440 Davis Court #1602
San Francisco, CA 94111-2496
415 781 5700
S U M M A R Y
DIARY: February 4, 2002 04:06 PM Monday;
Enron failed due to bad management according to Powers report.
2...Business Controls Avoided by Relying on Style and Image
3...Bad Management Failed to Provide Audit Trail Showing Support for Work
4...Accounting Practices Avoided Accountability with House of Cards
5...Audit Trail for Traceability to Original Sources Failed to Align Work
6...Good Management to Align Discussion with Requirements Ignored
7...Board Requires Independent Analysis and Deliberation
8...Image and Style Held Sway Not Enough Time to Understand Substance
9...Style Image Powerpoint Communication Trumped Accuracy and Alignment
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Enron Powers Reports Shows Bad Management Reduced Productiv y Earing
Traceability Continual Learning History Record Alignment
Audit Trail Communications
Good Management CEOs Fail Because Fail to Execute Which Requires Unde
Organizational Memory ISO Intelligence Audit Trail Alignment Accounta
Too Many People Having Too Many Problems is Price People Pay for Rely
People Pay a Price that is Saved Using SDS to Avoid Meaning Drift fro
Meaning Drift People Pay a Price that is Saved Using SDS to Avoid Mea
Enron Example Need for SDS Intelligence to Maintain Audit Trail
7911 - ..
7912 - Summary/Objective
791301 - Follow up ref SDS 57 0000, ref SDS 55 0000.
791303 - On 020201 Powers report shows failure to use good management practices
791304 - caused Enron to collapse into bankruptcy. ref OF 9 0001 Management
791305 - evolved into a "ponzi" game of buying and selling assets to itself
791306 - that created a false appearance of income, like fools gold," and used
791307 - complex accounting to conceal losses, with the result that management
791308 - failed to create sufficient earnings, as reflected in reports on
791309 - 011109 that Enron was in trouble. ref SDS 51 0001
791317 - ..
791318 - Bumbling created a house of cards, ref OF 9 04Y1, because neither the
791319 - CEO, president, nor anybody else used an audit trail to align the work
791320 - with objecitves, requirements and commitments. Enron policies and
791321 - procedures, along with federal regulations that mandate controls to
791322 - manage a complex organizational structure and conflicts of interest,
791323 - Enron's code of conduct, management and accounting practices were all
791324 - ignored. ref OF 9 04WY As a result, problems reached a critical mass
791325 - that caused productivity, earnings and the stock price to collapse.
791326 - ref OF 9 5P3J
791328 - ..
791329 - [On 020504 case study Enron common story; professional standards
791330 - and practices for communication and requirements on good
791331 - management specified in FAR, ISO, PMBOK, Covey, Drucker, law,
791332 - contract notice provisions, and 2,000 years of literacy for
791333 - alignment with contemporaneous documentation and feedback to work
791334 - intelligently, quickly, and accurately are mostly ignored in
791335 - government, business, health care, every sector. ref SDS 62 NS6F
791337 - ..
791338 - This record illustrates need for intelligence support to enable good
791339 - management, as explained in POIMS. ref OF 4 23H5
791341 - [On 020207 Enron is biggest corporate bankruptcy in history.
791342 - ref SDS 58 UK4I
791344 - [On 020207 CEOs silent on improvements for good management.
791345 - ref SDS 58 UK4I
791347 - ..
791348 - [On 090320 0857 Madoff guilty defrauding investors $50B in Ponzi
791349 - scheme. ref SDS 69 IR4U
791351 - ..
791352 - [On 090709 2020 HP selling computers for $2K that don't work
791353 - with Ponzi bait and switch selling computer for $4K that
791354 - actually works. ref SDS 70 1C4K
791356 - ..
791357 - [On 101011 1656 nobody has time to work intelligently too
791358 - many people having too many problems not enough time to
791359 - perform audit trail "connect the dots" maintaining well
791360 - ordered record, foreclosures fraud, mistakes causing
791361 - economic recovery to stall due to poor management again in
791362 - financial services. ref SDS 72 G057
791364 - ..
791365 - Enron's story mirrors the wider economy imploding under the weight of
791366 - information overload that makes communication the biggest risk in
791367 - enterprise using popular tools and methods approved for use on the
791368 - job, as set out in NWO. ref OF 5 TQ4O
791370 - ..
