The Enron Managers’ Mistakes
Looking for mistakes is a very difficult thing to do, especially if the case in point is something which is as successful in one point of its existence such as the Enron. Companies such as Enron employ the best managers because work at these levels leaves very, very, very little room for error; unless it was a calculated and deliberate error in the part of the erring managers.
If such was the case, then it would lead to the identification of malice and fraudulent motivations in the part of the managers, since no manager wants to commit knowingly a mistake. The identity of the ‘mistake’ shifts now from what used to be as poorly thought-of action plan made individually and independent of other people’s orientation and influence resulting to losses to the general course of action, attitude and mental alignment of some the managers in Enron that made the collapse as something which is highly improbable.
Still there were mistakes in general, and still, it will be managers at the end of the day who will be answerable and liable for these mistakes, from what was claimed as accounting processes that are bogged down by innocent human error, to deliberate cover ups and last minute action recourse that was a minute too late always people are thinking that at worst, it was a well schemed, well planned, internal sabotage. Yes, they made mistakes. And former Enron Corp.
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Chairman Kenneth Lay himself was among those who ‘admitted to mistakes’ which are by and all bereft of malice as he insisted that despite the mistakes, any wrongdoing in running the energy giant was not part of his activities while servicing Enron (Emshwillerm, McWilliams, 2006). Companies and business management executives adhere to a particular paradigm or accepted practice in the daily undertaking of business and commerce because it is a necessary tool in the check and balance system that guarantees that the interests of the company, the investors and the public are protected.
The main idea behind the collapse of Enron Corporation is its managers’ deviance from these paradigms due to fraudulent intentions, and because of this, investors and the public in general placed Enron’s managers and chief executives as the one who erred and the ones who are criminally liable, leading to one of the most controversial debacle in Wall Street history.
Enron willingly or unwillingly, knowingly or unknowingly kept analysts, investors and other people from the business industry outside and in the dark. Some of their actions made them accountable according to the letter of the law while some can interpret the entire fiasco as a mere case of incapable and incompetent managers.
The partnership and the role of these partnerships and the failure to see how it will work out in the long run is one of the biggest mistakes of Enron and its managers along with i5ts move to inflate its reported profits and manipulate its profits, and at some extent the managers knew of that this move was a potential mistake but the earnings are just to tempting for them not to wager and give it a try, providing Enron suddenly with a way to hide the true amount of its debts through these partnerships with companies who are people and managed by the same executives found in Enron (Rouleau, 2002).
The managers’ mistakes are assessed using two perspectives – first, their mistakes that contributed to the downfall and worsening of Enron as a company, and second, the mistakes that they made that lead to the conviction of the criminal charges that were slapped on them. What did they do wrong? Many.
Just for starters, Smith (2006) wonders about the foolhardy risk of Enron in booking profits using means which are considered as generally volatile, risky and perfectly lawful and legal; this alongside Enron’s racking up of “mark-to-market” gains, a steady real-cash influx based model for accounting, as reflected on the company’s trading book which do not reflect the use an accounting system which is based on the flow of actual money like the accrual system,
CRIMINAL LIABILITIES – The mistakes of Enron’s managers are reflected on their criminal records as their miscalculated mistakes led them from blue chip executive managers to criminal convicted felons, which may have cast light on the guilt of certain crimes of the Enron managers but was unable to bring to light fully other important details.
And by 2006, Smith (2006) still considers that it ‘isn’t clear how much Enron made or lost off its vaunted energy-trading, energy-services and broadband units’ or the extent of the earnings of Enron over what Smith considers as the exploitation of ‘the California electricity market during the 15-month crisis’ which started in the spring, year 2000 (Wall Street Journal, pA9).
And when several business mangers that are all capable and willing to commit criminal acts to the company and its investors are housed inside one company, it is the perfect recipe for an impending financial crisis. To be able to analyze the mistakes of Enron’s managers that lead to the collapse of the company, it is important to take a look at two things – the crimes for which every manager was accused of, and for the alleged crime that they made but were acquitted from.
