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"You can follow the rules and still commit fraud”

"You can follow the rules and still commit fraud”

Photographer:Fotograaf: Joey Roberts

Guest lecture by former Enron CFO and convicted felon, Andrew Fastow

“I didn’t know I was committing fraud, but I was. I pled guilty because I broke the law, behaved unethically and harmed people. I’m ashamed and want to apologise.” These are the words of Andrew Fastow, former chief financial officer at Enron, the US energy company that went bankrupt in late 2001 after one of the biggest corporate scandals in history. Last Wednesday evening, Fastow spoke at Maastricht University.

The auditorium at the Tongersestraat 53 is packed. A large number of men in suits as well as many students have gathered for the lecture organised by Career Services of the School of Business and Economics in cooperation with RSM, a global network of accountants and tax consultants.

Andrew Fastow, who served almost six years in prison until his release in 2011, appears relaxed and friendly as he looks around the hall. This is clearly not the first time he has shared his story. The day before he spoke at Antwerp, Amsterdam is on the schedule for later in the week, and he has previously spoken at numerous US universities. “I want to try to explain what I was thinking during my years at Enron. Not to justify myself. Let me be clear: I was thinking the wrong way.”

For years, Fastow explains, Enron was the darling of Wall Street, analysts and the financial press. Worth $70 billion at its peak, the energy giant was Fortune’s Most Innovative Company of the Year no fewer than six years running. Fastow himself was named CFO of the Year in 2000 by CFO Magazine. He holds aloft the trophy he received on that occasion. “It’s falling apart, it used to have a star on it.” The audience chuckles. Next he holds up his prison ID card. “I was given the award and the prison sentence for the very same deals. And every single deal was approved by the board of directors, the accountants of Enron, the outside auditors.” How was that possible, he wonders aloud, then answers his own question: “The loopholes. We followed the rules but undermined the principles. Accounting rules, tax laws and so forth – they’re vague, complex and sometimes non-existent. There’s a big grey area that allowed me to use the rules to my advantage. That was my job: finding the loopholes in the law.”

Bosses

He juggled the figures, holding large amounts of debt off the balance sheet and thus out of view of investors. “I never thought about right and wrong. There were no ethics involved in my decision process; there were no morals, just rules. The only question that counted was: do I have permission? Is it allowed? If my bosses said yes – and they did – I just carried on, even if I knew I was misleading people. That’s the essence of how I thought at Enron.” In 2001 the fraud came to light, Enron went bankrupt and thousands of people lost their jobs and their pensions. Fastow ended up behind bars, as did CEO Jeffrey Skilling, who is still serving out his sentence.

Looking around the auditorium, Fastow says, “I’m sure you’re all thinking, here in Europe, we have principles.” Laughter from the audience. “But everyone’s doing it. Accountants, governments, companies – the loophole industry is pervasive.” He rattles off a list of examples, such as a US oil company that valued its oil reserves at $95 per barrel at a time when it was clear the market value was no higher than $50. The profit margin was enormously inflated, yet no rule had been broken; the regulations call only for an average price, and while the price per barrel had dropped to $50 by the year’s close, at the start of the year it was still $120.

Dirty hands

He shows a photo of Apple’s global headquarters, located not in the US but in Ireland. “To avoid paying taxes. Is this a good deal for Apple? Is this fundamentally different from what Enron did?” There is mumbling from the audience. Fastow’s point is that everyone gets their hands dirty. It starts small; with tax returns, for instance. What do you do when your accountant says, how about we put a higher figure here and a slightly smaller amount there – all entirely within the bounds of the law – and that way you’ll get more money back?

In exchange for pleading guilty and testifying against his former colleagues, Fastow was given six years rather than the maximum of ten. It was only in prison that he finally managed to put into words exactly what he had done wrong. “My wife and kids came to visit and my eldest son, who was 15 at the time, was confused and asking all sorts of questions: if you didn’t break the rules, and all the deals were approved, then why are you in jail? I told him a parable. In a year’s time, you’ll be 16 and you’ll be allowed to drive. Say you drive to a friend’s party and you know you’re not supposed to drink. What do you say when that friend offers you a beer? ‘No thanks.’ Come on, one won’t hurt, says the friend. ‘No, no, I’m not allowed to drink.’ But the friend is smart, and offers you a tablet to chew on that has the same effect as a beer. If you take that, you’re not technically breaking any rules. ‘Would you do it?’, I asked my son. ‘Of course not’, he said. And then I told him: I’m in prison because of the beer tablet.”

Whistle-blower

The question comes from the audience: what would it take to put a stop to these kinds of practices? A whistle-blower? Fastow has his doubts. “You’d just organise an internal investigation and it would show that no rules were broken.” Tightening the rules then? “The accountants and banks are so smart, they’ll always find a hole.”

In Fastow’s view, change will have to come from the businesspeople themselves. He has drawn up a list of questions that can help to counter fraud: “If you hear about a deal that’s been done because it’s allowed, be aware and ask yourself, can I defend this decision? When you’re making a decision, ask yourself if you’d make the same decision if it were your own company and you wanted your grandchildren to take it over in the future? I think I wouldn’t have done 98 percent of what I did. Put a tenth man on the board, a kind of devil’s advocate who’s there to ask difficult questions. And think in Twitter terms: if you can’t explain what you want to do in 140 characters, than watch out.”

“Business schools are doing a great job”, he concludes. “In my day you only had to think about the shareholder. Now it’s all about stakeholders, ethical behaviour and much more. Change will happen slowly, over time.”

And Fastow leaves for the drinks, receiving a standing ovation.

 

 

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