Subcommittee on Oversight and Investigations
February 7, 2002
2322 Rayburn House Office Building
Mr. Robert Jaedicke
Enron Board of Directors Chairman of Audit and Compliance Committee
1400 Smith Street
Houston, TX, 77002
Chairman Greenwood, Congressman Deutsch, and Members of the Subcommittee. Good afternoon, and thank you for the opportunity to address the Subcommittee.
I am the Chairman of the Audit Committee of the Board of Directors of Enron Corporation. I have held that position since the mid-1980s.
Let me tell you about my background. I joined the faculty of the Stanford Graduate School of Busness in 1961. I served as Dean of the Business School from 1983 until 1990. At that time, I returned to the faculty of the Business School, and retired in 1992.
Throughout my tenure as Chairman of the Enron Board’s Audit Committee, I have been committed to ensuring that it is an effective and actively functioning body. Over the last few years, we undertook to review and strengthen our already vigorous control systems. In 1999, we began a number of initiatives to ensure that we remained a “best practices” Audit Committee. Throughout 2000 and into 2001, our committee worked with Arthur Andersen to make certain we complied with the recommendations of the Securities and Exchange Commission, the New York Stock Exchange, and the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees. That effort culminated in February 2001, when the Audit Committee finalized a new charter which was approved by the full Board. Throughout that lengthy process, involving both Enron management and Arthur Andersen, we implemented a series of further refinements to our corporate policies and controls.
The lifeblood of the work of any Audit Committee is the development and implementation of adequate controls, many of which cross check each other. And the oversight function of the Committee depends on the full and complete reporting of information to it. Without full and accurate information, an Audit Committee cannot be effective.
I have now read the report of the Special Committee. What comes across to me most clearly is that the controls the Board put in place to monitor these transactions broke down. Enron management, Arthur Andersen, the internal legal department—each had a role in our systems of controls. The Report of the Special Committee sets forth many instances where they did not fulfill their duty to us. We put in place multiple controls involving of numerous parties, because we are aware that one check may not be sufficient. We could not have predicted that all the controls would fail.
The Special Committee concludes that the Audit Committee and the Board failed in their duties to oversee these transactions, and that we were insufficiently vigilant. I do not accept that conclusion. As the Special Committee found:
The Board understood that these were special transactions and we reviewed their economic benefit to Enron. We established numerous controls to ensure that these transactions were properly structured, executed, reviewed, and reported, and the Board reasonably believed that these controls were adequate and would work.
The Board was entitled to rely on these controls, and the successful implementation of these controls turned on management’s and outside consultants’ thorough evaluation and review of these transactions, and fully reporting back to the Board.
As stated in the Report of the Special Committee, internal management and outside advisors did not raise concerns with the Board; regularly assured us that the transactions had been reviewed and that they were lawful and appropriate.
It is now clear that management and the outside consultants failed to disclose critical information about these transactions of which they were clearly aware.
After reading the Report, I would like to add that if even some of the Board’s had controls worked as expected, I believe that we could have addressed these issues and avoided this terrible tragedy.
A. Role of the Audit Committee
There has been much written of late about the role of Audit Committees, and about the performance of the Enron Audit Committee in this matter. I would like to comment about what we are and what we are not. The Audit Committee’s function is one of oversight. Its responsibility is to receive reports from management and the outside auditors, to review the adequacy of internal controls, and to oversee the filing of financial statements. We do not work full time in this job. None of the members of the Audit Committee is an employee of Enron. We do not manage the Company. We do not do the auditing. We are not detectives.
We held regular meetings, at which we received reports from a broad range of management and Arthur Andersen. There is an entire body of accounting literature known to Enron management and known to Arthur Andersen about the duties of those two groups to provide information to the Audit Committee and ultimately to the Board of Directors. We were entitled to rely on the representations made to us about the appropriateness of the accounting for the partnerships, and the adequacy of disclosure. We asked questions. We provided oversight, and set direction based on the information we received. I respectfully submit that we did our job.
