The Enron Effect
As the accounting scandal spreads, regulators and politicians
are pounding the table for reform. But will anything really
change?
By Allan Sloan and Michael Isikoff
NEWSWEEK
Jan. 28 issue — It was like the surgeon general’s
accepting a public-health award named after
Typhoid Mary.
• Yellow Pages
• Weather
• Shopping
• Stock Quote
• Newsletters
• Week In Pictures
HERE WAS FEDERAL RESERVE BOARD chairman
Alan Greenspan, renowned for rectitude, accepting the
Enron Award for Distinguished Public Service. This wasn’t
during Enron’s glory days, when the company had a
stock-market value in the tens of billions, but on Nov. 13.
That was only a few days after Enron endured a public
disgrace by admitting that it had filed five years’ worth of
misleading financial reports. And it was three weeks after
Greenspan had gotten a call from Enron chairman Kenneth
Lay, who desperately wanted Greenspan to intervene with
credit-rating agencies to help the stricken company survive.
Read the latest news on Enron
The ceremony had its awkward moments. Consider the
answer Greenspan gave during a Q&A session to a student
who asked how to succeed in this difficult job market. “The
best chance you have of making a big success in this
world,” Greenspan said, “is to decide from square one that
you’re going to do it ethically.” Greenspan, through his
spokesman, told NEWSWEEK that he hadn’t had Lay in
mind when he gave that answer, a Freudian slip if there ever
was one. What was Greenspan doing there in the first
place? His press aide explained that he had committed a
year earlier to former secretary of State Jim Baker to
accept the honor. The James A. Baker Institute of Public
Affairs awards the prize, which is funded by Enron. (Baker
had once been a consultant to Enron, sponsoring its
interests in Kuwait not long after the gulf war ended. But
that’s another story.) Greenspan turned down the $15,000
sculpture accompanying the prize—imagine that sitting in
the Fed’s lobby—and declined the $10,000 honorarium.
Andersen's CEO says Enron failed on
bad business moves
‘I AM INCREDIBLY NERVOUS ...’
The Greenspan story may be the most startling example
of how Enron managed to ensnare seemingly everybody
and every company worth snaring. Now that we’re in the
all-Enron-all-the-time news cycle, we’re getting answers to
“Who knew what when?” Revelations from last week:
people at Arthur Andersen, Enron’s outside accountant,
were worried about the Enron numbers they were certifying,
but did nothing. Ken Lay got a prescient letter from a
whistle-blower in August warning that “I am incredibly
nervous that we will implode in a wave of accounting
scandals,” but in September he was still telling employees
that the stock was “an incredible buy.” (It’s since fallen to
almost nothing.)
Enron whistleblower Sherron
Smith Watkins warned Enron
executives last August about
the company's finances
The
focus is now
shifting to the
next obvious
questions:
what’s being
done to
prevent
another
Enron? And
will anything
really change
once attention
moves on, as
it inevitably
will, to the next scandal? Harvey Pitt, the head of the
Securities and Exchange Commission, is proposing to set up
a new oversight body to police the accounting profession.
Business heavyweights want to beef up
corporate-governance rules to force boards to pay more
attention to what managers are doing. Politicians are calling
for rules to limit the amount of company stock that people
can hold in retirement accounts to protect workers from
riches-to-rags stock plunges like the one that’s turned some
Enronites from paper millionaires into people having trouble
paying food bills during their golden years.
Advertisement
Uncovering
Clinton: A
Reporter’s Story
by Michael Isikoff
Other books by
Michael Isikoff
But for all the table-pounding calls for change now,
urgency has a tendency to dissipate. There have been plenty
of accounting scandals before—Sunbeam, Cendant, Waste
Management, to name some recent fiascoes—but nothing
seems to have changed all that much in response to them.
Corporate America and the accounting profession have a
remarkable ability to frustrate fundamental reform. Shortly
before he came to the SEC, chairman Pitt, representing
Arthur Andersen as his client, fought fiercely against tougher
regulation of accountants. His current proposal is far milder
than the reforms he helped defeat not long ago. Those
would have made accountants accountable to federal
regulators, not to a self-policing body, as Pitt proposes.
And Sen. Joseph Lieberman, who’s holding hearings and
demanding post-Enron reforms, led the assault on the
Financial Accounting Standards Board when it tried to close
the most glaring loophole in the accounting system: letting
companies hand out millions or billions of dollars’ worth of
stock options to employees, but not counting that cost as a
charge against profits.