791371 - Too many people having too many problems using feel good management
791372 - causes productivity, earnings and stock prices to fall, as reported
791373 - 001207. ref SDS 38 V54M
791375 - [On 030826 investigation shows that culture of denial empowers
791376 - people to ignore requirements, regulations and specification for
791377 - good management when popular tools and methods approved for use
791378 - are inadequate. ref SDS 65 8K4G
791380 - ..
791381 - Connecting the dots at Enron shows similar results, when people ignore
791382 - good management that requires intelligence for accountability to align
791383 - daily work with objectives, requirements and commitments, called out
791384 - by ISO criteria reported on 950721, ref SDS 11 1740, and rely instead
791385 - on image and style to get by. ref SDS 38 MZ7G Kissinger says an Alice
791386 - in Wonderland of bumbling afflicts government and business because
791387 - nobody can keep up on the information highway, reviewed on 940609.
791388 - ref SDS 9 4238
791390 - [...disclosure of Enron's accounting practices causes fear about
791391 - integrity of accounting for other firms. ref SDS 57 0001
791393 - ..
791394 - [On 020207 CEOs fail to lead on improving management to correct
791395 - lessons of Enron. ref SDS 58 XW3L
791397 - ..
791398 - Enron's business plan was to buy an asset, such as a pipeline or power
791399 - plant, and add value that creates a new market by developing a
791400 - wholesale or retail business around the asset. Buying and developing
791401 - assets to create new markets requires front-end investment that is
791402 - risky because cash flow either from profits generated by the asset
791403 - being developed, or from other operations, or borrowing on future
791404 - earnings is required to finance asset development and market creation
791405 - until earnings are realized, many years later. Sometimes development
791406 - of assets and/or new markets cannot be created as planned, due to lack
791407 - of managerial and/or technical skill. A going concern with value at
791408 - risk strives to distribute this risk by attracting other investors.
791409 - Enron was unable to attract investors to share the risk, ref OF 9 04Y1
791410 - and ref OF 13 1Y6L and so, created sham transactions with "Special
791411 - Purpose Entities" (SPEs) that gave the appearance of risk management,
791412 - when in fact Enron and its share holders at all times bore the full
791413 - burden. ref OF 10 W95F
791415 - ..
791416 - While Enron's business plan to develop assets and build new markets
791417 - was sound, good management was required to avoid assuming obligations
791418 - that Enron's earnings could not afford, and to develop investments
791419 - into actual earnings, rather than as mere manipulating mechanisms to
791420 - cook the books.
791422 - ..
791423 - The pressure for earnings is recognized in the report citing irregular
791424 - accounting to improperly accelerate revenues that Enron had not
791425 - actually earned. ref OF 10 I26N
791427 - ..
791428 - Enron recognized income from appreciation of stock, which it inflated
791429 - by improper reporting of revenues on JEDI. ref OF 10 1B6K A similar
791430 - issue seems to have occurred with Rythms. ref OF 11 WY3L However,
791431 - Enron sought to conceal losses of income when Enron stock declined.
791432 - ref OF 10 0S9M
Enron Powers Reports Audit Trails Documentation Showing Alignment Co
800401 - ..
800402 - Business Controls Avoided by Relying on Style and Image
800403 - Bad Management Failed to Provide Audit Trail Showing Support for Work
800405 - Section 7 of the Powers report concludes on page 148 that Enron's
800406 - board and management failed. ref OF 13 G47T Lay, as CEO, bore
800407 - ultimate responsiblity, noted on page 170. ref OF 13 MH4F Skilling as
800408 - President and COO reporting to Lay failed to execute responsibilities
800409 - to Lay.
800411 - ..
800412 - "Controls" put in place by the board on LJM2 are set out on page 154,
800413 - ref OF 13 6J4M, but were not implemented by Lay, nor Skilling, and the
800414 - Board did not follow up to get feedback showing an audit trail in the
800415 - actual work to the controls put in place. Lack of execution and lack
800416 - of feedback showing alignment, prevented accountability, which is the
800417 - core of good management. The Powers report further notes on page 156
800418 - that the fact the Board found it necessary to put in place extensive
800419 - supplemental management "controls" was a flag that what was being
800420 - "controlled" was improper and so should not have been approved.
800421 - ref OF 13 3D5G
800423 - [On 020522 ISO 9000 major aerospace company hides failure
800424 - to perform good management requiremenst by "gaming the
800425 - system" with an inadequate audit. ref SDS 63 RJ4K
800427 - ..