Arthur Andersen representatives attended each meeting of the Audit Committee. At each meeting, they made reports to us about issues of interest or concern. Further, it was my invariable practice to hold an executive session with the Arthur Andersen representatives, or at the very minimum offer one, where they could meet with us without management present. Arthur Andersen was free to report to the Committee any matters regarding the corporation and its financial affairs and records that made the auditors uncomfortable, including; (1) whether the auditors had had any significant disagreement with management; (2) whether the auditors had full cooperation of management; (3) whether reasonably effective accounting systems and controls were in place; (4) whether there are any material systems and controls that need strengthening; and (5) whether Arthur Andersen had detected instances where company policies had not been fully complied with. At each of these sessions, Arthur Andersen was given the opportunity to meet privately with the Committee outside the presence of management to discuss any of these matters. It now appears that Arthur Andersen had significant concern about Enron’s financial practices, at least as early as February 2001, but failed to raise those concerns with the Audit Committee at that time.
Over the last several weeks, through disclosures by this Committee, the media, and the Report of the Special Committee of the Board of Directors, I have learned that within the management of Enron and within Arthur Andersen, there was substantial turmoil about the partnerships that are the subject of these hearings. For example, until recently, I was unaware that:
In February 2001, Arthur Andersen officials met and raised concerns about the accounting for the partnerships;
n the summer of 2001, an Enron in-house attorney was sufficiently concerned about the partnerships that he consulted with a separate law firm;
In September or early October 2001, Arthur Andersen retained outside counsel and formed a consultative group regarding these partnerships;
In October 2001, Arthur Andersen reportedly told a member of management of Enron that Enron’s soon to be released earnings statement for the third quarter of 2001 could be fraudulent and could bring SEC enforcement action.
Contrast what Arthur Andersen knew and was doing during at that time with what it was telling the Audit Committee. In a February 12, 2001 Audit Committee meeting, Arthur Andersen reported:
That Arthur Andersen’s financial statement opinion for the 2000 financial statements would be unqualified. The 2000 statements would cover the first full year of existence of the LJM partnerships.
That Arthur Andersen’s opinion on the company’s internal controls would be unqualified.
That the use of structured transactions and mark to market accounting required significant judgment, but Arthur Andersen did not suggest that anything about the judgments being made was inappropriate.
Arthur Andersen specifically reviewed with us the related party transactions, and did not indicate any impropriety with the accounting.
In our October, 2001 Audit Committee meeting, Arthur Andersen told us that there were no material weaknesses in our internal controls.
B. The Report of the Enron Board’s Special Committee
Much of the focus of the hearings this week has been on the Report of the Special Investigative Committee, which was formed by Enron’s Board of Directors to examine Related Party transactions entered into by Enron Corp. The Committee’s investigation was both a thorough and impartial investigation into the transactions in question.
In reading the report, I was deeply disturbed to learn of the marked lack of candor of both company management and our professional advisers concerning these transactions. The lifeblood of an effective Board is the ability to receive full and candid information by its outside advisors and management. It is clear now that substantial and critical information was in many instances concealed from the Board—and in others was affirmatively misrepresented to us—by both company management and its outside advisers. This lack of full disclosure severely undermined the Board’s effectiveness and oversight ability. No Board can properly execute its duties or make informed decisions without it.
I want to highlight two critical pieces of information about these transactions that the Report concluded management did not reveal to the Board. First, the Special Committee determined in its Report that many Enron employees never disclosed to the Board that employees other than Andrew Fastow had acquired interests in, or become parties to, additional Related Party transactions with Enron. This dereliction of duty is a clear violation of the existing Code of Conduct applicable to all Enron employees. Of equal importance, as the Report makes clear, is that other Enron employees apparently knew about—but did not report to the Board—the existence of these undisclosed conflicts of interest. Neither the conduct of the employees who acquired these interests, nor the conduct of others who knew of it and failed to tell the Board, is in any way excusable.
