In 2001, Enron Corporation (“Enron”), then the seventh highest-revenue-grossing company in America, crashed into bankruptcy. According to the U.S. Department of Justice, this collapse cost investors billions of dollars, and thousands of workers lost their jobs. 

An initial investigation uncovered an elaborate conspiracy to deceive investors about the state of Enron’s fiscal health. That conspiracy allegedly included overstating the company’s financial situation for over two years in an attempt to ensure that Enron’s short-run stock price remained artificially high. The conspiracy worked to manipulate Enron’s earnings to satisfy Wall Street’s expectations. Top Enron officials were key players in the unlawful scheme. A jury convicted Enron’s CEO, Jeffrey K. Skilling, of conspiracy, securities fraud, making false representations to auditors, and insider trading. Skilling’s co-defendant, Enron’s former CEO Kenneth Lay, was also convicted of conspiracy, securities fraud, and wire fraud charges.

The recent case of FTX Trading Ltd. (“FTX”), one of the largest cryptocurrency exchanges in the world with a valuation of $32 billion, is another example of how fraud, abuse, and mismanagement can cause a company’s collapse. Headquartered in the Bahamas, FTX was founded by Samuel Bankman-Fried and Gary Wang. FTX collapsed in early November 2022 following a report by CoinDesk highlighting potential leverage and solvency concerns involving FTX-affiliated trading firm Alameda Research LLC (“Alameda”). Based on a private document CoinDesk reviewed, they reported that Alameda had $14.6 billion of assets as of June 30. Much of it is the FTT token issued by FTX, another Bankman-Fried company. 

John J. Ray III, new CEO of FTX and former Chairman of Enron Creditors Recovery Corp., a company tasked with recovering creditor funds from Enron, stated the following in his testimony in the House Financial Services Committee hearing: “Nearly all of these situations share common characteristics, ranging from gross mismanagement, excessive leverage, failures of internal controls, failure of external checks as a result of audit firm failures, or insufficient board governance. But never in my career have I seen such an utter failure of corporate controls at every level of an organization, from lack of financial statements to a complete failure of any internal controls or governance whatsoever.” He also said regarding the loss because of this bankruptcy, “We don’t have exact numbers, but we know several billion dollars, you know, in excess of $7 billion”.

Based on the case filed by the U.S. SEC, “From at least May 2019 through November 2022, Samuel Bankman-Fried engaged in a scheme to defraud equity investors in FTX, the crypto asset trading platform of which he was CEO and co-founder, at the same time he was also defrauding the platform’s customers. Bankman-Fried raised more than $1.8 billion from investors, including U.S. investors, who bought an equity stake in FTX believing that FTX has appropriate controls and risk management measures. Unbeknownst to those investors and to FTX’s trading customers, Bankman-Fried was orchestrating a massive, years-long fraud, diverting billions of dollars of the trading platform’s customer funds for his personal benefit and to help grow his crypto empire. Throughout this period, Bankman-Fried portrayed himself as a responsible leader of the crypto community. He touted the importance of regulation and accountability. He told the public, including investors, that FTX was both innovative and responsible. Customers around the world believed his lies, and sent billions of dollars to FTX, believing their assets were secure on the FTX trading platform. But from the start, Bankman-Fried improperly diverted customer assets to his privately held crypto hedge fund, Alameda, and then used those customer funds to make undisclosed venture investments, lavish real estate purchases, and large political donations.” 

What lessons can be learned from these corporate collapses? Fraud, abuse, and mismanagement, as combined, are a sure-fire recipe for business disasters, if not corporate collapses and scandals. 

According to ACFE’s Occupational Fraud 2022: A Report to the Nations, organizations lose 5% of revenue to fraud each year, and corruption is the most common scheme. It also reported that the percentage of cases involving corruption was on the rise from 33% in 2012 to 50%. Fraud damages staff morale and raises questions regarding the competence and integrity of management and damages business reputation. In the cases above, fraud becomes the direct threat to the longevity of these organizations, if not the cause of their collapses.

Robust corporate governance and proactively addressing fraud through a robust Fraud Risk Management Program not only helps organizations protect their value, but also empowers them to take advantage of unidentified opportunities for recovery and growth. 

In partnership with ACFE, Grant Thornton developed the Anti-Fraud Playbook, which provides practical guidance for organizations looking to begin, advance, or benchmark their fraud risk management programs. The playbook is organized into five phases: fraud risk governance, fraud risk assessment, fraud control activities, fraud investigation and corrective action, and fraud risk management monitoring activities. 

All said, a proactive approach to fraud risk management protects your organization and stakeholders from becoming victims to another Enron or FTX collapse.


As published in The Manila Times, dated 15 November 2023