When I first started teaching fraud at the university level about 20 years ago, I had no idea that I was about to be handed a case study like no other. A few months later the now-infamous accounting scandal at Enron hit the headlines, and the once-celebrated
energy firm collapsed in disgrace soon thereafter.
Enron’s name has become synonymous with corporate fraud across the globe, and its downfall still provides valuable lessons for CFEs. On the 20th anniversary of the company’s bankruptcy, the U.S.’s largest at the time, Fraud Magazine looks back
on those events with a cover story by Sherron Watkins, the former vice president at Enron’s mergers and acquisitions group, who courageously blew the whistle on its shady accounting practices. She examines how a company once lauded by business experts
deceived the public and what still needs to be done to avoid future Enrons.
“Illusion,” the word used by Watkins, is an apt description of Enron’s financial statements. As in the classic film, “The Wizard of Oz,” Enron’s former CEO and founder Ken Lay and his replacement Jeffrey Skilling told everyone to ignore the men behind
the curtain. In this case, it was a multibillion-dollar sleight of hand.
Enron executives made full use of the ambiguity of accounting rules to flatter financial numbers and convince board directors to rubber-stamp their assertions and transactions. They were all making money, so what could go wrong? Yet this was about more
than just bending accounting rules. Many on the board and in senior management positions simply shut their eyes to the misdeeds going on in front of them.
Those attitudes can permeate an organization, and Enron’s case illustrates why the right tone at the top is so important. “My boss is doing it — it must be OK” isn’t a good leadership model. The same lessons applied to Arthur Andersen, the prestigious
accounting firm that turned a blind eye to wrongdoing at Enron and ultimately paid the price with its demise. The firm might still be around today had it stuck to its practice of reassessing clients who were “flying too close to the edge of propriety,”
says Watkins.
Paying lip service to a fraud risk management plan, as Enron did, is insufficient. Organizations must live and breathe their codes of ethics and ensure all employees practice what management preaches. ACFE research shows that companies with targeted anti-fraud
measures, such as training and hotlines, catch frauds faster and reduce their losses. My hope is that more organizations, with your help, will invest in their people to help root out fraud and prevent a repeat of the events that took place 20 years
ago.
Bruce Dorris, J.D., CFE, CPA, is president and CEO of the ACFE. Reach him at: President@ACFE.com.