convicted
on 19 counts-- one count of conspiracy to commit securities fraud and wire fraud, 12 counts of
securities fraud, five counts of making false statements to accountants, and one count of insider
trading. Recently, it was questionable whether or not he would be temporarily released after his
sons suicide attempt. Fastow was sentenced on conspiracy to commit securities fraud and
sentenced from 10 to 6 years after he testified against Ken Lay, Jeff Skilling, and others. His
release date is scheduled on December 2011.
Enron, the companys, aftermath also stands witness to the corruption of its officers,
Enron Creditors Recovery Corp. is a shell of the former Enron Corp. (once the
world's #1 energy trader) and is shelling out the remaining assets of the bankrupt
Enron to creditors. Once the largest buyer and seller of natural gas and electricity in
the US, Enron also traded numerous other commodities. Following its collapse
Enron was forced to sell all of its North American power utility and gas pipeline
assets, as well as its global interests in utilities and power plants. Between 2004 and
the end of 2010 Enron Creditors Recovery Corp. paid out more than $21.6 billion to
Enron's creditors, including $40 million in November, 2010.


1. Analyze the reasons for the failure of Enron as outlined by Harriss textbook including
the groupthink and how you would handle the situations if you were one of the staff
especially the justifications for the appropriate types of whistleblowing. Accessed March, 2011).
Sources: Carozza, D. (2007). Interview with Sherron Watkins, Constant Warning. Fraud Magazine. Accessed April, 2011.
Mulligan, T. and Bustillo, M. (July 6, 2006). "Death Puts Lay Conviction in Doubt". Los Angeles Times.,1,4669506.story?coll=la-headlinesfrontpage; Corporate convicts: Where are they now? Andrew Fastow. (2009, June 25).; Yahoo! Finance (2011,
March 8). Enron Creditors Recovery Corp. Company Profile.,
March 8.
Rufca, S. (2010, Mar.1). Update: Supreme Court hears former Enron CEO Skilling's arguments. Kristen, C.

(2004, Jul. 7). "Lay surrenders to authorities". CNN Money.
Pasha, S. and J. Seid (2006, May 25). "Lay and Skilling's day of reckoning". CNN Money.; Wikipedia. Kenneth Lay.