800428 - [On 100207 1454 Command Commissioning improves initial
800429 - planning through construction, testing, and maintenance of
800430 - multi-faceted building projects providing independent audit
800431 - to verify alignment with owner's design intent and
800432 - operational needs are accomplished. ref SDS 71 WX7W
800434 - ..
800435 - A year after LJM2 was launched, Enron's legal department was
800436 - assigned on 001006 and 001007 to maintain audit trails and files
800437 - on all transactions. ref OF 13 MF6I
800439 - The Powers report, however, does not cite a single audit trail
800440 - followed in preparing the report. This likely indicates that
800441 - requirements for an "audit trail," like the other controls,
800442 - were not executed, most likely, because maintaining an "audit
800443 - trail" of alignment is extremely difficult and expensive to
800444 - perform using conventional technology, as reported on 020110
800445 - reviewing Microsoft programs. ref SDS 53 S97L Earlier on
800446 - 950426 executive training does not teach support for accurate
800447 - communication, because executives like to work by conversation
800448 - without any records. ref SDS 10 4392
800450 - [On 020217 Enron accounting was in chaos unable to exercise
800451 - controls. ref SDS 61 0001
800453 - ..
800454 - [On 020207 CEOs silent on improvements for good management.
800455 - ref SDS 58 UK4I
800457 - ..
800458 - [On 020217 DOD program manager explains need to support FAR
800459 - requirements for documenting work showing accurate
800460 - communications that save lives, time and money, ref SDS 60
800461 - 1332; when people cannot point to an accurate record they
800462 - point fingers in accusation and blame to avoid
800463 - accountability for mistakes. ref SDS 60 9360 SDS offers a
800464 - direct solution to make management productive. ref SDS 60
800465 - 3105
800467 - ..
800468 - [On 020504 study shows professional standards for
800469 - communication practices and requirements on good management
800470 - specified in FAR, ISO, Health Care, Covey, Drucker, law,
800471 - contract notice provisions, and 2,000 years of literacy for
800472 - alignment with contemporaneous documentation and feedback
800473 - to work intelligently, quickly, and accurately are ignored
800474 - in government, business, health care, every sector.
800475 - ref SDS 62 NS6F
800477 - ..
800478 - [On 041118 Aerospace company reports there are no
800479 - requirements to support accurate communication enabled by
800480 - SDS. ref SDS 67 KU85
800482 - ..
800483 - Who was assigned to track the audit trail on everything else,
800484 - besides LJM2, e.g., Chewco, LJM1, etc.
800486 - ..
800487 - On page 170 Lay had ultimate responsibility, with operational
800488 - authority assigned to Skilling. ref OF 13 MH4F
800490 - ..
800491 - The "controls" seem to have been a cover up of transactions known
800492 - to be improper, since the presentation to the board on 000501
800493 - cited "accounting scrutiny" as a risk for the Raptors initiative,
800494 - shown in Powers on page 157. ref OF 13 RV6L If the very vehicle
800495 - by which the board is charged to hold management accountable to
800496 - share holders is a "risk" to the success of a proposal, then the
800497 - only possible conclusion is that the initiative is inherently
800498 - wrong.
800500 - [On 020522 ISO 9000 large system used to hide failure to
800501 - perform good management requiremenst by gaming the system
800502 - with an inadequate audit. ref SDS 63 RJ4K
800504 - ..
800505 - Powers states on page 165 and continuing on page 166 that no one
800506 - took responsibility for execution of controls, i.e., no one was
800507 - "minding the store." ref OF 13 EM6N The two principle people
800508 - responsible were Lay and Skilling, shown on page 170. ref OF 13
800509 - MH4F
800511 - ..
800512 - Documentation providing feedback that shows alignment with
800513 - objectives, requirements and commitments was ignored, or performed
800514 - incorrectly. Lack of time is cited as one excuse, and the
800515 - conflict of interest where Fastow had a personal stake in
800516 - negotiations, and influence as a senior executive over staff
800517 - enaged in negotiating on opposite sides. An example is
800518 - preparation of deal approval sheets (DASH), which the Powers
800519 - report says on page 170, were ignored, done after-the-fact and
800520 - prepared incorrectly, often without signatures. ref OF 13 HT5I
800522 - [On 020207 Reuters reports evidence that conflicts of
800523 - interest prevented Enron staff from performing their job to
800524 - protect Enron's interests. ref SDS 58 0001
800526 - ..
800527 - [On 020207 CEOs silent on improvements for good management.
800528 - ref SDS 58 UK4I
800530 - ..