It is also apparent that Management’s lack of candor was not limited simply to the non-disclosure of conflicting interests. According to the Report, many Enron employees believed that particular transactions with the LJM entities were unfair to Enron, were an improper effort to manipulate the company’s financials, or were not properly being disclosed in Enron’s proxy statements and financial disclosures. These are serious issues, and the Board was entitled to have them brought to its attention. These officers and employees may have made their objections known to other management, but that does not excuse their failure to bring these problems to or to notify properly the Board so that it could address them. This marked disregard for the Company’s best interests—and for the Board’s directives—is deeply disturbing.
With respect to the various transactions that were the subject of the Special Committee Report, I would like to make a few comments about what the Board did, why we did it, and what we knew at the time. I want to first address the current criticism directed at Enron’s use of widely-accepted and well-established off balance sheet financing or special purpose vehicles to raise money. This practice is permitted by the accounting rules (if structured correctly). Many companies use off- balance sheet financing every day. Enron’s extensive use of off-balance sheet financing was widely known and well-publicized.
Now, let me begin with the earliest Enron transaction at issue, which was in 1997 and involved an entity called Chewco.
The Chewco transaction was part of Enron’s restatement of its financial statements last November, when it was determined by Enron and Arthur Andersen accountants that Chewco was a related party that did not satisfy the accounting rules which permit an entity to remain unconsolidated. When the Board learned last fall that Chewco did not satisfy the SPE rules and Enron’s financial statements had to be restated because of it, we were shocked. I do not recall the Board ever being made aware that Chewco was an affiliated transaction until last fall, and the Special Committee apparently found no evidence of anyone informing the Board of this critical fact.
The Board had relied on senior management and its external advisers, including Arthur Andersen and Vinson & Elkins, to structure and account for the Chewco transaction. The Board had no reason to question the accounting for the Chewco transaction because, as far as the Board knew, Chewco was entirely unaffiliated with Enron, and Enron’s internal and external auditors would ensure that it was properly accounted for.
Yet these internal and external controls failed to bring to the Board’s attention the critical fact that Michael Kopper, an Enron employee, had a interest in Chewco. To the contrary, the representation made to the Board was that Chewco was a completely unaffiliated third party. Those presenting this transaction in 1997 had to know this was untrue, and they had an obligation under Enron’s Code of Conduct to disclose Mr. Kopper’s involvement to the Board. According to the Special Committee Report, they did not. Had they done so, I am confident that we would have taken appropriate steps to avoid what ultimately happened.
With the benefit of hindsight, the Report of the Special Committee concludes that the presence of extensive, Board-initiated controls over the LJM transactions should have signaled that the LJM structures should never have been approved from the outset. I disagree with this conclusion
As noted in the Report, LJM1 and LJM2 were presented to the Board as having significant benefits to Enron. The Office of the Chairman determined that the LJM structure – with Mr. Fastow as the general partner of the LJMs– would not adversely affect the interests of the company. Senior management discussed with the Board the very real and substantial benefits to Enron of such a structure. The Board thought, based upon these presentations, that the LJM partnerships offered real business benefits to Enron that outweighed the potential risks. Even today, the Special Committee recognizes – as did the Board when it approved the LJM structure – that significant and legitimate economic benefits were presented to justify why Mr. Fastow should be permitted to assume the role that we ultimately permitted him to assume. The Special Committee can disagree with the Board’s weighing of the benefits and potential risks of the LJM structure, but it cannot fairly be characterized as a decision that the Board was not entitled to make.