The management and the managers were, after all, responsible for letting Enron be ‘dependent on paper trading gains’, which, according to Smith (2006) actually had ‘little real cash attached to them and so vulnerable to credit calls that made it incapable of riding out a crisis’ (The Wall Street Journal, pA9), something which is not very much explored since the trial focused on the liabilities of the leaders and managers who kept on insisting throughout the trial that Enron was merely a ‘victim to a run on the bank’. Smith, A9). Before making a scrutiny overall individual mistakes by Enron managers, one of the mistakes of the board of directors should be mentioned since it was symbolic to the law-bending and law-twisting nature of doing business inside Enron that put them in this mess in the first place.
This particular incident which symbolizes the many other similar erratic actions and costly mistakes made by the board of directors is about the time when the board of directors opted to waive the aspect of conflict of interest and allowed Enron’s very own Chief Finance Officer Andrew Fastow to head a business that is directly in dealing with Enron since the board of directors may have seen the merit, however temporary, of the strategy that allows Fastow’s LJM to acquire by buy out Enron’s assets which it considers as underperforming, in truth the company of Fastow is no more than a smokescreen so that the debt of the Enron is shielded and the profit improved on paper. The most significant person and Enron manager who made the most telling mistakes en route to the downfall of Enron is no other than Kenneth Lay.
Others were just a notch lower than Lay’s stature in the mismanagement department, and these include others like Jeffrey Skilling, Greg Whalley, Mark Frevert and Andrew Fastow – they may or may not be included in Lay’s excuse list of what he considers as ‘deceitful underlings’ (Emshwillerm, McWilliams, 2006). For Lay and all the involved Enron managers, their mistake was to wager their career and the future of Enron in exchange for whatever financial gains they experienced resulting from undertaking fraudulent actions and strategies while inside the company and holding key positions in Enron. Lay faced eleven criminal charges as an aftermath of the Enron scandal, all of which he pleaded not guilty.
During the sentencing, Lay was found by the jury guilty of securities and wire fraud. This reflects Lay’s two main mistakes which he made throughout his Enron career – the mistakes that he made that caused the downfall of Enron considering that all of the accusations hurled against him are false, and the second mistake, the inability to protect himself for worst case scenario, whether or not he is truly guilty of criminal actions. Another managerial mistake of Lay is his show of support and trust to the operations of Lou Borget, who was later convicted of money laundering. Lay was notorious for undertaking questionable and shady workings that are hardly transparent to those who need to see and understand it.
Even before his Enron days, Lay was always full of suspicious and strange actions, like how he still managed to control Internorth despite the fact that it was his small company which the Internorth brought and how insurance companies point to Lay’s questionable dealings in foreign countries like Peru where Enron formerly do business in. This resulted to Lay’s career being capped with losses, sales of what is otherwise considered as a very profitable operation, employee lay-offs and shady partnership deals which analysts consider as Lay’s way of hiding debt. If Lay is synonymous with shady accounts, questionable transactions and strange partnership moves, Skilling seemed to be haunted by a curse which is just as bad as that of Lay – failed business operation. Skilling joined Enron in 1989. Prior to that, his career was inside a banking institution, the First City Bank of Houston, which collapsed as he left.
If Skilling’s excuse was that his mistakes were made without malice and as a result of some human error factor, then he was misled and confused at least 19 times, the same number of times he was acquitted for wire fraud and securities fraud. Even with the fact that it is close to impossible for Skilling to have an excuse for such number of instances pertaining to erroneous but not malicious managerial actions inside Enron which can prove that he is innocent after all, his capability as a top tier manager will be put to question next, as well as the authority and prudence of those who hired him since Skilling, after all, is close to being moronic with the nature of the job he was signed up to work in, if it is true that he did not have any acts with malicious or destructive nature towards the company for all of the times he was said to have committed securities and wire fraud.
