WASHINGTON – Enron Corp.’s internal guidelines for managing financial risk required board members, as
well as senior managers, to evaluate the overall value at risk in the bankrupt company’s overly aggressive derivatives trades, a company manual plainly shows.
Yet at least some key board members apparently were in the dark about many of the energy giant’s
value-inflated commodities deals, which invited the funny bookkeeping that contributed to the company’s collapse last year.
Nearly a decade ago, Houston-based Enron created a new market in energy derivatives, hiring hotshot traders
using sophisticated computer programs to sell price-hedging contracts to electricity producers and end-users. Its sexy new trading operation became a
major revenue engine, and once-dull Enron became a Wall Street darling practically overnight.
As speculator on the deals, however, Enron made a lot of bad trading bets, and hid its losses in off-the-books partnerships, unbeknown to Wall Street
or securities regulators. In 2000 alone, its
derivative-related liabilities soared to more than $10 billion from nearly $2 billion.
It was finally forced to disclose its debt and inflated profits last year, leading to its Dec. 2 record bankruptcy.
Top executives like Jeffrey Skilling and Andrew Fastow, who allegedly cooked up the shell partnerships
(in part to enrich themselves), have taken much of the blame for Enron’s collapse.
But company insiders say it might never have happened had directors on Enron’s audit committee followed the
system of checks and balances outlined in the company’s own risk-management rules, which were published in a manual and widely distributed,
WorldNetDaily has learned.
Enron directors, including former board chairman Kenneth Lay, were supposed to routinely monitor the
trading unit’s combined bets – or total “value at risk” – and figure if the parent company could back them up. If not, they were supposed to recommend
adjustments.
“Are senior management and Board members aware of the risks/rewards inherent in the financial activities?”
Enron’s manual asks as part of a controls checklist, under the heading: “Senior Management Awareness and
Communication.”
WorldNetDaily obtained a copy of the 89-page document, entitled, “An Overview of Petroleum Industry
Commodity-Based Financial Derivatives.”
The checklist also calls for circulation, at all levels of the organization, “management-level reports
which effectively communicate risk.”
Earlier in the manual, under the heading, “Assessing Derivatives Activities,” the company says policies and
guidelines should be “approved by the Board of Directors.”
A few bullet points down on that same page, it adds that directors should be “provided adequate information regarding the company’s activities and
exposures, considering the significance and volatility of the exposures.”
Yet some members of the Enron board’s audit committee “don’t know the details of (the) trading business,
they don’t know about value at risk,” Enron’s chief risk officer Richard Buy is quoted as saying in taped
corporate videos seized and reviewed by federal investigators. The Wall Street Journal first quoted from transcripts of the tapes, recorded in late 1999 or early 2000.
Both Enron and its outside auditor, Arthur Andersen, are under criminal investigation in the still-mushrooming scandal, which cost employees millions of dollars in pension losses. Andersen is
under federal indictment for shredding evidence in the case.
Ironically enough, Enron’s risk-management checklist was adopted from a guide developed by Price Waterhouse
LLP’s Capital Market Group for its clients.
In yet another irony, Enron’s manual quotes recommendations from a study on derivatives practices and principles led by former Federal Reserve Chairman
Paul Volcker. His 1993 report, put out by the so-called Group of 30 he chaired, called for heightened management oversight of such risky financial instruments.
Andersen has enlisted Volcker to head an internal review of the firm to help repair its damaged reputation.
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