I first want to note that the Board did not waive Enron’s Code of Business Conduct when it approved Mr. Fastow’s participation in LJM. Mr. Fastow was at all times bound by Enron’s Code of Conduct, as well as its Code of Ethics, and Mr. Fastow always owed a fiduciary duty to act in the best interests of Enron Corporation. That Code of Conduct allows a senior officer to participate in a transaction in which he has a conflict of interest with Enron if the Office of the Chairman determines that this would not adversely affect the interests of the Company. Mr. Fastow was allowed to participate in LJM because the Office of the Chairman made such a determination, and the Board ratified it. This action had no affect whatsoever on Mr. Fastow’s obligation to comply with all other requirements of Enron’s Code of Business Conduct and its Code of Ethics as a senior officer and fiduciary of Enron, including the requirement that all LJM transactions be on terms fair to Enron and in its best interests
In addition, the Board was certainly aware of the problems that could result from Mr. Fastow transacting business with Enron as the general partner of LJM. That is why the Board put in place an added layer of strict controls specifically for transactions between Enron and LJM. The controls established for LJM include the following:
Enron and LJM had no obligation to do business with each other.
Enron’s Chief Accounting Officer, Mr. Fastow’s equal in the corporate structure, was to review and approve any transactions.
Enron’s Chief Risk Officer, also Mr. Fastow’s equal in the corporate structure, was to review and approve any transactions.
Jeff Skilling, President and Chief Operating Officer, and Mr. Fastow’s superior, also was to review and approve any transactions.
Arthur Andersen was involved from the beginning in structuring and accounting for these transactions to ensure that they were done properly.
Once a year the Audit Committee reviewed the transactions that had been completed in the prior year.
An LJM Approval Process Checklist was to be filled out to ensure compliance with the Board’s directive for transacting with LJM, including questions regarding alternative sales options, a determination that the transaction was conducted at arms-length, and review of the transaction by Enron’s Office of the Chairman, Chief Accounting Officer and Chief Risk Officer.
Enron employees who reported to Mr. Fastow were not permitted to negotiate with LJM on behalf of Enron.
The Commercial, Legal and Accounting departments of Enron Global Finance were to monitor compliance with the procedures and controls, and were to regularly update the Chief Accounting and Risk Officers.
Mr. Fastow was not relieved of his fiduciary duties to Enron.
The Office of the Chairman or the Board could ask Mr. Fastow to resign from LJM at any time.
Mr. Skilling was to review Mr. Fastow’s economic interest in Enron and LJM.
Enron’s internal and outside counsel were to regularly consult regarding disclosure obligations concerning LJM, and were to review any such disclosures.
These are extraordinary controls. The Audit Committee was repeatedly assured by senior management and by Arthur Andersen that these controls were being followed. The Board was told, and had every reason to believe, that Jeff Skilling, Enron’s President and Chief Operating Officer at the time, Richard Causey, Enron’s Chief Accounting Officer, Richard Buy, Enron’s Chief Risk Officer, and Arthur Andersen, Enron’s auditor, were ensuring that the Board’s policies were followed and that any transactions with LJM were fair to Enron and properly accounted for. The Board relied on Enron’s accounting staff, external auditors and legal counsel to ensure the accuracy of Enron’s disclosures in its proxy and financial statements. Unfortunately, it is now clear that our reliance—while reasonable and expected—was misplaced.
Despite the existence of these controls, the Special Committee has found that numerous critical and troubling facts about LJM1 and LJM2 do not appear to have been brought to the attention of the Board or the Audit Committee, even though LJM was generally discussed at almost every meeting and there was a formal presentation and review once a year to the Audit and Finance Committees. Some of the facts about LJM that the Special Committee found appear to have been concealed from the Board are:
As with Chewco, the Board did not know that Michael Kopper was involved in LJM. According to the Report, the Private Placement Memorandum – which was reviewed by Enron’s in-house lawyers and by Vinson & Elkins – indicates that Michael Kopper would be involved in managing LJM’s day-to-day activities. Both Enron’s in-house lawyers and Vinson & Elkins, Enron’s outside counsel, apparently reviewed this memorandum, but failed to inform the Board of what they learned.