This is the case of someone stupid being smart enough to land a position of power, something which is not just convincing and realistic enough as it was plain dumb. Regardless, it is still Skilling’s mistake that burdens him with such load. Andrew Fastow’s mistakes was opting to do things which are not designed to answer Enron’s brewing financial problem but to provide a mat under which Enron managers can sweep the dirt when business visitors and investors come in for a visit. This is true with the case of Fastow’s creation of the so-called off-book entities. Even before Enron crashed, Fastow was already showing the company how he is mistake prone. Example of which was the 1996 job that he bungled, described by Barboza and Schwartz (2002) in detail; ‘Fastow… as nearly fired for the poor job he did running a retail unit that aimed to put Enron into competition with local utilities around the country’ (The New York Times).
The same poor sense of long term outlook despite the innate financial wizardry inside Fastow’s head led Fastow to create an escape for Enron when its Calper’s interests are not being addressed to as planned and expected by Enron his wife’s family posing as outside investor and a low level Enron employee who was promised a hefty 10 million profit, the use of Chewco as the hiding place for Enron’s debts and as a way to help in the inflation of Enron’s profits which were both impossible in the first place, .
Again, maybe Fastow was guiltless after all of the crimes stacked against him after the Enron collapse; but the one sure thing is that despite his intelligence, he committed too many mistakes that netted him in a web and be ‘wrapped up in a series of complex transactions that ultimately doomed him’ (Barboza, Schwartz, 2002), and the doom that came as a result of his mistakes amounted to an indictment of 78 counts of crimes that included fraud, money laundering, and conspiracy. Paula Rieker was one time the managing director of investor relations of Enron. She was guilty of the criminal charge set against her (criminal insider trading charge) as she was guilty of the mistake of allowing herself to join her colleagues in what was called the exercise of self enrichment inside the company wherein managers use the situation at hand to make the most out of one’s profit.
Former Enron CAO Richard Causey, Enron treasurer Ben Glisan Jr. nd energy trader John Forney were all guilty of securities fraud as he was guilty of the mistake of failing to do what is right for the company or the mistake of failing to act upon constructively using one’s sources and capabilities to keep Enron alive. OUTSIDE CRIMINAL LIABILITIES- Aside from the analysis of Enron’s managers that led to convictions to criminal acts, a look at the Enron situation without the malice of fraud will also reveal little things that help compound the growing mismanagement of Enron and made the fall a bit faster. The mistakes of the Enron managers can also be stacked together in either of the two categories – financial management failure and poor people management.
For now, the idea that the company may have been sabotaged directly behind fraudulent intentions from the top executives will be put aside in the name of management strategy assessment, and also because of the fact that common sense business dictates that no business entity or individual would risk building a blue chip firm that it will take down so hard so fast. The assessment of the errors is based on the fact that the top executives and managers of Enron did something hugely erroneous and disastrous for the company sans the malice that some economic and business conspiracy theorists are exploring or what the criminal convictions simply proved.
Simply said, Enron top brass made big time mistakes particularly because they are running a big time firm, and the paper will try to look at these big time mistakes and how it affected and contributed to the fall of Enron and their eventual conviction. Poor Financial and Overall Management – Despite the fact that companies are indeed legit, it is difficult to prove that 100 percent of all the legit businesses, may it be in the United States or anywhere in the world, operates using strategies and methods that are 100 percent legal. Some of these companies tweak and bend the law here and there, and the reason why some of them are not caught is because they are prudent and good enough that no fall-out in the magnitude of crisis level would result from such law-bending actions.
Having established that, Enron and its managers are plainly not good enough to sustain the good financial position of the company and they were not able to balance out with good management maneuver and strategy whatever downside and ill-effect the results of their ‘criminal acts’ has on the company’s performance even before it hit crisis-level. It was just a case of poor financial management. Considering that Enron did not have any fraudulent intentions, the management of the company is still guilty of hiring incompetent individuals which they used to fill in key positions since none of them were capable of salvaging what was left of the fast sinking company. “Financial fraud is often a team sport. It took a host of banks, lawyers and accountants to hide Enron’s problems from investors” (The New York Times, 2007). They are guilty of maneuvering poorly Enron inside the trade and stock exchange landscape with or without the illegal and criminal transactions that they did.
