Decoding Enron
The New York Times
February 5, 2002
As the evidence of financial
abuses at Enron grows, the
more it looks as though the
company was an intricate Ponzi
scheme designed to enrich top executives and defraud
stockholders. That, at least, is the impression left by a
scalding examination of the company's operations
prepared by a special committee of Enron's board of
directors. The report, issued over the weekend, suggests
that rather than being a thriving corporation brought
down by accounting shenanigans, Enron at its core may
have been a corporate mirage created to deceive the public
while enriching insiders. Enron's leadership comes across
as having been more concerned with managing the stock
price, and profiting from it, than with running a real
company.
The report reviews the dealings between Enron and scores
of partnerships set up by company officers. Ostensibly
meant to hedge the risk associated with some of the
company's investments, these partnerships really served
to take debt off Enron's balance sheet, inflate the
company's earnings and enlarge the bank accounts of the
executives who created them.
The partnership transactions "served no apparent
business purpose for Enron," the report says. They did,
however, enable Enron to improperly claim $1 billion in
profits in the year before the company's implosion, and
generated bountiful but illegitimate revenues for those
involved, particularly Andrew Fastow, the chief financial
officer at the time. Top Enron officers made even more
money during that period by unloading stock that they
were going to such lengths to inflate.
The report strongly suggests that crimes were committed,
though it stops short of making concrete allegations of
securities fraud. The Justice Department and the
Securities and Exchange Commission will determine in
the days ahead whether prosecution is warranted. Given
the complexity of Enron's financial manipulations, and
growing signs on Wall Street that widespread accounting
abuses may be eroding investor confidence, the White
House and Congress should consider providing
prosecutors with additional resources to investigate such
cases. Securities fraud cases are hard to prove, and there
is always a temptation to settle for assessing civil fines.
Federal prosecutors must pursue the Enron case
vigorously.
The possibility of criminal prosecutions does not absolve
Congress and federal regulators of their duty to reform
the overall financial system. Regardless of whether crimes
are ultimately proven, Enron's conduct already provides a
primer on how current financial disclosure rules and
accounting standards fail to protect investors adequately.
No one should be lulled into believing that this was simply
a case of sound rules being broken.
Kenneth Lay, the former chairman of Enron, passed up
an opportunity to shed more light on the case when he
called off a planned appearance yesterday before the
Senate Commerce Committee. The cancellation followed
his wife's televised assurances last week that her husband
had done nothing wrong and was eager to set the record
straight. The committee will vote today on whether to
issue a subpoena to force his appearance, as it should. He
and his fellow Enron executives have a lot of explaining to
do.
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