The Board was not informed of and did not approve any other Enron employees – besides Mr. Fastow – working for or having a financial interest in LJM. It turns out that a number of other employees – in violation of the Enron Code of Conduct – did work for or took a financial interest in LJM.
The Board was not told that Enron sold seven assets to LJM1 and LJM2 in the third and fourth quarter of 1999, and then turned around and repurchased five of those seven assets after the financial reporting period closed. I do not believe any of those repurchase transactions were presented to the Board for review.
The Board was not told that Enron agreed to protect LJM from losses on any of its transactions with LJM.
The Board was not told that the requirement that only employees who did not report to Fastow could negotiate with LJM on behalf of Enron was ignored.
In early 2001, the Board was not told that the Raptor transactions were several hundred million dollars undercapitalized, or that management therefore intended to restructure those transactions requiring issuance of some 800 million additional shares of Enron stock.
Finally, the senior management and external advisors of Enron, on whom the Board relied for information, never reported to the Board that any of the LJM transactions were unfair to Enron, involved questionable terms, or violated any accounting rules. Instead, the Board and the Audit Committee were regularly told by those who had no personal stake in LJM that all of the controls were functioning properly, and that all of the transactions being done were properly accounted for, were at arms length and were fair to Enron.
The Report itself makes clear that the controls established by the Board were not adequately executed, and important information was affirmatively concealed from the Board. The Audit Committee reviewed all of the LJM transactions with Enron’s Chief Accounting Officer each year, in the presence of Arthur Andersen, and was assured that all of the transactions were done at arms length and were fair to Enron. The Board and the Audit Committee had no reason not to trust the assurances they received.
Some now contend that we should have spent more time, and asked more questions. I can assure you that the controls and the transactions were given more than just a superficial review. Furthermore, they were reviewed by two committees. Considering the amount and seriousness of information that was concealed from us and misrepresented to us, I am not confident as I sit here today that we would have gotten to the truth with any amount of questioning and discussion. Nobody seems to be saying that they did not have an opportunity to inform us about the problems with Enron’s related party transactions. They had plenty of opportunity to tell us the complete truth, we imposed numerous controls that required them to report to us fully and honestly—but they chose not to do so.
The Report recognizes that a Board of Directors can fulfill its duty to act with due care either “through one of its Committees or through the use of outside Consultants.” The Board was, as the Report notes, repeatedly assured by its outside auditors, Arthur Andersen, that all of the Related Party transactions were on fair terms consistent with those available to Enron from Third Parties. Importantly, this was an audited representation by Arthur Andersen—and was made to the Board even in the face of significant, and undisclosed, internal concerns at Arthur Andersen that the transactions were not in fact on arms’ length terms. During the relevant period I cannot remember Arthur Andersen expressing any concerns to the Board about the fairness or legitimacy of any of the related party transactions. Instead, Arthur Andersen repeatedly assured the Board, and specifically the Audit Committee, that it had reviewed the structuring of the transactions and that it was being proactive with respect to the accounting issues involved. For example, Arthur Andersen made the following assurances to the Board:
In October 1999, when LJM2 was approved, Arthur Andersen assured the Audit Committee that it had spent considerable time during the third quarter reviewing a joint venture Enron was forming to assist in monetizing investments.
In presenting LJM2 to the Finance Committee in October 1999, senior management discussed the fact that Arthur Andersen had reviewed LJM2 and were fine with it.
In May 2000, Arthur Andersen reported to the Audit Committee that Enron’s related party transactions were a high priority area, that Arthur Andersen would be spending additional time specifically on Enron’s structured transactions and hedging vehicles, and that Arthur Andersen gets involved in these structures at the front end to discuss applicable accounting issues.
In December 2000, Arthur Andersen reported to the Audit Committee that there were no significant audit adjustments to be made, no disagreements with management and no significant difficulties encountered during the audit.
