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September 20, 2017

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Ethics, Enron and Arthur Andersen

The United States Supreme Court has just heard the appeal of Jeffrey Skilling, former chief executive officer of energy giant Enron, which collapsed in 2001. He is currently imprisoned for fraud. Skilling and Chairman Ken Lay, now deceased, were central to an exceptionally risk-oriented corporate culture.

At least some of the justices appear to be sympathetic to the argument that jury selection for Skilling's trial was too cursory and the law involved too vague. His sentence may be reduced or even overturned. Coincidentally, Duane Kullberg and Jim Peterson, respectively former chief executive and senior counsel of Arthur Andersen, just completed a visit to Carthage College. Both men retired before the collapse of client Enron, which in turn brought down Arthur Andersen.

Kullberg during his tenure as head of the firm fought to reconcile the ultimately irreconcilable tensions between traditional financial auditing and the rapidly growing, extremely lucrative consulting practice. Finally tensions between these two camps forced a separation, and the consultants formed the new company Accenture. In blunt terms, the promise of large sums of money effectively decimated a previously strong partnership culture.

As Enron collapsed, a federal indictment of Arthur Andersen by the Bush administration for obstruction of justice rendered the company incapable of continuing in business. Even before the firm's conviction at trial, income disappeared. While Andersen's verdict was unanimously overturned by the Supreme Court, the firm had by then been destroyed.

Leadership personality is telling in any organization. Skilling from early days as a McKinsey consultant was notorious for an exceptionally aggressive, grasping style. Business author and former colleague Tom Peters described him as apparently able to "out-argue God."

As Skilling wheeled and dealed, Ken Lay played senior statesman. When the Houston Astros baseball team demanded a new stadium, he spearheaded the civic effort to build "Enron Field." The firm agreed to pay US$100 million over thirty years for the visibility. Enron also secured a contract to supply the stadium's energy needs, arbitrarily valuing the estimated income at US$200 million, thus smoothly overbalancing very big new expense with much greater income — but only on paper.

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