What can we learn from Enron's fall?
In hindsight, this collapse seemed so inevitable
12/10/2001
By JIM MITCHELL / The Dallas Morning News
Business schools will study Enron's rise and accelerated fall as diligently as scholars probed the collapse of Drexel Burnham Lambert and the junk bond market in the 1980s.
In disaster, there is knowledge, albeit sometimes short-lived, on how not to repeat mistakes of the past.
No one can yet say for sure how Enron spun out of control. But I suspect when the forensic studies are completed, the death certificate will read: self-induced.
To be lauded as the biggest anything is to be saddled with a lofty, difficult-to-honor reputation. Marry that intoxication with Enron's "what-have-you-done-for-me-lately" corporate culture, and in hindsight Enron's fall seems so inevitable.
Enron wasn't a household name outside energy circles but within the energy club, its name was as well known as IBM and AT&T are to the rest of the world. Enron was the world's biggest energy trader, and as such, occupied the rarified air that sometimes induces corporate executives and others riding the coattails of boundless success with a false sense of invulnerability. It's this decade's Bonfire of the Vanities.
Last year, Enron was the nation's seventh-largest corporation, ahead of IBM, and behind only Citigroup, General Electric, Ford Motor, General Motors, Wal-Mart, and No. 1 Exxon. Today, Enron's legacy will be as the world's largest bankrupt corporation, a collapse that is unmatched in U.S. business history.
The questions about Enron have to begin with what its board knew and wanted not to know about complex partnerships that inflated the company's financial performance. Questions also swirl over the role of Enron's independent auditor, Arthur Andersen. Did the complexity of the transactions simply elude accounting oversight, or did the $27 million in fees Andersen drew as a consultant to Enron encourage the auditor to ignore accounting red flags? And, of course, did Andersen actively set up any of the Enron practices now under investigation?
Last year, the Securities and Exchange Commission adopted controversial new rules to require greater public disclosure of accountant-client relationships. But in the face of industry opposition and sketchy evidence of audit failures, the SEC declined to erect a solid firewall between a firm's auditing and consulting roles. The SEC also is trying to work out some kinks in its requirements to encourage fair and timely disclosure of "material" financial information.
If indeed accounting conflicts of interest are found to have contributed to the Enron debacle, then another look may be warranted. And, of course, anything that facilitates timely and complete exchanges between companies and investors is welcome. The real solution has to come from within.
Corporations are made up of people who collectively embody a corporate culture. They set boundaries of what is right, wrong, or unduly risky. When boundaries are stretched without accountability, credibility, which is arguably a corporation's most valuable currency, craters. Enron's collapse was particularly swift because its trading partners and potential white knight had lost confidence in Enron. Character counts.
The tragedy is when oversight failures occur, be they the result of innocent mistakes or the result of brutal deception, the entire investment community must ask "could it happen here?" and take steps to make sure it does not. In the past, some corporate governance experts have suggested that corporations create a self-policing office of business practices similar to government's inspector general to deter fraud and integrity violations. Some have advocated that audit firms be subjected to a more rigorous review of their audit performance.
Specific remedies aside, investors must have assurances that financial statements have been reviewed with impartial, trained eyes, and that company directors are looking out for shareholder interests. And it must come from financial statements and public disclosures that are designed to inform and not mislead investors.
Nothing happened to Enron. Enron happened to itself.
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Jim Mitchell is an editorial writer and columnist for The Dallas Morning News. |
