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CH 6] Business 101 6-15

Scotland and Merrill Lynch collapsed along with the insurance companies who sold
policies on the recommendations of the accountancy firms and the bond underwriters.
Merrill Lynch was absorbed by Bank of America.
What is important to understand is that ethical lapses do not suddenly happen;
rather they occur over time and build up to a tragic climax.
Documents obtained by TIME show the energy giant Enron enjoyed much closer
ties with President Clinton’s (D) administration regulators than were generally known.
President Clinton’s energy team drafted in 1995 plans to help facilitate cash flow and
credit for energy producers, it asked for Enron's input—and listened and incorporated
that advice. Clinton Deputy Energy Secretary Bill White wrote. That the staff was
directed to “rework the proposal to take into account the specific comments and
suggestions Enron made.” Clinton officials also made efforts to help Enron get
business overseas. Clinton Energy Secretary Hazel O'Leary included Enron officials
on trade missions to India, China, Pakistan and South Africa. White, returning from a
1994 trip to Mexico, wrote chairman Lay that “much opportunity” existed there for
natural gas, and he sent a copy of Mexico's energy plans. To persuade an Enron senior
vice president to join a mission to Pakistan; White wrote, “I have strong personal
relationships with the existing government.”
Enron showed its gratitude. At Christmas 1995, documents show, it donated an
unknown sum of cash in O'Leary's name to a charity called “I Have a Dream.” And
when Clinton ran for re-election a year later, the company made its largest single
contribution ever—$100,000—to the President's party—the Democrat party.
The issues that resulted in the collapse and bankruptcy of Enron were perpetuated
by the knowledge and direct actions of Lay, Skilling, Fastow, and other Enron In accounting assets are
executives. Lay served as the chairman of Enron and approved of the actions of always reported on the
Skilling and Fastow, although he did not always inquire about details. Skilling books at the value they
constantly focused on meeting Wall Street expectations, advocated the use of mark-to- were purchased less
market accounting (accounting based on market value, which was then inflated) and accumulated
pressured Enron executives to find new ways to hide its debt. Fastow and other depreciation and not the
executives “created off-balance-sheet” vehicles, complex financing structures, and current market value. A
market-to-market value
deals so bewildering that few people could understand them. Enron made a habit of results in a false report.
booking costs of cancelled projects as assets, with the rationale that no official letter
had stated that the project was cancelled. This method was known as “the snowball”. 6
In accounting, costs are expenses which reduce owner’s equity, and will not increase
assets. Thus in the Enron financial structure an expense is recorded both for tax
purposes to reduce tax liability and also as an asset to increase equity.
The Aftermath of Enron
Judgment always comes to those who do not follow the maxim: “Do not lie, cheat,
or steal, and do not tolerate those among you who do.” There are those who think they
are ‘smarter’ than those who tried and failed in the past, and that they, being smarter,
can “get away with it”. But are they ‘smarter’, and do they ‘get away with it’?

Ken Lay: Graduated from the University of Missouri earning a B.S. and PhD in
economics. Though convicted, he never served time. On July 5, while on a week-long
vacation at his Aspen home with his wife Linda and prior to sentencing, Lay got out of
bed in the early morning to go to the bathroom and collapsed, dying of a massive heart
attack.

Jeff Skilling: Graduated from Southern Methodist University and Harvard Business
School. Felony convictions for conspiracy to commit fraud, insider trading, making
false statements to auditors and securities fraud. Skilling stood before Judge Simeon
Lake on October 23, 2006 and heard him pronounce a sentence of 24 years in prison
and a fine of $45 million. On December 13, he reported to a minimum-security prison
in Waseca, Minnesota to begin serving his sentence. On June 21, 2013, Judge Lake
reduced Skilling's sentence. He was released in 2017.

Andy Fastow: Graduated from Tufts University in 1983 with a B.A. and earned an
MBA at Northwestern University. Felony convictions on Conspiracy to commit fraud,
wire fraud, securities fraud, making false statements, insider trading and money
laundering. Fastow was released from prison on December 16, 2011. As a speaker at a

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