Conflicts of Interest

After reading the The Rise and Fall of Enron (B), it is remarkable how potential issues were just glossed over when it came senior management officials.  Andrew Fastow (CFO) was the most obvious example of this in his role in the LJM partnerships.  I found it remarkably naive of Jeffrey Skilling (CEO) to just dismiss Fastow’s potential conflicts of interest so simply.  Skilling’s reasoning that ‘Fastow had larger economic stakes in Enron’ and therefore would always work in the best interest of the company seems extraordinarily dumb and short-sighted.  The high-volume of off-sheet balance sheet partnerships used by Enron should have meant that higher internal controls would be in place and maintained.  The fact that Jeff McMahon (Treasurer) was negotiating with his boss (Fastow), who was representing the other side of the table, should put up multiple common-sense red flags up in terms of ethics and conflicts of interest.

The other fascinating takeaway I had was just how interwoven the auditors of Arthur Andersen were with the culture of Enron.  I’m not going to pretend to be any type of auditing or assurance expert, but the fact that Andersen accountants were sometimes essentially performing in-house accountant functions feels like something the Audit and Compliance Committee (a principal committee of the board) should be worried about.  In addition, the fact that there were so many employees brought over from Andersen and that Andersen was reporting issues, but signing off on them anyway should have caught the attention of senior officials of Arthur Andersen.

This entry was posted in Cases (Real World), Class, Ethics and tagged , , , . Bookmark the permalink.

5 Responses to Conflicts of Interest

  1. rhe005 says:

    I couldn’t agree more. When conflicts of interest start to form it can completely undermine the basis of capitalism, competition. I feel like we see similar instances of conflict of interest before many business downfalls, including the recent economic downturn. One example being that Goldman Sachs executive used short positions to profit from the housing downturn while marketing and selling mortgage-backed securities to clients.

  2. jwhite17 says:

    I definitely agree. This relates to a lot of the things we have talked about so far in the class as well. It is obvious that Enron is the classic example of trying to maximize short term gains at the expense of sustainability. The LMJ’s are the classic example of this. There was little oversight because it did not matter how the growth came as long as the company’s stock increased. It is also obvious that Arthur Anderson had the same mentality, as it did not want to lose Enron as a client and was capitalizing on its rise. This did, however, lead the business world to take a closer look at auditing controls, which led to Sarbanes-Oxley, so while the collapse was bad it did help to promote the interests of society in the end.

  3. katiebaum13 says:

    I completely agree as well. AIG is another company in which conflicts of interest played a major role in their down fall. I feel that there was an over reliance on rating agencies and conflict of interest between agencies and their customers played a huge role in their fall. Although this was an external factor and not the main factor, it is still very important because not only did it put AIG in a situation where they could not get out of, it also made it so the public lost trust in these credit agencies.

  4. mmilne23 says:

    I 100% agree. I had to the same feeling when reading the Enron case. I felt as though there were conflicts of interest looking within the company and then looking at Enron’s accounting firm as well. How did these acts go unnoticed? I thought it was interesting that especially for Arthur Andersen they would have wanted Enron to fix its balance sheets. I woud imagine that Enron was a huge client of theirs. They must have known that this business model was going to crash and burn at some point which would mean Andersen would be out of huge sums of money.

  5. eeewald says:

    I also agree. Most organizations have rules preventing conflicts of interest for a reason. They are never healthy for business. The fact that such a large and important company like Enron could just turn a blind eye to such glaring conflicts is utterly stupid in my opinion. When you stand to lose as much as Enron did, why would you leave anything to chance, let alone the financial security of your company? It was just poor corporate governance.

What do you think?

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s