Antique Credit Methods Would Have Pierced the Enron Smoke Screen
Behanna, Nancy T., American Banker
One of the many lessons to be learned from the Enron debacle is the value of old-fashioned credit quality. In the banking industry, this lesson seems to have to be relearned every few years in some new context, as we find out the hard way that hot industries and financial innovation don't really change the fundamental value of financial soundness.
Let's review some of the characteristics of the old-fashioned credit environment.
Credit officers downgraded borrowers, or even recommended against a proposed loan relationship, because the financial statements lacked sufficient disclosure.
Experienced credit staff knew that if they couldn't find out what they needed to know about a company from its financial information, they should keep asking for more. If it wasn't forthcoming, they recommended against the loan. Period.
Think of the anguish that could have been prevented if Enron's banks had demanded adequate financial disclosure as a condition of approving lines of credit.
Credit officers downgraded borrowers or recommended against a proposed relationship if there were clear conflicts of interest with the accounting firm or in the company's management team.
At the community bank level, this might mean the accountant was the business owner's wife or brother-in-law. At the large-public-company level, it's the auditor-consultant relationship. Coupled with the willful lack of disclosure, a credit officer of the past would even have recommended that dreaded event, THE CHANGE OF ACCOUNTING FIRM. …