Risk & Compliance

Fastow’s Plea Is Not the Final Chapter

Enron's former finance chief is going to jail, but the system that aided and abetted him in his efforts has not reformed.
Tim ReasonJanuary 16, 2004

Indicted on 98 criminal counts, former Enron CFO Andrew Fastow ultimately pleaded guilty to one count of conspiracy to commit wire fraud and one count of conspiracy to commit wire fraud and securities fraud. He will forfeit $29 million in assets (most of which had already been frozen by federal authorities) and face a prison sentence of 10 years.

That Fastow committed fraud, or that he misled regulators, analysts, investors, the press (including CFO magazine), and others is indisputable. Moreover, he profited directly from his schemes — a departure from the classic pattern of high-level financial frauds, which are more typically born of a misguided desire to make the numbers at any cost.

But the blame for the fall of the energy giant; the dissolution of its auditor, Arthur Andersen; or the cascade of corporate misdeeds that were later uncovered cannot fall solely to Fastow. In fact, he bragged openly about many of his maneuvers, even boasting to CFO that bankers pitched his own schemes back to him. Of course, he concealed myriad transactions that crossed the line from too-clever-by-half into outright fraud. But the warning signs were there — and largely ignored by a market that didn’t want the boom to end.

Today the market is no doubt anxious for Fastow’s cell door to close on several years of unfolding scandals and falling share prices. But Fastow didn’t act alone. Banks paid heavy fines for helping Enron structure wildly inappropriate transactions, and Arthur Andersen destroyed itself by signing off on them.

A glance at the unfolding scandal at Parmalat or at the tax shelters targeted by the Bush administration shows that banks and audit firms still consider the exploitation of loopholes to be a sign of innovation, not bad faith. Indeed, the last few weeks have seen at least one bank still stiffly describing an embarrassing transaction as “appropriate,” and shifting blame by pointing to auditor sign-offs.

In addition to being the maximum that prosecutors thought they could get and still gain Fastow’s cooperation, the apparent idea behind the 10-year sentence is that Fastow will serve as an example to others who would be tempted to get too “innovative.” But we’re sure he didn’t think he’d be caught, especially given how brazenly he behaved, and we wonder when he thought he might be doing something wrong. With the aiders and abetters still out there, and the opportunities only temporarily curtailed, the only safeguard is still the conscience of the CFO.