Enron's Culture of Corruption
Washington Post Editorial
Tuesday, February 5, 2002
Page A14
THE WEEKEND'S revelations about Enron make it tempting to see the scandal as an epitaph for the 1990s bubble. The firm seems to have assembled the various strains of hubris found in different corners of the country: the technological vanity of Silicon Valley mixed with the financial alchemy of Wall Street, the influence-peddling of Washington fused with the ten-gallon brashness of Texas. Not content with earning hundreds of thousands of dollars, Enron's senior executives cooked the books so that they could pocket millions. Not content with having created a wonderful new market in energy derivatives, they lied and cheated to create an illusion of impossibly fast earnings growth. Contemplating Enron's self-destructive arrogance, Sen. Byron Dorgan has spoken quite accurately of "a culture of corporate corruption."
In time, historians may indeed choose Enron as a kind of symbol of the 1990s, much as Michael Milken's junk-bond empire has come to stand for the excesses of the preceding decade. But for now the cultural dynamics of the scandal ought not be the focus in Washington. The architects of Enron's corruption will be punished in due course by the justice system, and there's nothing to be gained by spinning a broader morality tale that might amplify the anti-corporate rhetoric of the globalization protests. The right focus for Congress and the administration is to fix the rules that allowed Enron's culture to evolve in the first place.
That means, first and foremost, fixing the audit system. The report on Enron released over the weekend pointed the finger at three groups of people -- the managers and board members as well as the accountants -- but it is the third group whose behavior is most reformable. Capitalism works on the assumption that managers will do all they can to boost profits, much as football assumes players' aggression. Up to a point, company boards can impose discipline on managers, but directors who meet only infrequently can no more be relied upon to spot foul play than a ref without line judges. This is why the key constraint must come from auditors. These are the experts who get paid millions of dollars to certify that corporate accounts are accurate.
The Enron story shows how badly auditors neglect this mission. According to the weekend's report, few managers at the company knew the extent of Enron's phony bookkeeping; the board, while knowingly approving some dangerous transactions, was also partly in the dark. But Arthur Andersen, the auditor, knew all about the off-balance-sheet partnerships because it had been paid $5.7 million for advice about them; it must also have known about the illusory profits created by the advance booking of estimated future earnings, because it signed off on those accounts. In 2000 alone, Andersen's experts were paid $25 million to understand Enron's finances. But because of the looseness of the laws that define auditors' responsibilities, they did not feel obliged to share their insights with the ordinary investors whom they are meant to serve. If this scandalous laxity had not existed, the hubris of Enron's managers would not have mattered. A culture of corruption cannot develop if tough watchdogs are in place.
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