Former Enron CFO says rock the board’s boat

Convicted securities fraudster offers advice to corporate governance conference.

August 19, 2015

MONTREAL — Public companies can avoid unethical actions if directors are willing to rock the boat and make decisions as if the companies were family owned, according to one of the main figures convicted in the Enron scandal.

Andrew Fastow, the Enron chief financial officer fired shortly before the energy trading company declared bankruptcy in 2001, told a corporate governance conference on that the only question most boards often ask is if an action is allowed, not if it is morally correct.

Instead, they should carefully question financial assumptions presented by management and ponder if the decision would be in the best interests of a company being left to their grandchildren.

“It’s that simple,” he said in his first presentation to a Canadian audience. “I’m not sure if catches everything but I think it would have caught 99% of the stuff at Enron.”

Fastow spoke from Houston because a 2006 securities fraud conviction prevents him from entering Canada. He was sentenced to six years in prison after pleading guilty to charges related to complex financial schemes that hid losses at the doomed energy company.

The Canadian Society of Corporate Secretaries said it invited Fastow to speak because he embodies everything industry professionals are trying to avoid repeating.

Referring to himself as Enron’s “chief loopholes officer,” the 53-year-old said he took advantage of grey areas in accounting rules to push schemes approved by Enron’s board and advisers that inflated the financial health of the company.

Fastow said far too little attention is still paid to complicated structural transactions that may technically follow the rules but can still result in fraud or be very ill-advised.

“In general I think things have gotten better because there is a greater focus on corporate governance in general…but what if you’re following the rules and still committing fraud,” he said in an interview.

Fastow pointed to US banks which he said are engaged in transactions similar to Enron and to oil and gas companies that he said use regulatory rules that inflate the value of their reserves by 60% despite a large drop in the price of oil.

Fastow also said far too many board directors move in lockstep with management and are unwilling to ask tough questions.

Michel Nadeau, executive manager of the Institute for Governance of Private and Public Organizations, said it’s not easy for directors to challenge management when it repeatedly delivers earnings growth.

He pointed to the case of former SNC-Lavlin CEO Pierre Duhaime who oversaw a doubling of profits before parting ways with the embattled engineering company and ultimately being charged with fraud.

“When you are raising questions to that guy (a star CEO) good luck because all the board members will have a very good respect for him,” Nadeau said in an interview.
He said directors need to be better informed and should have budgets to engage studies that would help them to challenge staff.

© 2015 The Canadian Press

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