800531 - This aligns with the report in Fortune magazine that the main
800532 - cause of CEOs failing is refusal to execute good management
800533 - practice, due to bordom and laziness, reviewed on 990625.
800534 - ref SDS 21 7344
800536 - ..
800537 - On 911116 discovered that Tudor failed to approve the design
800538 - submittals for Broadwater Dam, leaving the entire plant
800539 - without engineering support, which later led to failure.
800540 - ref SDS 3 0001
800542 - ..
800543 - Documentation, controls and audit trail are generally not
800544 - "welcome at the party," reported on 980405, ref SDS 19 5065,
800545 - like accountants who are reviled as "bean counters" because
800546 - people hate accountability, reported on 920207. ref SDS 5 1194
800547 - However, this reflects ignorance from inexperience with SDS
800548 - that changes the model of "documentation" for accountability
800549 - from reporting mistakes and failures, into intelligence for
800550 - proactive management that avoids mistakes and discovers
800551 - otherwise missed opportunity that enable success, per POIMS.
800552 - ref OF 4 KE1T See as well explanation on 980405 about
800553 - difference between accountability being blamed for mistakes
800554 - and getting credit for success. ref SDS 19 3307
800556 - [On 020213 report Aerospace company able but unwilling to use good
800557 - management by maintaining an audit trail. ref SDS 59 E24M
800559 - ..
800560 - [On 020522 ISO 9000 large system used to hide failure to
800561 - perform good management requiremenst by gaming the system
800562 - with an inadequate audit. ref SDS 63 RJ4K
Default Null Subject Account for Blank Record
810401 - ..
810402 - Accounting Practices Avoided Accountability with House of Cards
810403 - Audit Trail for Traceability to Original Sources Failed to Align Work
810405 - Enron "gamed" and ignored the core system of accounting that requires
810406 - an audit trail to align daily work with requirements and commitments,
810407 - that aid personal memory and strengthen judgements by limiting the
810408 - power to put other people's money at risk. Bad management ignoring
810409 - accepted accounting practices gave Enron opportunities to develop
810410 - assets which it could not afford, and so "bet the store" that its
810411 - management would be good enough to develop assets and build markets
810412 - that generate revenue faster than debt accumulated to pay for the
810413 - opportunity of trying. It, also, seems to have bet that it could
810414 - "manage assets" by playing the stock market to generate sufficient
810415 - revenue independent of developing any assets and marketing actual
810416 - products and services, called out in its marketing plan. ref SDS 0
810417 - 7Q8H
810419 - [On 030108 Morris describes how engineers "game" the system to
810420 - avoid accountability for failing to perform action items.
810421 - ref SDS 64 9G7G
810423 - ..
810424 - [On 050728 GE has policies similar to Enron ignoring standards
810425 - for good management due to fear of accountability. ref SDS 68
810426 - AO66
810428 - ..
810429 - [On 100207 1454 Command Commissioning improves initial planning
810430 - through construction, testing, and maintenance of multi-faceted
810431 - building projects providing independent audit to verify alignment
810432 - with owner's design intent and operational needs are
810433 - accomplished. ref SDS 71 WX7W
810435 - ..
810436 - Enron's reliance on bad management collapsed the firm into bankruptcy.
810438 - ..
810439 - Arthur Anderson was Enron's management consultant and accountant for
810440 - auditing compliance.
810442 - ..
810443 - On 951031 a representative reported that Arthur Anderson uses good
810444 - management practices of traceability to original sources. ref SDS 13
810445 - LQ9J There is no evidence in the Powers report that this was done at
810446 - Enron.
810448 - ..
810449 - For example, footnote 57 on page 120 of the Powers report says
810450 - Anderson's local audit team prepared a memorandum on 001228
810451 - stating two partners in Andersen's Chicago office were consulted
810452 - and Anderson determined that the 45-day cross-guarantee among the
810453 - Raptors (Special Purpose Entities - SPEs - Enron set up
810454 - ostensibly to hedge risks, but actually to conceal losses, since
810455 - Enron bore the majority of burden) to avoid a credit reserve loss
810456 - was permissible. There is an amended version of the December 28,
810457 - 2000 memorandum, dated October 12, 2001, nearly a year later,
810458 - stating that the partners in the Chicago office advised that the
810459 - 45-day cross-guarantee was not permissible accounting to avoid a
810460 - credit reserve loss. ref OF 12 HX8M
810462 - ..
