Will Enron's Exploits Bring Reform or Rhetoric? (Trends)

By Levinsohn, Alan | Strategic Finance, March 2002 | Go to article overview

Will Enron's Exploits Bring Reform or Rhetoric? (Trends)


Levinsohn, Alan, Strategic Finance


* WHAT'S ALL THE FUSS about the failure of Enron Corp.? Few of the reasons for its collapse are unique. Most had already occurred at other companies, which often were investigated, penalized, and regulated to some extent.

The reason for the storm is the size of the company's failure and the scope of its transgressions: the biggest bankruptcy in history, investor losses of $66 billion (value of shares outstanding at year-end 2000), employee retirement savings of $1.2 billion gone. It's that kind of tsunami that's causing legislators and regulators to probe and try to change the practices that led to Enron's downfall.

Just as the scale of the September 11 attacks woke up a naive electorate and prompted politicians to act more comprehensively against a menace that long threatened Americans, perhaps the Enron saga will force reform. Or will it? No sweeping change comes without unintended side effects. Nor are there clear-cut solutions to the ambiguous issues of this case. Here are several main ones investigators are focusing on:

* Do independent external auditing firms have a conflict of interest that imperils their impartiality when they earn as much (or more) from consulting services to the audit client?

* Are boards of directors, under current laws, able to adequately oversee management and auditors while governing the corporation?

* Are employees' retirement savings invested propitiously when their portfolios are heavily weighted with employer stock?

Originally a utility that produced and transported natural gas and electricity, Enron began shifting its focus to trading energy securities in 1989. The company pioneered hundreds of different types of trading contracts ranging from commodities such as water to exotic new financial instruments.

With approval and participation from other Enron senior officers, the company's former chief financial officer, Andrew S. Fastow. created off-balance-sheet limited partnerships that removed everything from telecom fiber to water companies from Enron's debt-heavy balance sheet. Enron's bankruptcy filings show $13.1 billion in debt for the parent company and an additional $18.1 billion for affiliates. At least $20 billion more debt existed in the limited partnerships set up to conceal losses, hedge investments. shift assets and liabilities, borrow more, inflate earnings, and personally enrich the executives who managed some of them, according to analyses of company reports and court documents.

For four years dating back to 1997, Enron's financial statements overstated earnings by $583 million, or 20%, which Arthur Andersen LLP audited and provided unqualified auditor's reports for. In 2000, Andersen earned $25 million from Enron's external audit and $27 million from other services, including Enron's internal auditing to prevent fraud and accounting irregularities. …

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