Andrew Fastow Advises Construction Industry Update Event Attendees On How To Navigate ‘The Gray Zone’
Have you ever taken advantage of a loophole for personal or professional gain? I mean, exploiting a loophole technically isn’t the same as breaking a rule. Therefore, it must be ok, right?
Not necessarily.
Just ask Andrew Fastow, former chief financial officer of Enron Corporation.
Andrew presented this argument for consideration during GBQ’s second annual Construction Industry Update event sponsored by Heartland Ventures, Hub International, ADP, and Kegler Brown Hill + Ritter.
As a result of his actions while on Enron’s leadership team, Andrew was sentenced to six years of prison for two counts of conspiracy to commit securities and wire fraud. After years of soul-searching and reflection, Andrew is now a principal with Keen Corporation, an artificial intelligence software firm, and he regularly consults with non-executive directors, management companies, hedge funds, and auditors to identify potentially critical finance, accounting, compensation, and cultural issues. Specifically, he addresses business ethics and how the ambiguity and complexity of laws and regulations breed opportunities for problematic decisions.
Andrew explained that, oftentimes, people do not set out on a mission to harm their companies and stakeholders. Rather, their challenges arose from an inability to lead their teams through and to the right decisions. It’s the “Gray Zone,” he said, where leadership is needed most, but where leaders have the least amount of training.
Click Here To Request Access To The Event On Demand
Entering The Gray Zone
Back to loopholes.
When you take advantage of a loophole, Andrew said, you are intentionally ignoring the principles of (or exploiting) the rules for your benefit.
“Every single deal that I did was approved by Enron’s accountant, by the outside auditors, by Enron’s attorney, by Enron’s outside attorneys, and by the board of directors. No information was withheld,” he explained. “How’s it possible to have all those gatekeepers approve all of your deals? More importantly, how is it possible to have all those really smart and ethical people approve all your deals, and yet you’re committing fraud? If I were to sum it up with one word, it’s ‘oversimplification.’
A Culture Of Exploitation
“In business, our brains are trained to find every advantage we can using the rules, not breaking the rules, but exploiting the rules for our benefit. And I’m not going to say there’s anything wrong with that,” he continued. “Except that is the Enron story. That’s how you can explain how all those gatekeepers approved every deal. It wasn’t the culture where we set out to break the rules. It was a culture where all we did was try to find ways to exploit the rule, and we did that to such a great extent that it eventually destroyed the company.”
After Enron went bankrupt, and the charges came down, Andrew said he had full intentions of proving his innocence in court. After all, he thought, he did nothing wrong. Every deal was approved. Information wasn’t withheld. He had the necessary documentation to prove he was acting lawfully. It wasn’t until his lawyer, playing the part of the prosecutor, asked Andrew if he thought the deals were “right,” (not “right” in the sense of being correct, but “right” as in were these deals the “right” thing to do) did he have a change of heart.
When What’s Right Is Wrong
“Make no mistake about it,” said Andrew when considering the deals he had made for Enron over the years. “I was trying to be misleading. That’s what a CFO of a large public company does. You make the company look as good as it can.
“Is there any jury that would have gone back to deliberate and concluded that … ‘He’s a good guy. He followed the rules. Let’s send him home.’ No. They would have come back and simply said, ‘Shame on you. You knew that what you were doing was wrong.’ And they would have sent me away for the rest of my life.
“That’s why I say I’m the person most responsible for Enron’s failure because I should have been the one asking that [reasonable] question and instead I was the person finding every loophole,” he continued.
Learn More About GBQ’s Construction Industry Services
Pause For The Gut Check
The gut check, or being able to ask yourself and others reasonable questions about the ethics of a situation or an action, should take precedence even if the situation or action in question is “legally” right. This area of ambiguity, said Andrew, is called the “Gray Zone.” This is the place where the creative application of complex and ambiguous rules allows us to get a technically correct answer that may also be the wrong solution.
“You have to go into that Gray area, where the rules are complex, ambiguous, sometimes nonsensical. Sometimes the rules don’t even exist yet for what you’re doing. You have to operate there, otherwise, you’re out of a business because the other guys are going to do it,” he said. “We’re trained to believe that, so long as we’re following the rules and so long as we get permission, by definition, our behavior is acceptable, I’m the poster boy that says that’s not the case.”
Even if the attorneys or the accountants sign off on a decision because it’s within the confines of the law, you still have to ask yourself whether the decision is reasonable or reprehensible.
Stay Aware, Stay Alert
Andrew explained that the problem isn’t necessarily with our ethics, but rather with our ability to be more aware of how our decisions (while legally sound), may impact the world around us. We must take the time to pause and consider the spirit in which the rules, laws, commandments … whatever you want to call them, were intended.
We all grapple with questions that fall within the boundaries of Andrew’s “Gray Zone.” At GBQ, ours is a culture of working to do what’s right for our people and our clients while also helping empower growth. If you find yourself facing difficult business decisions and need help weighing all the possibilities to arrive at a desirable outcome, contact your GBQ advisor today. We’re always here to help.
By Ryan Kilpatrick, CPA, CCIFP, director, tax and business advisory services
Looking for more? Check out these additional resources:
Understand The Difference: Tax Basis vs. GAAP Basis
Strategic Tax Planning Tips For Construction Industry Professionals
GAAP Checklist For Construction Companies