810463 - Where is Anderson's "audit trail" to the original source of
810464 - the partner's instruction on 001228 supporting the amended
810465 - version issued on 011012, in accordance with the ISO
810466 - requirements, which Anderson advised on 951030 is inherent in
810467 - its practice of accounting? ref SDS 13 7U4M
810469 - ..
810470 - Padding the record after the fact by Anderson's senior
810471 - management (partners) reflects practices on Broadwater Dam
810472 - where engineers slipped past the owner's approval eliminating
810473 - an independent test engineer, ref SDS 3 9630, which, two (2)
810474 - years later, resulted in approval of a defective plant that
810475 - took ten (10) years to fix.
810477 - ..
810478 - Footnote 70 cites Anderson for failure to report failure to align
810479 - work on LJM2 with controls instituted by the board, and seems to
810480 - note that Anderson's engagement letter for LJM2 includes review
810481 - of compliance with controls. ref OF 13 6J9N
810483 - ..
810484 - Anderson likely lacked a Communication Metrics procedure to
810485 - integrate control requirements into a due diligence checklist
810486 - for reviewing alignment. Without SDS support, explained in
810487 - POIMS, ref OF 4 2300, this kind of proactive risk management
810488 - for "connecting the dots" with deliberative analysis is very
810489 - difficult to perform, and so is beyond reach for most people
810490 - assigned to capture and manage organizational memory. Powers
810491 - does not, in fact, say how control requirements were submitted
810492 - to Anderson; so, perhaps they never got the word. Who was
810493 - responsible for seeing to it that Board instructions are
810494 - carried out? Is it the CEO? What was the follow up? Where
810495 - is the record of performance?
810497 - [On 020522 ISO 9000 large system used to hide failure to
810498 - perform good management requirements by gaming the system
810499 - with an inadequate audit. ref SDS 63 RJ4K
810501 - ..
810502 - Powers cites Anderson for noting requirements to investigate
810503 - controls for Enron, and further cites an engagement letter
810504 - dated 000502 in which an engagement partner wrote that
810505 - Andersen's work would "consist of an examination of
810506 - management's assertion that the system of internal control of
810507 - Enron as of 001231, was adequate to provide reasonable
810508 - assurance as to the reliability of financial statements .... "
810509 - Powers does not make clear if the Controls approved by board
810510 - for launching LJM2 were incorporated into the Enron record, or
810511 - were part of LJM2 which was intended to be a separate entity.
810513 - ..
810514 - Where is Enron's audit trail from the Board's instruction in
810515 - October 1999 to implementation in 2000 and 2001?
Default Null Subject Account for Blank Record
820401 - ..
820402 - Good Management to Align Discussion with Requirements Ignored
820404 - Bad management is evident in the Powers report relating big decisions
820405 - by Enron management, discussed below, ref SDS 0 KM4F, were not based
820406 - on deliberations to analyse organizational memory; there was no "audit
820407 - trail" to objectives, requirements and commitments, as called out by
820408 - management standards, reported on 950721. ref SDS 11 1740 The report
820409 - shows work was based on cursory understanding and impulse driven by
820410 - discussion, ref OF 10 P942, which is transitory and fungible. Andy
820411 - Grove says in his book, Only the Paranoid Survive, that the mind is
820412 - very forgiving of ambiguity, ref SDS 18 7571, which can only be
820413 - avoided by a copious record of daily work. ref SDS 18 3668
820415 - ..
820416 - Bad management relies on "fools gold" of spontaneous reaction to
820417 - events in constant meetings, calls and email that cause continual
820418 - bumbling, cited by Kissinger, reviewed on 940609, ref SDS 11 4238,
820419 - because people fail to invest time for working intelligently to
820420 - convert information into knowledege of cause and effect, due in
820421 - part to laziness, explained on 010908, ref SDS 43 YF5O, and to
820422 - fear of accountability, reviewed on 980405. ref SDS 17 5065
820424 - ..
820425 - Good management follows accepted standards for accountability by
820426 - investing time to work intelligently, as explained in POIMS,
820427 - ref OF 4 2300, that enables listening to understand and follow up
820428 - so communication is effective to get things get done correctly, on
820429 - time and within budget, as reported on 890809. ref SDS 4 CJ9J For
820430 - example, ISO criteria requires alignment of organizational memory
820431 - using an audit trail of "intelligence" reported on 950721.
820432 - ref SDS 11 1740
820434 - ..
