In a report that condemns Enron Corp.'s senior managers, directors, accountants and attorneys, a special committee of Enron's board said yesterday that the company had inflated its profits by almost $1 billion in the year before its financial collapse through Byzantine dealings with a group of partnerships.
The 217-page report describes an across-the-board failure of controls and ethics at almost every level of the Houston energy company. It was issued in advance of testimony in Congress by Enron's top executives and during criminal and regulatory investigations into what has emerged as one of the landmark scandals of American business.
As oversight broke down at Enron, the report states, a culture emerged of self-dealing and self-enrichment at the expense of the energy company's shareholders. Accountants and lawyers signed off on flawed and improper decisions every step of the way, the report concluded.
The transactions, which resulted in the collapse of the company, were caused by "a flawed idea, self-enrichment by employees, inadequately designed controls, poor implementation, inattentive oversight, simple (and not so simple) accounting mistakes, and overreaching in a culture that appears to have encouraged pushing the limits," the report states. "Our review indicates many of those consequences could and should have been avoided."
According to the report, Enron entered into a series of transactions with the partnerships - which were controlled by the company's former chief financial officer, Andrew S. Fastow - that served no economic purpose other than to manipulate reported profits. An independent third party would never have entered into such dealings, the committee concluded.
Among those cited in the report for failures were Kenneth L. Lay, Enron's longtime chairman and chief executive, and his protege, Jeffrey K. Skilling, who served as president and then chief executive before resigning abruptly in August.
In essence, both men were condemned for setting up a system in which Fastow would work as chief financial officer of Enron and as general partner of the partnerships - putting him on both sides of each transaction - without ensuring that there was appropriate oversight.
Indeed, according to the report, Skilling was warned in March 2000 by Enron's treasurer, Jeffrey McMahon, that there was reason for strong concern about the Fastow partnerships. "It appears Skilling did not take action" after that discussion, the report states.
Moreover, it says, the committee obtained information showing that Skilling actively participated in efforts to disguise Enron's true performance and hid those efforts from the board.
"Although Skilling denies it, if the account of other Enron employees is accurate, Skilling both approved a transaction that was designed to conceal substantial losses in Enron's merchant investments, and withheld from the board important information about that transaction," the report states.
But the strongest criticism in the report is reserved for Fastow, who is described as having ultimately deceived the company and its directors as part of an effort to enrich himself personally.
In meetings with the board, what Fastow "presented as an arrangement intended to benefit Enron became, over time, a means of both enriching himself personally and facilitating manipulation of Enron's financial statements," states the report, which was filed with the federal Bankruptcy Court in New York that is overseeing Enron's bankruptcy case and posted to the court's Web site about 6 p.m. yesterday. "Both of these were inconsistent with Fastow's fiduciary responsibilities and anything the board authorized."
The committee, headed by William C. Powers Jr., dean of the University of Texas law school, was appointed in the wake of Enron's disclosure of its dealing with the partnerships. The committee's other members are Raymond S. Troubh and Herbert S. Winokur Jr.
In October, the company took a charge against earnings of $544 million after its auditing firm, Arthur Andersen, concluded that some of the partnership results should have been consolidated with the company's. That decision also contributed to the reduction of $1.2 billion in shareholder's equity, a measure of the value of the company.
In the aftermath of those disclosures, Enron's finances fell as confidence in the company and its reporting rapidly dwindled among banks, investors and traders. Ultimately, the company collapsed, filing for Chapter 11 bankruptcy protection in December.
W. Neil Eggleston, a lawyer who is representing Enron's outside directors, said that the report showed "that critical information was withheld from the board."
"The board and its committees were repeatedly assured that the controls that the board had ordered were adequate and being followed, but the board was misled," he added.
Eggleston said the board had agreed to permit Enron to enter into these transactions only on the condition that certain "stringent controls were followed." According to the report, several Enron executives used the partnerships for personal gain, at the expense of the corporation.
"Enron employees involved in the partnerships were enriched, in the aggregate, by tens of millions of dollars they should never have received," the report states. Fastow received at least $30 million from his partnership transactions, according to report. Another executive who worked with him, Michael J. Kopper, received at least $10 million. Two others received at least $1 million each, and two more obtained what the committee said appeared to amount to hundreds of thousands of dollars.