By Dick Carozza, CFE, Editor in Chief, Fraud Magazine
Convicted fraudster Andrew Fastow said he knew he was doing wrong but didn’t think at the time he was breaking any rules as Enron’s CFO. “I was prosecuted for not following specific rules in the financings,” Fastow said during the closing session. “I don’t think that’s the important reason why I’m guilty. I think I’m guilty and most egregiously guilty [by] engaging in transactions that caused a misrepresentation … to appear different to the outside world. …
“I knew that what I was doing was misleading. But I didn’t think it was illegal. I thought that’s how the game was played,” he said. “You have a complex set of rules and the objective is to use the rules to your advantage. And that was the mistake I made.
“I have lots of rationalizations for that: I was helping the company and shareholders. We just had a timing problem — from one quarter to the next we had to do a deal to fix the timing problem, and it would correct itself in the next quarter. It was immaterial — a little $10 million deal, a little $100 million deal there. It wasn’t so significant when you’re a company with $100 billion in revenue. …
“In 2000, I was awarded CFO of the Year,” he said. “My award this year is to be called Fraudster of the Year for ACFE. … I take full responsibility for my actions. I caused immeasurable damage.”
Fastow was one of the accounting masterminds behind a complex web of off-balance-sheet special purpose entities used to conceal years of massive losses at Enron. In 2001, the U.S. Securities and Exchange Commission opened an investigation into his and the company’s conduct.
Enron, once the nation's seventh-largest company, declared bankruptcy in December 2001 after attempting to hide billions in debt and cover up failed ventures. The next year, a federal grand jury indicted Fastow on 78 counts including fraud, money laundering and conspiracy. In January of 2004, he pleaded guilty to two counts of wire and securities fraud. He completed a six-year prison sentence in December 2012.
Fastow said that the things that he and Enron did “are being done today and in many cases are being done in a manner that make me blush.” He said many companies are still placing much of their assets in off-balance sheet, offshore vehicles and in “special purpose entities.”
“So what do you do if the rules are complex, vague, non-existent?” Fastow asked “Well, you do four things from where I was standing. You get management and board approvals, you get legal opinions, you get … outside auditors to make sure it’s okay, and then you make disclosures in your financial statements.
“Here’s what’s not widely reported. We did that in every deal in Enron, and still it’s considered the largest accounting fraud in history. So how can that be? How can it be that you’re getting approvals for deals, attorneys and accountants are telling you it’s okay, the board is approving it, and it’s still fraud?” Fastow said.
“I thought I was being clever; I thought I was being smart by doing these deals. But the filter I used was: Am I following the rules? Am I getting permission? The filter I never used was: Is this the purpose of the rule? Is this the point of the rule? Is this the right thing to do? And that’s where I made my mistake. And it was a very big mistake.”
Fastow said he lives with his mistake every day. “I carry my prison ID card around with me. And I take it out every morning as a ritual to remind me of all the people I’ve harmed,” he said.
(The ACFE doesn’t compensate convicted fraudsters.)