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Welcome to The Modern CFO, the latest newsletter from Chief Executive Group, publishers of StrategicCFO360, Chief Executive and Corporate Board Member, brought to you in partnership with BlackLine. We’ll bring you the smartest and most useful ideas and tips from your fellow finance chiefs each week. Drop us a line and let us know what you think. 

Emily DeNitto, editor, The Modern CFO. 

Enron’s Andy Fastow: How CFOs Go Bad 

Editor’s Note: In the annals of CFO misdeeds, it’s hard to top the notoriety of Andrew Fastow, the chief financial officer at Enron during its 2001 collapse. Lauded in the media as a genius, celebrated as CFO of the Year by CFO magazine, Fastow was famous for putting together the cutting-edge asset securitizations, special purpose entities and balance sheet debt instruments that catapulted Enron’s fortunes—and ultimately felled the company. (For more from Fastow, check out the CFO Leadership Conference: East in Boston June 6-8, where he will keynote.) 

Against the backdrop of the FTX meltdown, StrategicCFO360’s Russ Banham reached out to Fastow for a series of three interviews in February and March to see if he agreed with oft-cited similarities between the two corporate failures, how CFOs can get lost in what he calls “gray areas” for the profession and, most importantly, to try and better understand the reasons why he—and other CFOs—end up making the kinds of questionable ethical choices that can spell disaster for an organization, and themselves. “I was motivated not by greed,” says Fastow, “but by ego.” The conversation that follows has been edited for clarity and conciseness. Part II to follow next week. 

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In a presentation you gave four years ago on rules versus principles, you made the argument that someone can follow the rules and still not do the right thing. Do you still feel that way? 

I do. Because accounting rules are complex [and] sometimes ambiguous and nonsensical. There is a tremendous amount of gray area that allows management to exploit the rules and report the numbers they want. There is an entire industry of bankers, lawyers and accountants whose sole function is to help a company manage its financial reporting. It isn’t difficult to find examples of companies that technically follow the rules [that] deliver financial statements that are materially misleading.  

But isn’t it the job of the CFO and the board to ferret out ambiguous statements? 

Yes, but they take too much comfort from an auditor saying the financial statements are a fair representation. Despite PCAOB 203b saying that if you follow the rules, your financial statements should not be considered materially misleading, the Second Circuit Court of Appeals has said that if your financial statements are misleading, you cannot hide behind the rules.  

Sounds like a gray area?  

Yes. I’m not recommending that CFOs avoid the gray area. Rather, when CFOs are inevitably in the gray area, understand that your brains will not assess risk correctly. 

I want to get back to that in a minute. But first I need to ask if you see any similarities between your motivations at Enron and those of Sam Bankman-Fried at FTX and Alameda? 

I don’t know what was in Sam Bankman-Fried’s head. For many people, it’s greed. I was motivated not by greed but by ego. Of course, money affects how the brain works, but I would argue that ego affects the brain even more. You feel you’re accomplishing something. People believe you’re smart, and you begin to accept that adulation.  

They believe you’re smart because you’ve found a way around the rules? 

Yes. There’s a tendency when a company is successful that the people who should be natural skeptics become obsequious. Instead of challenging what you’re doing, they want to be part of the success. They don’t do their jobs.  

Got an example? 

Sure. Look, the banks knew that LJM existed, and they knew what it was doing, and not just because of the disclosures. They were investors in LJM and had details on every deal LJM did with Enron. Instead of challenging the situation, they viewed it that Enron, no matter what, would find a way to get things done and report the right numbers. Listen, I’m not blaming them or anyone else. It was my fault what I did at Enron and no one else’s. There are many examples of good CFOs doing exactly the opposite of what I did. 

That presumes that some CFOs are doing what you did, motivated by ego or greed to find the loopholes. 

What I’m suggesting is that CFOs who manage the financial statements aren’t necessarily thinking that what they’re doing is the wrong thing to do. When they achieve the objective, managing the financial statements to hit the numbers, they receive adulation and compensation. [This] factors into causing the brain to work even harder to find the next creative solution. The adulation feels so good, you crave it and do it again. 

Do you think ego drove Bankman-Fried in his motivations at FTX? 

I don’t know what was going on at FTX, but very few CFOs would even entertain the idea of doing something illegal in exchange for money. In my case, doing these structured finance deals and solving company problems was like taking drugs. It felt so great to be the hero, I wanted to do it again. 

Managing Risk in an Era of Permacrisis
April 18, 2023 | 12:00 pm - 1:00 pm ET | Complimentary Webinar 
Featured Speaker: Ed McGrogan, Retired Senior Vice President and Chief Accounting Officer, Discover Financial Services

CFO Peer Group Meeting
April 27 & 28, 2023 | Dallas, TX

Making Hybrid Work Great
April 27, 2023 | New York, NY | Streaming Online 
Keynote: Stephen Covey, Best-selling Author, Trust & Inspire and The Speed of Trust

The Remote Work Future
May 2, 2023 | 11:00 am - 3:30 pm ET | Live, Online
Featured Speaker: Joe Hart, President and CEO, Dale Carnegie

CFO Leadership Conference East
June 6-8, 2023 | Boston, MA
Keynote: Andy Fastow, Former CFO, Enron Corporation
(Save $100 with code CEG100)

Smart Manufacturing Summit
June 20-21, 2023 | Louisville, KY
Featured Speakers: Nick Pinchuk, CEO, Snap-on
Bill Good, VP of Supply Chain, GE Appliances USA

Leadership Conference
November 2 & 3, 2023 | Nashville, TN | Streaming Online
Featured Speakers: Cindy Baier, Senior Living CEO & Author, Heroes Work Here
Alan Beaulieu, President, Institute for Trend Research (ITR) 
Marshall Goldsmith, CEO Coach & Author, What Got You Here Won’t Get You There
Verne Harnish, Author, Scaling Up and Mastering the Rockefeller Habits
Hermann Simon, Simon-Kucher Founder & Author, Hidden Champions 

Leading Through Stagflation: Ram Charan’s Essential CFO Guide

Beyond Blind Spending: Building Expense Transparency for the Downturn

Remote Yet Aligned: How to Manage Finance Teams in the Post-Pandemic Workplace

It’s Not Just Where You Deploy Capital — It’s How You Do It

How Real-time Visibility and Automation Power the Modern Finance Leader

Measuring Sustainability to Create Value

VISION 2030: Preparing for the Future of Work, the Workforce and Workplaces

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