Conflicts of interest abound in business
01/24/02
Mike Francis
I f you're looking for silver linings in the Enron debacle -- and I don't mean the linings
of certain executives' pockets -- you may find it in the sudden attention being paid to
the conflicted role of Arthur Andersen, the
consulting and accounting firm.
From the sound of things, many
elected officials, regulators and
financial observers are shocked
-- shocked! -- by the fact that
Andersen was extracting huge
fees from Enron for two,
unrelated sets of services.
On the one hand, Andersen
was Enron's accountant,
checking the books, keeping
the records and handling taxes.
At the same time, it was
providing management
consulting services. Andersen's
CEO has acknowledged that Enron represented as much as $100 million
in potential annual fees for Andersen. (Last year, Enron paid Anderson
$52 million for its services.)
Why, such fees mean that Andersen might have had an incentive to avoid
unpleasant conversations with Enron! Conversations between Enron and a
diligent auditor, for example, might have focused on the danger of dubious tax
strategies, the need to disclose the structure of interlocking limited partnerships
and the necessity of more straightforward communications with employees
and other shareholders.
Heavens to Betsy! That would make it hard to stay friendly.
The startling magnitude of Enron's failure, combined with its trail of
misguided or deceitful dealings, is shining a light on a range of practices
that aren't commonly discussed in the media or in Washington.
This is the silver lining. Of course there's an inherent conflict of interest
in the role Andersen played with Enron. But this is hardly the first time it's been seen.
The same conflict exists in many companies large enough to require the service
of professional auditors and business consultants. It's healthy that, at last, this situation
is being questioned.
In business, as in politics, conflicts of interest abound. Consultants use
one professional service as a wedge to sell another. Elected officials take money
from companies' political action funds and executives, then vote on legislation that
affects corporate interests. Analysts make money based on transactions
generated by their opinions.
On Wall Street, for example, stock analysts rarely publish candid,
negative opinions for fear of disturbing the business
relationship between a public company and the investment bank that
employs them. Just count the number of stocks that are listed as "sells"
by the major brokerages. And isn't it troubling to think that the broker
who's advising you to unload or snap up shares is going to benefit from
the commission on your transaction?
Technology firms, especially those in relatively arcane segments such as
computer-aided engineering, pay consultants to evaluate their products.
Then they cite them as experts when the press or their customers come
calling. (I remember one call from a Portland-area chief executive officer
who was responding to my question about whether a consultant's glowing
opinion was influenced by the fee he was paid by the CEO's company.
The CEO sounded impatient. "It's absolutely standard," he insisted.)
From the Enron mess, we are likely to see legislation that erects some
sort of wall between divisions of professional service firms. We are likely
to see some heightened requirements for disclosure of various
professional relationships. And it's entirely possible that we'll see the
collapse of one of the most storied names in the accounting profession.
All this will come as belated and regrettable acknowledgement that
then-Securities and Exchange Commission chairman Arthur Leavitt was
on the right track when he proposed prohibiting accounting firms from
providing consulting services to their audit clients. The protests from
accounting firms forced him to back down.
Yet in a few years, memories will fade. And consultants, brokerages,
bankers, insurers and lobbyists will establish new frameworks for their
interlocking professional and political relationships.
Real reform is dreadfully hard to come by. Businesses are difficult to
compartmentalize. Services may sprawl over a range of departments.
People move from company to company, board to board or into or out of
the public sector. Yet they remain connected to the places they've been
before. That leaves a lot of threads draping through the branches.
Our web of professional relationships can get messy. Enron and Andersen have
simply given us our sharpest reminder of just how messy.
Reach
Mike Francis, a Portland financial writer and editor, via e-mail at
bizmike@aol.com.
oregonlive.com
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