820435 - Covey says a journal aids "understanding" of daily events, reported on
820436 - 921205. ref SDS 6 2229 A journal or diary can contain the audit trail
820437 - that aids human memory, so, like Hansel and Grettel, people don't lost
820438 - in the woods of complexity; yet, no journals or diaries are reported
820439 - by Powers. There is no reference to Enron management policy put in
820440 - place by Skilling for controlling the record. There is no mention in
820441 - Powers of any recommendation by Anderson for an audit trail.
820443 - ..
820444 - Everyone was relying on memory, working moment to moment telling
820445 - people stories, rather than capturing organizational memory in order
820446 - to understand the story.
820448 - ..
820449 - Peter Drucker says analysis is primary responsibility of management,
820450 - reported on 931130, ref SDS 8 7911, yet very little analysis is
820451 - cited by Powers.
820453 - ..
820454 - Enron Powers report says on page 61...
820456 - According to a document McMahon identified as the written buyout
820457 - analysis he provided to Fastow, this would give the investors a
820458 - 152% internal rate of return on their investment and a return on
820459 - capital multiple of 7.99. McMahon said that Fastow received the
820460 - proposal, said he would discuss it with Kopper, and later
820461 - reported back to McMahon that he had negotiated a payment of $10
820462 - million. McMahon also said that Fastow told him that Skilling had
820463 - approved the $10 million payment. McMahon's recollection of
820464 - events is consistent with a handwritten memorandum addressed to
820465 - "Andy" (in what we are told is Kopper's handwriting) that
820466 - analyzes McMahon's written proposal and refers to Enron's
820467 - purchasing Chewco's interest for $10.5 million. McMahon said he
820468 - told Fastow that $10 million would be inappropriate and, if that
820469 - was the agreement, it would be better for Enron to continue with
820470 - the current JEDI structure and not buy out Cheweo's interest.
820471 - ref OF 10 P942
820473 - ..
820474 - Thus, a written buyout analysis was prepared, and discussed with a
820475 - variety of people. There was a representation of approval through
820476 - discussion, with then CEO, or COO, Skilling. Skilling reportedly
820477 - denied having approved the transaction or even being aware it had
820478 - occurred. ref OF 10 HE9O There is no record of Skilling having seen
820479 - the written proposal, nor of alignment in the proposal showing
820480 - traceability to company policy and controlling legal requirements.
820482 - ..
820483 - How could a CEO approve anything that is not in writing, so there is
820484 - a record of what transpired?
820486 - Failure to provide an audit trail that enabled management to work
820487 - intelligently reflects the report on 951026 that industry has been
820488 - unable to implement ISO requirements for traceability to original
820489 - sources. ref SDS 12 3245
820491 - ..
820492 - Organizational memory reported on 010420, ref SDS 47 IE4M,
820493 - does not exist at Enron, as set out in the Powers report.
820495 - ..
820496 - On 010228 suggestion that SDS can strengthen financial management
820497 - that requires traceability to original sources. ref SDS 45 ER5F
820499 - ..
820500 - Skilling has been identified in the media as a "control freak," who
820501 - introduced procedures and practices for managing the company, but
820502 - failed to exercise traceability to original sources, and failed to
820503 - require subordinates to use this core fundamental of good management.
820505 - ..
820506 - For the entire transaction involving hundreds of millions of dollars,
820507 - there is only mention of a single written record of communication.
820508 - Where is the "control" that Skilling implemented? What do his
820509 - procedures call out, where is the record showing implementation, and
820510 - where is the record showing his oversight? Where is the "audit
820511 - trail" that is inherent in any system of "controls"?
820513 - ..
820514 - The Powers report says that....
820516 - There is credible evidence that Fastow authorized the payment [by
820517 - Enron of $2.6 million] to Chewco even though Enron's in-house
820518 - counsel advised him unequivocally that there was no basis in the
820519 - Agreement for the payment, and that Enron had no legal obligation
820520 - to make it. ref OF 10 304P
820522 - ..
820523 - Powers does not provide evidence of advice by counsel to Fastow, and
820524 - of course the report does not present any written explanation from
820525 - Fastow that supports the transaction. Everything seems to be verbal.
820527 - On 991108 verbal transactions are useful for encouraging people to
820528 - say "yes," through exaggeration and entertainment. ref SDS 25 4505
820530 - ..
820531 - Same issue is discussed in Powers report page 65 on tax indemnity
820532 - agreement; lots of discussions, including alleged approval by CEO
820533 - Skilling, but no organizational memory, and nothing linked to policy
820534 - nor to any authority of any kind. ref OF 10 XS4N
820536 - ..