Alter on the Legality of Enron's Mess
WARNINGS IGNORED
While politicians and theoreticians struggle with the idea
of reform, real and immediate solutions to particular
problems tend to come from people like Enron
whistle-blower Sherron Smith Watkins, who warned Lay
about accounting problems. Watkins, 42, who recently
became a mother for the first time, has a highly developed
moral sense and was incredibly courageous. But even
having the right person in the right place blowing the whistle
about the right thing won’t change a place like Enron that
didn’t want to change.
As we now know, thanks to subpoenaed documents
that have become public, Watkins warned Ken Lay last
August that the company had inflated its reported profits
with suspect accounting. Watkins, besieged by interview
requests, wouldn’t talk to us. But we can reconstruct her
story with now public documents and with information from
her lawyer, Phillip Hilder of Houston. Like many of her
fellow employees, Watkins, an Enron vice president, was
worried on Aug. 14 when Enron’s chief executive and
resident numbers whiz, Jeffrey Skilling, abruptly resigned.
Watkins, who has a master’s degree in accounting and is a
CPA, got a company-wide invitation Lay sent everyone to a
meeting at the Houston Hyatt Regency on Aug. 16. The
message also urged employees to send him letters,
anonymously if necessary, if they thought there was
something he should know. Watkins dropped off an
anonymous one-page letter before the meeting. Lay’s
speech inspired her. So she wrote a detailed six-page letter
and gave it to Lay after meeting with him on Aug. 22. It’s
not clear how much Lay knew about Enron’s financial
shenanigans at the time—although ignorance is no excuse
for the chief executive officer.
“Ken Lay was professional and concerned, and he
promised to investigate,” lawyer Hilder said, adding that
“the company has treated her in a professional manner, and
she is still employed there.”
But what effect did her note have? Not much. As we
see from other internal documents that have become public,
Watkins’s letter was turned over to En-ron’s outside law
firm, Vinson & Elkins, which investigated the charges. The
firm dispatched a nine-page letter to Enron saying that
Watkins’s concerns did not, “in our judgment, warrant a
further widespread investigation by independent counsel and
auditors.” The V&E letter hedged, though, by warning of
public-relations and legal dangers if some of the deals
Watkins warned about became public.
THE MELTDOWN
The V&E letter was dated Oct. 15. The very next day,
Enron revealed that it had lost more than $600 million in the
third quarter. That touched off the very meltdown that
Watkins had feared.
Meanwhile, it turns
out, Watkins had aired her
concerns with a former
Andersen colleague at the
Houston office, and asked
him for a financial-sanity
check before delivering
her letter to Lay. (We
know this from an internal
Andersen memo that’s
become public.) But no
one seems to have done
more than to create a
paper trail that showed
their concern. Meanwhile,
yet another disclosed
document shows that
earlier last year, some
Andersenians were
considering having the firm
drop Enron as a client
because Enron’s aggressive accounting was making them
nervous. But Andersen kept the account, which brought in
$52 million in 2000 and had the potential to rise much
further, thanks to Enron’s voracious appetite for consulting
services.
Andersen is under intense pressure for having certified
Enron’s bogus numbers. It’s also being investigated for
shredding Enron documents. And it fired the head partner
on the Enron account two days after he talked to federal
investigators. It sure looks like Enron and Andersen—each
of which claims to have fired the other—are trying to stick
each other with the blame.
But even as one part
of the federal government
is investigating criminal
charges against Andersen
for document-shredding,
among other things, the
FBI is relying on
Andersen’s
information-systems
expertise. Last summer
Andersen undertook the job of reforming the FBI’s
record-keeping. That was after the FBI admitted losing
thousands of documents in the Timothy McVeigh case,
which briefly delayed his execution. “This study, by a firm of
Andersen’s caliber, will provide valuable information to
enhance the institutional integrity and performance of the
FBI,” Attorney General John Ashcroft said. Andersen’s
report is due soon.
The key to the Enron mess is that the company was
allowed to give misleading financial information to the world
for years. Those fictional figures, showing nicely rising
profits, enabled Enron to become the nation’s seventh
largest company, with $100 billion of annual revenues.
Once accurate numbers started coming out in October,
thanks to pressure from stockholders, lenders and the
previously quiescent SEC, Enron was bankrupt in six
weeks. The bottom line: we have to change the rules to
make companies deathly afraid of producing dishonest
numbers, and we have to make accountants mortally afraid
of certifying them. Anything else is window dressing.
With Mark Hosenball and Rich Thomas in Washington
© 2002 Newsweek, Inc.
msnbc.com |