Arthur Andersen often mentioned that Enron was utilizing highly complex structured transactions that required significant judgment in the application of the accounting rules. Arthur Andersen assured us that they were working with their experts in Chicago to make sure that Enron properly accounted for those transactions.
All the time that Arthur Andersen and senior management were assuring the Board that the controls were all being followed and the transactions were being done at arms length and were fair to Enron, many of the controls were in fact being completely ignored. Perhaps the most egregious example of this occurred in and around February 2001. According to the Report, sometime in the first quarter of 2001 it became clear to Enron management that the Raptor vehicles were no longer creditworthy. That meant that Enron was in danger of having to take an enormous charge to earnings. Senior management, however, did not come to the Board with this extremely serious problem. At the same time, Arthur Andersen held an internal meeting involving Houston and Chicago management on February 5, 2001, in which they discussed the fact that they had serious concerns about Enron’s accounting. The next week, however, when Arthur Andersen came to meet with the Audit Committee, the Report concludes that they did not mention even a single concern to us. Instead, Arthur Andersen simply reported that their financial statements opinion would be unqualified, there were no significant accounting adjustments, there were no disagreements with management and that their opinion on Enron’s internal controls would be unqualified and no material weaknesses had been identified.
We now know that the Raptors were underwater by hundreds of millions of dollars in early 2001, and nobody brought that to the immediate attention of the Board or the Audit Committee. Instead, senior management entered into a transaction to provide $800 million of Enron stock in an attempt to prop up the failing Raptor structures. The Board was not told about this transaction at the time. I agree with the Report’s conclusions that Arthur Andersen “failed to provide the objective accounting judgment that should have prevented these transactions from going forward.” (Report, p. 24-25).
C. Findings of the Special Committee Report
The Report clearly recognizes that the controls implemented by the Board were “a genuine effort by the Board to satisfy itself that Enron’s interests would be protected.” (Report, p. 156). Importantly, as I have discussed, had the controls been adhered to—in particular the requirements that the terms be fair to Enron and obtained at arms’ length—none of the transactions criticized in the Report would, or should, have occurred. Under no circumstances should it ever have been the case that LJM was guaranteed that it would never lose money. (Report, p. 135) Under no circumstances should a transaction have been approved that offered LJM2 the “internal rates of return on the four Raptors of 193%, 278%, 2500% and a projected 125% .” (Report , p. 128) These returns were “far in excess of the 30% annualized rate of return described in the May 1 2000 Finance Committee”—but none of the Enron employees who knew these facts disclosed them to the Board. (Report, p. 128-29) The Board cannot be faulted for failing to act on information that was withheld from it, nor can it be faulted for failing to respond to information that was affirmatively misrepresented to it. (Report, p. 156-58).
I agree with the Report’s conclusion that “[t]he evidence available to us suggests that Andersen did not fulfill its professional responsibilities in connection with its audits of Enron’s financial statements, or its obligation to bring to the attention of Enron’s Board (or the Audit or Compliance Committee) concerns about Enron’s internal controls over the related-party transactions.” (Report, p. 20) By necessity, Boards of Directors must rely – and the law allows them to rely — on outside advisers who are hired by the Board and owe their duties to the Board. As the Report found, Enron’s Board of Directors “reasonably relied on the professional judgment of Arthur Andersen concerning Enron’s financial statements and the adequacy of internal controls. Andersen failed to meet its responsibility in both respects.” (Report, p. 25) The Report’s additional findings about Andersen’s inexcusable failure to fulfill its professional duties include the following:
“It is particularly surprising that the accountants at Andersen, who should have brought a measure of objectivity and perspective to [the transactions] did not do so…and there is no question that Andersen accountants were in a position to understand all the critical features of the Raptors and offer advice on the appropriate accounting treatment….Indeed, there is abundant evidence that Andersen in fact offered Enron advice at every step, from inception through restructuring and ultimately to terminating the Raptors. Enron followed that advice.” (Report, p. 132) (emphasis added)
“Enron’s outside auditors supposedly examined Enron’s internal controls, but did not identify or bring to the Audit Committee’s attention the inadequacies in their implementation.” (Report, p. 148).
