Enron board accused by U.S. Senate panel; a Senate subcommittee concludes that Enron's board of directors knowingly gave its blessing to outrageous business practices that led directly to the company's downfall

0 Comments | Insight on the News, August 19, 2002 | by Kelly Patricia O'Meara

With the recent record bankruptcy filing by WorldCom Inc., the Houston-based Enron Corp., formerly the seventh-largest corporation in America, no longer holds the dubious distinction of being the nation's No. 1 corporate failure. That's the good news ... and the bad news.

Most believe these corporate crashes are just the tip of an enormous iceberg that has been struck by the titanic U.S. economy. Often the bankrupt behemoths are referred to in press accounts as having been "felled" by accounting scandals, as if bean counters in suspenders and green eyeshades mistakenly had put a few zeros in the wrong columns. But a quietly released Senate report reviewed by INSIGHT reveals what accountants and auditors long have known--that figures don't lie but liars figure.

Immediately following the December 2001 bankruptcy filing of Enron, the Senate Permanent subcommittee on Investigations chaired by Carl Levin (D-Mich.) conducted an in-depth investigation into the collapse of the highly touted oil and gas company. Over a six-month period the subcommittee issued more than 50 subpoenas, reviewed the contents of more than 350 boxes of related documents and interviewed 13 past and present Enron board members. The subcommittee concluded that the Enron board of directors could not escape its responsibility--that the board had, according to the Business Roundtable, failed in its "paramount duty" to safeguard the interest of the company's shareholders. The subcommittee findings are as follows:

* Fiduciary failure. The Enron board failed to safeguard Enron shareholders and contributed to the collapse of the seventh-largest public company in the United States by allowing it to engage in high-risk accounting, inappropriate conflict-of-interest transactions, extensive undisclosed off-the-books activities and excessive executive compensation. The board witnessed numerous indications of questionable practices by Enron management over several years but chose to ignore them to the detriment of company shareholders, employees and business associates.

* High-risk accounting. The board knowingly allowed the company to engage in high-risk accounting practices.

* Inappropriate conflicts of interest. Despite clear conflicts of interest, the board approved an unprecedented arrangement allowing Enron's chief financial officer (CFO) to establish and operate the LJM private equity funds that transacted business with Enron and profited at Enron's expense. The board exercised inadequate oversight of LJM transaction and compensation controls and failed to protect Enron shareholders from unfair dealing.

* Extensive undisclosed off-the-books activity. The board knowingly allowed the company to conduct billions of dollars in off-the-books activity to make its financial condition appear better than it was. The board also failed to ensure adequate public disclosure of material off-the-books liabilities that contributed to Enron's collapse.

* Excessive compensation. The board approved excessive compensation for company executives, failed to monitor the cumulative cash drain caused by Enron's 2000 annual bonus and performance-unit plans, and failed to monitor or halt abuse by chairman and chief executive officer (CEO) Kenneth Lay of a company-financed, multimillion-dollar, personal credit line.

* Lack of independence. The independence of Enron's board was compromised by financial ties between the company and certain board members. The board also failed to ensure the independence of the company's auditor, allowing the Arthur Andersen accounting firm to provide internal audit and consulting services while serving as Enron's outside auditor.

In a nutshell, the subcommittee found that the Enron board of directors failed to safeguard the company's shareholders, engaged in high-risk accounting, allowed numerous inappropriate conflict-of-interest transactions, was fully aware of and allowed off-the-books activities, and granted excessive compensation.

Based on in-depth interviews with board members and the review of millions of documents, the subcommittee was not persuaded that the downfall of Enron was due to inadvertent accounting mistakes. Rather, the subcommittee's monthslong investigation suggests that the board not only had knowledge of Enron's complicated yet deteriorating financial transactions, but continued to give its blessings up to the point of the corporate implosion.

The subcommittee reported that Enron board members were compensated with cash, restricted stock, phantom stock units and stock options totaling $350,000 a year--more than twice the national average for large publicly traded companies. For this lofty sum, the subcommittee further reports, the board members who were interviewed admitted to spending on average between two and 16 hours preparing for board meetings, which were scheduled five times a year.

Assuming the average time spent preparing for a board meeting was eight hours for each session, and each spent 12 hours in travel and attendance, the total is 20 hours per meeting. Another way to examine the data is that the members of the board spent 100 hours per year on board meetings and were paid $3,500 per hour, or $70,000 per meeting.