enron Archives - Compliance Culture

Whistleblowers in major US corporate organizations

This is the third of a three-part series profiling whistleblowers in different industries. The first of these posts was on October 24 and focused on the financial services industry, including Julius Baer and PricewaterhouseCoopers. Last Tuesday’s post covered whistleblowers in the pharmaceutical industry, with stories of exposing corporate fraud in the manufacturing and marketing processes at companies like Eli Lilly and GlaxoSmithKline.

Today’s post, the final in this set, will look at whistleblowers from prominent historic cases of business fraud or miconduct in major US corporate organizations. The actions of these individuals in speaking up to expose unethical or illegal business practices led to major media attention, legislative and regulatory scrutiny, legal actions, and deep review of corporate cultures of the organizations. In some of these cases, deep societal debate about or change of previously accepted practices and standards was kicked off by the information exposed by whistleblowers.

Sherron Watkins, Enron Corporation: One of the most famous whistleblowers in modern business history, Sherron Watkins was Vice President of Corporate Development at Enron Corporation, the disgraced energy company which is often referred to as one of the biggest corporate scandals in modern history. In August 2001, Watkins reported suspicious accounting practices she observed in the company’s financial statements to Enron’s CEO, Kenneth Lay, who famously did not take action on the memo Watkins wrote on the issue. Enron, of course, filed for bankruptcy in December 2001, after the public disclosure of the fraudulent accounting practices that led to gross overstatement of the company’s financial condition. Watkins has spent the years since the Enron scandal writing and speaking about the problems within the corporate culture of the organization that allowed the fraud to occur and continue. For information on how Watkins sees her role in the Enron scandal more than fifteen years on, check out this Texas Monthly article from 2016.
Cynthia Cooper, WorldCom: Cynthia Cooper was the Vice President of Internal Audit at WorldCom, which at one time was one of the largest telecommunications companies in the US. Amid declining profits in the telecommunications industry and a thwarted merger with Sprint, starting in 2000 the company used fraudulent accounting practices to maintain the price of WorldCom stock in a decreasing market. In 2002, Cooper led a team of internal auditors which investigated and exposed this $3.8 billion accounting fraud. Cooper never intended for her internal audit memo to be publicized, and did not want public attention from it, as her feelings about exposing this fraud at a company where she had loved working were complicated. However, investigations by the Department of Justice and the Securities and Exchange Commission followed, which by the end of 2003 determined that the company’s assets had been inflated by an estimated $11 billion due to the fraudulent accounting. Have a look at this Q&A with Cooper from 2008.
Courtland Kelley, General Motors: For 30 years, Courtland Kelley worked at General Motors, ultimately as the national head of GM’s vehicle inspection program. For years, Kelley warned GM about design flaws in its cars and trucks that had gone unaddressed. To Kelley, the company seemed more interested in avoiding costly recalls and saving face in public than in making a relatively simple safety fix to the ignition switch system. In 2003, he sued GM under Michigan state whistleblower laws, hoping to expose this company inaction that led to manufacturing unsafe vehicles that were involved in crashes, some resulting in deaths. Kelley’s case was dismissed on procedural grounds, and in the aftermath, Kelley found that he was silenced and marginalized by GM in retaliation for speaking up. The company waited almost ten years before issuing a recall in February 2014. For an in-depth look at what happened at General Motors and to Kelley after he blew the whistle, read this Bloomberg Businessweek piece.
Mark Whitacre, Archer Daniels Midland: Mark Whitacre was president of the Bioproducts division at Archer Daniels Midland, a food and commodities trading corporation specializing in processing of grain and oilseed crops. For three years from 1992-1995, Whitacre was an FBI informant aiding in the agency’s investigation of ADM for price fixing (conspiracy arrangement between buyers or sellers to buy or sell a product at a fixed price only, irrespective of market conditions). The price fixing at ADM involved lysine, a chemical additive to animal feed. ADM was part of a cartel with four other companies that inflated prices on lysine because of their concerted market manipulation. Due to Whitacre’s initial reporting and subsequent acting as an undercover informant, the FBI collected a tremendous trove of information about the cartel’s activities and ultimately fined ADM $100 million, with many more hundreds of millions of dollars going from ADM to harmed plaintiffs and customers. Price fixing, once an overlooked practice in the industry which controlled prices without recourse, became a global investigation and enforcement priority. Whitacre himself was a complicated figure, as it turns out he was exposing one fraud while participating in others. In the course of the investigation, he confessed that he had been involved with arranging corporate kickbacks and money laundering schemes, and later pled guilty to tax evasion and fraud in connection with the embezzlement of $9 million, serving 8.5 years of a 10.5 year sentence. Whitacre’s story was dramatized in the movie The Informant!, which starred Matt Damon. For a profile on Whitacre from the time the movie was released in 2009, check out this CNN story.
Gregory Minor, Richard Hubbard, and Dale Bridenbaugh, General Electric: Gregory Minor, Richard Hubbard, and Dale Bridenbaugh are known as the “GE Three.” They were a group of nuclear engineers at General Electric who turned whistleblowers in 1976 to alert the public of ongoing safety issues at US nuclear power plants. Their disclosures about the dangers of nuclear power received significant media coverage and Congressional attention. Minor, Hubbard, and Bridenbaugh timed their disclosures with resigning in protest from their positions in the GE nuclear reactor division. Nuclear power was at that time in wide use in the US; the GE Three raised huge concerns about insufficient controls within the industry due to vulnerabilities from human error and an engineering process that isolated individuals from the overall decision-making process. Their protest resignations and subsequent testimonies had a huge impact on society’s view of the safety of nuclear power and inspired activist campaigns against nuclear power and in favour of environmental safety and protection. Check out this 1976 report from the New York Times archive for the contemporary reaction to the GE Three.

