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Non-Tech : The ENRON Scandal -- Ignore unavailable to you. Want to Upgrade?

To: Mephisto who wrote (1250)	1/26/2002 4:16:37 PM
From: Mephisto	Read Replies (1) \| Respond to of 5185

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 " Send This Page \|