820537 - Same problem of people working based on recollections that later
820538 - conflict because there is no organizational memory occurred on the
820539 - Rythms matter, explained on page 84. ref OF 11 EG7L
820541 - ..
820542 - The desire to work by conversation to maintain deniability seems to
820543 - fall of its own weight. It turns out that regardless of key people
820544 - not keeping a record of discussions, there are so many discussions
820545 - among a wide range of people, that inevitably a few people do keep at
820546 - least fragmentary notes.
820548 - ..
820549 - Memo on buyout agreement on Chewco........ ref OF 10 P942
820550 - Minutes of board meeting for 991011....... ref OF 11 BA4N
820552 - ..
820553 - Skilling claims to have recommended board approval of Fastow's
820554 - proposal to remain CFO of Enron and sole managing partner of LJM2,
820555 - based on adopting "controls" to protect Enron's interests.
820557 - ..
820558 - Powers reports following controls were adopted on 991021....
820560 - ..
820561 - Fastow proposed as a control that all transactions between Enron
820562 - and LJM2 be subject to the approval of both Causey, Enron's Chief
820563 - Accounting Officer, and Buy, Enron's Chief Risk Officer. In
820564 - addition, the Audit and Compliance Committee would annually review
820565 - all transactions completed in the prior year. Based on this
820566 - discussion, the Committee voted to recommend to the Board that the
820567 - Board find that Fastow's participation in LJM2 would not adversely
820568 - affect the best interests of Enron. ref OF 11 5O5O
820570 - ..
820571 - This overlooks that Fastow was superior to both Causey and Buy, and so
820572 - could not possibly perform the proposed supervision of their superior.
Default Null Subject Account for Blank Record
830401 - ..
830402 - Board Requires Independent Analysis and Deliberation
830403 - Image and Style Held Sway Not Enough Time to Understand Substance
830404 - Style Image Powerpoint Communication Trumped Accuracy and Alignment
830406 - Enron's collapse into bankruptcy, per above, ref SDS 0 0001, reflects
830407 - failure to understand and follow up by the Board that gave "rubber
830408 - stamp" approval for complex ventures that placed stockholder interests
830409 - at severe risk without deliberation nor alignment with objectives,
830410 - requirements and commitments. ref OF 9 06GD Style and image
830411 - overwhelmed good management practice to work intelligently. For
830412 - example, Fastow gave, what sounds like, a Powerpoint presentation on
830413 - 990628 for a very complex, high risk transaction involving Rythms and
830414 - LJM1, and the board approved it on the spot. ref OF 11 338O
830416 - [On 020207 CEOs silent on improvements for good management.
830417 - ref SDS 58 UK4I
830419 - ..
830420 - Powers report states on page 158 that Raptor was an extremely complex
830421 - transaction, presented to the Committee by advocates who conveyed
830422 - confidence and assurance that the proposal was in Enron's best
830423 - interests, and that it was in compliance with legal and accounting
830424 - rules. Nevertheless, this was a proposal that deserved closer and
830425 - more critical examination. ref OF 13 3R9M
830427 - ..
830428 - This record aligns with the record on 960103 reporting that
830429 - executives rely on style and image of a presentation, because
830430 - there is not enough time for good management to understand
830431 - content, ref SDS 14 8409, as set out in POIMS. ref OF 4 YZ4I
830433 - ..
830434 - On 010510 Steve Balmer reported that top people at Microsoft sit
830435 - around at meetings, ref SDS 48 656F, working to build technology
830436 - that improves productivity. ref SDS 48 YG5K They expect this will
830437 - take about five (5) years. ref SDS 48 8Y8H
830439 - ..
830440 - One improvement that might be helpful is to give the board
830441 - independent support for deliberative analysis of alignment with
830442 - investor interests, authority and good practice, which do not
830443 - always align with management's interests.
830445 - ..
830446 - In this case, approval for a number of very high risk matters seem
830447 - to have been given impulsively, rather than the board taking the
830448 - matters under advisement for decision within a reasonable time
830449 - commensurate with value and risk.
830451 - ..
830452 - Board members act like a judge in approving proposals, and so need
830453 - support for deliberation to make effective judgements.
830455 - ..
830456 - Merely holding board members accountabile does not overcome the
830457 - zeal to cut corners under the guise of cost savings by ignoring
830458 - good management. Bad management never expects accountability, and
830459 - so good management must be mandated by statute.
830461 - ..