Whistleblowers have been the impetus behind some of the most explosive and powerful disclosures of corporate fraud and malfeasance in recent history. Companies once admired and viewed as financial stalwarts have been shown to have deeply unethical business practices and a concerning lack of organizational and employee integrity below the surface. In an economy and culture which is increasingly dominated by large corporate interests, trust in and credibility of these major institutions is critical for the public. When this is violated by inaccurate disclosures, dishonest accounting practices, or fraudulent business arrangements, consumer and markets confidence is greatly impaired. Whistleblowers therefore perform an invaluable function in making the often personally difficult and professionally costly decision to stand up for the protection of these values when observing misconduct from within their organizations.

Deep dive on what happened at Enron

Almost 16 years after Enron declared bankruptcy in December 2001, questions about the root causes of the financial fraud and ensuing publicity of the corrupt business practices there persist. Despite the subsequent years where other major bankruptcies and the global financial crisis may have somewhat desensitized the public to these scandals from the greater business world, the many answers to the “why” of Enron’s fraudulent business practices are still fascinating to contemplate.

Enron: The Smartest Guys in the Room: This 2005 documentary, based on the 2003 book of the same name written by Fortune magazine reporters Bethany McLean and Peter Elkind, and directed by noted filmmaker Alex Gibney, is the seminal work on the Enron scandal. The film goes back deep into Enron’s history to unpack why its success of the 1980s and 1990s and its desire for sustained growth and competitive edge in new business areas, drove its fraudulent practices ever deeper into the corporate culture. Great attention is paid to those “smartest guys” – Kenneth Lay, Jeffrey Skilling, Andrew Fastow – and their sometimes philosophical, occasionally political, and always profit-motivated, views of management that contributed to the fraud.

The Crooked E: The Unshredded Truth About Enron: This television movie from 2003 is based on the book Anatomy of Greed by Brian Cruver. Cruver was an ex-Enron employee and detailed his personal experiences there in addition to those of several anonymous colleagues, some very senior members of the organization. The movie shows how the lack of organizational integrity made an impression on Cruver, a good person who found himself doing bad things because of the unethical environment and processes in which he was working. The excesses of the corporate culture are shown in great detail and in contrast to the suffering of shareholders, including many employees who had their retirement funds entirely invested in the company, that followed the company’s collapse in 2001.

Enron Explained: An Insider’s Account: On a similar, but non-dramatized note, this 2006 C-SPAN American Perspectives program provides a deeper look at the workings of the accounting practices and corporate culture at Enron. This time it is from Robert Bradley, who was the Director of Public Policy Analysis at Enron. Bradley provides detail into the technical aspects of the accounting fraud as well as his personal perspective on Kenneth Lay. From Bradley’s point of view, Lay’s actions should be viewed in light of the narrow framework in which he had worked, achieving great success in his years at Enron by focusing on profit-driven business strategies that promoted driving for financial gains and did not emphasize strategic ethical decision-making. While certainly not an excuse for lack of personal accountability, or a legal defense, this is a powerful lesson for how strong organizational contexts and heuristics can impact employee integrity.