They are guilty of sticking to a team of financial executives and their strategies and capabilities even when it appears that these personnel and their strategies are taking Enron nowhere but down, that is with consideration to the fact that again, they did not have any fraudulent intentions in the first place. The fact that Enron was poorly managed is hardly challenged as the proofs are just overwhelming and the tale of the stock price of Enron says it all – before the crisis, Enron shares stood at 90 US dollars; by November 21, 2001 the stock price of Enron is down to just seven US dollars. A week later the price was down to 0. 61 US dollars as the trading day closed along with the withdrawal of Dynegy Incorporated from previous deals with Enron and the awarding of the junk status rating to the company.
Adding to these are other happenings that bolstered the claims that Enron was poorly managed before and during the crisis; the debt repayment obligations that amounted to 9 billion US dollars at the close of the year 2002, an amount which cannot be covered by the company’s available cash at that time, the decimation of five billion US dollars in just fifty days of the amount that Enron borrowed from financial firms and banks which was originally planned for use in buying its commercial paper and other strategies to resuscitate the company’s financial standing. Even the pattern of its financial behavior is reeking of the foul odor of poor management – the big third quarter loss followed by the company’s announcement that it has actually overstated Enron’s earnings in the last four years, and then followed by the making public of Enron’s $3 billion obligations to its several partnerships.
Questionable Business Strategies – The Enron debacle highlighted not just Enron managers’ poor financial and business acumen; it also showcased the poor people management skills of the managers of Enron reflected by its strategies and its inability to protect the company and its investors from long term and short term losses which they may have failed to predict or foresee in the first place. The only thing it appears they do best is confuse the company, confuse the public and in the end confuse even themselves that even when they wanted to, they cannot explain to the public, particularly to the SEC and to the investors, what is really going on inside Enron.
Public Assurance – Credited to the faults of the Enron managers is the fact that the company’s managers were unable to convince the investors in the time of crisis that everything is being done to create or maintain stability. The investors were not waiting to be told that everything at Enron is ok, since they would not believe it if it was said in the first place owing to the fact that the company is not transparent enough to even convince the investors and the public in general that they are even telling the truth. The managers were not able to control the mounting unrest and it was the case because of their refusal to divulge important information that can convince the people about the state of the company.
And this attitude is not impossible to think that many of the Enron managers were all in denial on what Enron, their milking cow, their cash cow, has become, ‘Mr. Fastow was reluctant to acknowledge what was happening'(Barboza, Schwartz). Deterioration of Credibility – Another important and noteworthy fault that the Enron managers, particularly Kenneth Lay, committed is that they allow their credibility to deteriorate in front of the public and in the face of the investors. How did they, particularly Lay, do that? Through a lot if different ways that merely exacerbated the situation and compounded the growing negativity of the people towards him owed to his being overly shady and secretive of the many aspects of Enron’s operation and financial status.
With the breaking of the credibility of the top management tier of Enron comes the decreasing level of respect the people has for Enron managers, not just because of the result of the impending loss and the financial impact it has on investors some of which has there whole future in it, but because Enron managers themselves are creating inter-personal friction between them and those who are pushing for answers to unresolved questions. This attitude is reflective of how Enron’s top management people like Skilling treated investors who are merely calling for transparency by asking balance sheets and detailed earnings and was instead treated with expletive words over a conference call.
Breaking of Ranks – During Enron’s financial battles, one of the aspects that greatly crippled them as an organization is the massive breaking and falling apart of their own ranks. In any battles – corporate or not – it is important that managers and top tier executives show a united front, especially when it comes to addressing the public and providing the assurance that everything is alright, and that whatever minor problems are being addressed immediately through the unity of the top management brass. In the case of Enron and its managers, it is either top brass people are leaving or they are simply being replaced during the most critical part of the company’s financial battle when senior and long time veterans are expected to hold the reigns and maintain control.