A primer for Freepers on three issues of the Enron fraud and investigation

self

[ken5050]

There are two distinct aspects to the Enron mess; the political mudslinging, and the criminal fraud aspects of the case as pertains to the company and its auditors, Arthur Anderson. Oddly, in all the verbiage that has been written to date, very little has been written that begins to explain the TRUE nature of the financial fraud at Enron. More oddly, it is not that difficult to understand. For those who would like some insight, I will attempt to clarify, in lay terms, three points which, I believe, will ultimately be crucial as the investigations commence. So, if you'd like to learn, and understand a few things, read on.....

[SpencerRoane]

I doubt it. Josh was a real yuppie. He doesn't like to associate with bouncers.

[ken5050]

Usually, the directors have E&O coverage to protect them. I don't believe their own assets can be attached unless they are proven to conspire criminally..and stupidity is not a crime, yet.......but that's another reason why AA is going down..., they're the only big assets left...usual practice was when an accounting frim screwed up, it threw on the table the check from it's insurance company, maybe added a pencil or two...it was a gentleman's agreement not to sue the bean counters for more than there coverage, that's why they always settled first, never wetn to trial.....now, it's a whole new ball game....

[freedom4ever]

This is very interesting because the CEO of the company I work for came from Enron before he came to our company just a few years ago. I am not positively sure if he was CEO at Enron or President of a division of Enron, but I suspect the latter. I have wondered what this guy has been up to since he's been with us. He has made a lot of changes with our company, some good, some bad.

What is even more scary is that one year ago, I interviewed for a job at a new Enron gas turbine peaking plant near where I live. I owe it to the interviewer for advising me to stay where I was and not come to work for them, even though I was offered the job.

[GregoryFul]

..at least the taxpayers, via the FDIC or FSLIC, won't get stuck for this one..

Wanna bet?

[Constitutional_Republican]

Thanks for the excellent, crisp analysis.

[cookcounty]

"1) Why would most Enron employees have "their life's savings" all in Enron stock? Were they encouraged to put it all in Enron by the company? I'm not an investor but it seems to me not to be the smart thing to do."

I'm no expert, but you may find this info helpful: Years ago, my company periodically gave employees stock, with the caveat that it could not be sold until we leave the company. That stock has since been rolled into a 401K. It amounts to about 25% of my 401K at this point. It never occured to me that perhaps I CAN roll it over. I'm wondering if something similar was going on with Enron.

[Constitutional_Republican]

Thanks for the excellent, crisp analysis.

[ken5050]

In the 40lk lan, the employees could choose to put there own money in many different options. Enron stock was only one of them. However, the company's contribution was always in Eneron stock, and indeed, the employees were required to leave that in Eneron...as the stock went throught he roof, most of the employees switched all their own directed contributions into eneron....thus,quickly, the effect was that all their net worth was in enron stock....also, Enron grew early in the 90's via several takeovers and aquisitions....as new employees came aboard, they were most likely allowd to roll the assets from their old pension plans into the new one....many "employee friendly" companies permit this, thus..more $$ go into the plan, and most went into enron common..

[hole_n_one]

Thanks for that answer..........

Which leads me to this comment........

It would seem that it would be quite commonplace for the type of fraud you mention to occur, unless of course, the deterent is the subsequent audit that ensures the integrity of the sale/transfer.

.........and a question...........

How does the "auditor" get chosen?

Did Enron know in advance who was to perform the audit?

[ken5050]

Forgot parts 2 & 3..

2. Maybe wishful thnking..whistlign past the graveyard..for about 30 seconds..then they realized the jig was up...

3. I can't be sure if Enron ever was a viable company, therefore the recession didn't affect it....I feel the same about Amazon...it's never made money, never will..Amazoin and Lucent shoudl both go under this year....so, the recession didn't kill Amazon...a lousy business plan did...

[SpencerRoane]

"But, at least formally, legally, the directors are elected by the stockholders to provide oversight. If they didn't, aren't they at least liable for civil, if not criminal penalties?"

There won't be criminal penalties for any individuals without some proof of criminal intent. Unless the directors aided and abetted the fraud, they will be off the hook criminally.

[habs4ever]

They booked the profits, through asset sales, but they didn't generate cash.All the profits did was aid in inflating more assets and levering things up more.I'm not suprised a bank wouldn't inquire too closely at the books of Enron, as they were doing tons of biz and they probably had a hands off, arrogant attitude as well.Same as what befell the Reichmans and Olympia and York back in 1992.

[ken5050]

If the employees were fraudently locked out of their assets, then the plan's insurance policy may help. PBCC coverage doesn't apply to these thype of plans, but if itwas fraud, then I would not be adverse to a "look-back" provision to make them whole, with the govt then stepping infront as prime creditor to recover any assets to offset the settlement..

[ken5050]

Bush's new Army Secretay was a former Enron high-up. have you heard anything about this/him?..It's also very possible that below the top 15 people or so, the other managers didn't know what was going on.....

[A Citizen Reporter]

I'm sure glad bookmarks are back! Thanks for taking the time to do this.

[Buckeroo]

I love these drafts about "insurance clauses." Is this what a government is about? Will the government "bail-out" ENRON with my hard earned money?

[ken5050]

The auditor is hired by the corporation, usually based on two factors..the lowest bid, and if the head audit partner belong to the same CC as the company CEO.....but it's usually price which determines choice....though the spate of mergers among CPA firms..remember the BIG 8??..now the BIG 5..soon to be the BIG 4....has redusced the number of bidders......I recall the old quote from Neil Armstong, when he was asked his thoughts before he took off to be the first man to land on the moon...."I'm sitting atop this huge rocket, consisting of several million parts, EACH one built by the LOWEST bidder......."........ regards.

[hole_n_one]

......and if each sale/transfer requires an audit, there must have been 10-20, 300-400 audits done.

All performed by one firm...........Arthur Anderson?

[ken5050]

Forgot the first part....normal practice would be to try and get sevral bids to determine the fair price....if Enron didn't, then the auditor should do so...remember Billy Sol Estes,and the empty silos of soybean oil,,,a huge fraud..no one looked inside....all the auditors had to do was get out the dipstick....

[zonealarm]

Thank you for this excellent primer.