Bigger than Enron: The PBS documentary series Frontline took on the Enron story in 2002. This program suggests presciently that the bankruptcy of Enron, which immediately became one of the largest scandals in the history of American business, could actually have the harbinger of the deeper systemic weaknesses. From the current standpoint, of course, this points directly to the subsequent economic and regulatory crisis in the global financial markets that began to unfold in public in 2007-2008. From this perspective, the root causes of that crisis go much deeper than the fiscally unsustainable growth of the sub-prime mortgage market and subsequent securitizations. Instead, epic failures in the oversight system – from management, from government, and from outside business partners such as auditors – exposed investors to huge losses and enabled corporate fraud such as occurred at Enron and other major companies before and, indeed, after its 2001 collapse.

Sherron Watkins at UNC Kenan-Flagler Business School: Sherron Watkins was Vice President of Corporate Development at Enron and is known to history as the author of the August 2001 memo to CEO Kenneth Lay detailing the questionable accounting practices she noticed in the company’s financial reports. Five months later her memo was made public, and she is therefore thought of as the Enron whistleblower. Watkins was criticized in the aftermath of Enron’s bankruptcy for not going public sooner and not immediately escalating her suspicions of the fraud to Enron’s regulators or law enforcement. The speeches Watkins has given in the years since Enron’s bankruptcy, such as this one, focus on how complicated acting as a whistleblower is in reality – not what you would do better than someone else in a hypothetical situation, but what you would or could actually do if it happened to you. This is a challenging ethical dilemma and one that organizations must consider in order to create a reporting system in which whistleblowers are encouraged and protected.

The Enron business case remains one of the most famous examples of modern corporate fraud and corruption. Studying the root causes behind the fraudulent accounting and business practices provides insight for why an effective controls and reporting framework is so important for investor protection and markets integrity.

Enron and the mood in the middle

The Enron scandal is one of the most famous examples of modern corporate fraud and corruption. The publicity of the fraud, subsequent bankruptcy of the firm, trial of principals Kenneth Lay and Jeffrey Skilling, and the cascading negative impact on employees and shareholders form a notorious history of corporate malfeasance and misleading investors.

Enron was an energy company that dominated its market in the 1980s and 1990s. Originally involved in the distribution of electricity and natural gas and creation of the related infrastructure, through a series of mergers and acquisitions and expansions of corporate strategy, Enron extended its business into commodities trading, retail energy, water distribution, and data management. Enron was well-known for its commercial success, immense corporate wealth, and aggressive marketing and promotion strategies. Enron was also a fraud, with many of its purported assets overestimated in value or non-existent, and its immense liabilities and losses hidden in other entities so that its financial statements appeared much more positive than they ever actually were.

More has been written about the pervasively fraudulent practices that led to Enron scandal, and the individuals and motivations behind them, than probably any other corporate bankruptcy in history. Many of the principles of, and the unfortunate justifications for, a robust compliance and ethics program can be illustrated by this case. One of the more interesting points of analysis involves the conduct of employees during the fraud and their reaction to signs they may have noticed but not reported, followed by the eventual widespread discovery of the scandal.

Professional skepticism is undervalued in many corporate cultures. Enron employees were so enchanted by the aspirational allure that the company offered that they too often became blind to risks and unethical behavior, and missed or refused the opportunity to get out or to report the fraud. The focus in discussions over corporate governance and compliance programs often focuses on “tone at the top” (senior management and supervisory boards) or the impact corporate collapses have on shareholders and the public – but a more important question is what about these employees who were there during the fraud, may have noticed signs, did not or could not do anything, and after are left with nothing but a sense of betrayal? The question of how to encourage these employees to mitigate risks or report wrongdoing, even in the face of personal loss or certain reprisals, challenges and inspires compliance professionals to strive for positive change.

This tale of corporate non-governance, as it was, demonstrates that putting compliance and ethics on the back burner in favor of commercial and competitive pursuits can have a far-reaching disastrous impact. The intersection of business and compliance will always be a tense spot, underscored by commercial pressures, cultural differences, and never-ending change. However, a closer, more understanding relationship between the two disciplines is the best path to modelling the employee conduct that is necessary for longevity and sustainability of success.

For compelling anecdotes from a personnel perspective of the Enron scandal, this 2002 article by Charles Fishman is a good read.