830462 - The fact that board required an "audit trail" for work on various
830463 - transactions, per above, ref SDS 0 ST5G, was inadequate, because
830464 - the pace of daily work prevents creating traceability to original
830465 - sources. This record shows the board needs a mechanism to ensure
830466 - communication is understood and followed up, as explained on
830467 - 890809. ref SDS 2 CJ9J
830469 - ..
830470 - Fastow's role as both CFO of Enron, and managing partner of LJM2 was
830471 - not concealed from investors. Marketing cited this relationship as an
830472 - advantage, reported on page 72, explaining governance of LJM2.
830473 - ref OF 11 KL8H
830475 - ..
830476 - LJM2 investors totaled approximately 50 limited partners and
830477 - included...
830479 - American Home Assurance Co.
830480 - Arkansas Teachers Retirement System
830481 - MacArthur Foundation, and
830482 - Merrill Lynch,
830483 - J.P Morgan,
830484 - Citicorp,
830485 - First Union,
830486 - Deutsche Bank,
830487 - G.E. Capital, and
830488 - Dresdner Kleinwort Benson.
830490 - ...as reported on page 73. ref OF 11 LV4N
830493 - ..
830494 - LJM2 invested $10M during March 1998 in Rythms, which was an Internet
830495 - Service Provider (ISP). ref OF 11 WY3L
830497 - ..
830498 - On 990407 Rythms became a publicly traded stock, and the price was bid
830499 - up from opening at $21 to $69 per share. By May 1999 Enron's original
830500 - $10M investment was valued at $300M based on appreciation of the stock
830501 - price, a substantial gain.
830503 - ..
830504 - Enron was prohibited from selling its stock before the end of $1999,
830505 - in order to establish an actual income gain relative to the original
830506 - investment. Enron, none-the less reported the stock appreciation as
830507 - actual income for 1999. ref OF 11 454O
830509 - ..
830510 - Enron sought to use the "embedded" value of its own equity to
830511 - counteract declines in the value of certain of its merchant
830512 - investments. Enron used the extremely complex Raptor structured
830513 - finance vehicles to avoid reflecting losses in the value of some
830514 - merchant investments in its income statement. Enron did this by
830515 - entering into derivative transactions with the Raptors that functioned
830516 - as "accounting" hedges. If the value of the merchant investment
830517 - declined, the value of the corresponding hedge would increase by an
830518 - equal amount. Consequently, the decline--which was recorded each
830519 - quarter on Enron's income statement--would be offset by an increase of
830520 - income from the hedge. ref OF 12 IG5F
830521 - ..
830522 - As with the Rhythms hedge, the Raptors transactions were not
830523 - true hedges, because Enron bore virtually all of the risk, and so was
830524 - hedging risk with itself. ref OF 12 9V6O
830526 - ..
830527 - On 000501 a presentation to the finance committee of the board
830528 - evidently disclosed that Raptors 1 was not an effective hedge, since
830529 - notes prepared by the Secretary to assist her in preparing the
830530 - minutes, state: "Does not transfer economic risk but transfers P&L
830531 - volatility. " ref OF 12 7V9H
830533 - ..
830534 - This strategy of using Enron's own stock to offset losses runs counter
830535 - to a basic principle of accounting and financial reporting: except
830536 - under limited circumstances, a business may not recognize gains due to
830537 - the increase in the value of its capital stock on its income
830538 - statement. ref OF 12 4Z8L
830539 - ..
830540 - The strategy seems to have failed when Enron's stock price
830541 - dropped, along with the general decline in the market in 2001.
830542 - ref OF 12 KJ9K
830544 - ..
830545 - On 000901 an Enron attorney voiced concern Enron was using Rapters 1
830546 - to "cook the books" to enable Enron to conceal losses on investments.
830547 - ref OF 12 V58A
830549 - ..
830550 - Restructering of Raptors made effective on 010326 to avoid $500M
830551 - charge against Enron earnings is reported by some as have Skilling's
830552 - interest and ulitmate approval of steps taken; yet Skilling denies
830553 - knowledge. ref OF 12 496F As well, CEO Lay, whom Skilling replaced
830554 - seems to have not been aware of this event impacting Enron earings.
830555 - ref OF 12 X84O
830556 - ..
830557 - Accounting error discovered during August 2001 in complex
830558 - financial arrangements required reduction in share holders equity of
830559 - approximately $1B. ref OF 12 N17F
830561 - ..
830562 - LJM2 and Raptors enabled Enron to circumvent accounting conventions.
830563 - ref OF 12 G148