“The Board was entitled to rely on assurances it received that Enron’s internal accountants and Andersen had fully evaluated and approved the accounting treatment of the [Raptor] transaction…The involvement of Enron’s internal accountants, and the reported (and actual) involvement of Andersen, gave the Finance Committee and the Board reason to presume that the transaction was proper. Raptor was an extremely complex transaction, presented to the Committee by advocates who conveyed confidence and assurance that the proposal was in Enron’s best interests. (Report, p. 156-18)
“The Board appears to have reasonably relied upon the professional judgment of Andersen concerning Enron’s financial statements and the adequacy of controls for the related-party transactions.” (Report, p. 25)
These statements establish, as the Report acknowledges, that the Board could and did discharge its obligations to understand and evaluate these transactions “through its Outside Consultants,” Arthur Andersen. That Andersen, in the words of the Report, “failed to meet its responsibilities in both respects” cannot be laid at the feet of the Board.
The Board recognizes that these transactions had catastrophic consequences for Enron—in an environment already made difficult by investments that were otherwise performing poorly in its broadband, retail energy and water businesses. In retrospect, and with the knowledge of the duplicity of its employees and the failures of its advisers, the Board deeply wishes that it had never agreed to these transactions. The Board, however, did not – and could not — have foreseen that significant information about these transactions would be withheld from it.
The Board cannot be faulted for failing to respond to information that was concealed from them, or that was actively misrepresented to them. It is not accurate to suggest that the Board “did not effectively meet its obligation with respect to the LJM transactions” when the record is replete with evidence that—without Board approval—the most senior management of Enron was willing to enrich itself at company expense, to deceive the Board and to disregard its fiduciary obligations of candor to the Company and its shareholders. Indeed, it seems evident—from a review of the Chewco, Raptor and Southhampton transactions—that no amount of process or oversight would or could have prevented the actions of these employees.
Of equal importance, there is absolutely no suggestion that the Board was in any way personally interested in these transactions. The Board acted at all times with a good faith belief that these transactions—though they presented risks—were in the company’s best interests and were being carefully structured and reviewed by internal and external professionals to ensure that they were done properly.
Finally, the Board did consider these transactions carefully, attended to the risks created by Mr. Fastow’s conflict of interests, and was repeatedly assured by company management and by the company’s advisers that these transactions were appropriate and in the Company’s best interests. While others may differ with that business judgment, it is incorrect to imply that the Board’s decision to authorize the transactions was reached carelessly or without considered attention to, and good faith reliance upon, the information made available to us at the time. This is the proper role of a board of directors—but it simply was not adequate to prevent the deliberate and improper actions of certain of the Company’s employees.
What happened at Enron has been described as a systemic failure. As it pertains to the Board, I see it instead as a cautionary reminder of the limits of a director’s role. We served as directors of what was then the seventh largest corporation in America. Our job as directors was necessarily limited by the nature of Enron’s enterprise—which was worldwide in scope, employed more than 20,000 people, and engaged in a vast array of trading and development activities. By force of necessity, we could not know personally all of the employees. As we now know, key employees whom we thought we knew proved to be dishonest or disloyal.
The very magnitude of the enterprise requires directors to confine their control to the broad policy decisions. That we did this is clear from the record. At the meetings of the Board and its committees, in which all of us participated, these questions were considered and decided on the basis of summaries, reports and corporate records. These we were entitled to rely upon. Directors are also, as the Report recognizes, entitled to rely on the honesty and integrity of their subordinates and advisers until something occurs to put them on suspicion that something is wrong.
We did all of this, and more. Sadly, despite all that we tried to do, in the face of all the assurances we received, we had no cause for suspicion until it was too late.