As one congressional aide put it, the Enron debacle is the "perfect storm" a catastrophic mix of all the worst in business, government and politics.
Following the biggest bankruptcy in history, the revelations just keep coming:
l The company's auditor, Arthur Andersen, confessed to destroying Enron documents during the very period last fall when it was becoming clear they'd be needed to explain why Andersen had not raised the alarm over the huge energy-trading firm's high-risk practices. The company has fired the partner in charge and disciplined others.
l The White House acknowledged that Enron's chairman, one of President Bush's biggest political contributors, had contacted two Cabinet officials as the company was collapsing. Enron denied it was seeking favors, but one of those contacted, Commerce Secretary Donald Evans, said Enron Chairman Kenneth Lay had indicated he could use government help shoring up the company's bond ratings. Ratings reductions are what pushed the firm into its final downward spiral. Administration officials said they had given no help.
l The Justice Department launched a criminal investigation while Atty. Gen. John Ashcroft said he would not take part because he, too, had received generous Enron contributions during his Senate campaign in Missouri in 2000.
l A string of congressional committees prepared for hearings, while Democrats positioned themselves to exploit the Enron catastrophe in next fall's campaigns.
It's far too soon to know all the implications of the Enron story, but what is known so far is enough to point clearly to the need for change in the way business and politics are conducted in this country.
If it wasn't obvious before, the Enron case underscores the need for campaign finance reform. President Bush may spend months trying to convince Americans that Enron hadn't bought access and influence in his administration. That's going to be difficult, given the contacts disclosed recently and earlier disclosures that
Enron executives had met six times with Vice President Cheney during energy policy discussions last year. Enron long has been known as one of the most aggressive lobbiers in Washington.
Accounting accountability
Even lacking evidence of a quid pro quo between contributor and recipient, common sense tells you many contributors must believe they will get special treatment, else they wouldn't spend the money. People who think they've bought protection are more likely to fudge the rules. Hence, the perceived corruption in politics encourages corruption in business.
While much remains to be learned about the relationship between Enron and Arthur Andersen, it's already clear the case demonstrates the need for accounting reform. Accountants are supposed to be watchdogs for shareholders and the public. Too many have become lawyerlike advocates for the corporate executives who hire them.
Part of the problem is the conflict of interest that has developed as accounting firms have moved more heavily into corporate consulting. Many simply are afraid to jeopardize lucrative consulting deals by issuing critical audits. Washington should tackle this conflict of interest by forcing these firms to divest their consulting operations.
Accounting rules also need to be strengthened so that reports to shareholders and regulators accurately portray earnings and risks. For years, Enron was able to inflate its profits by concealing debts in a string of "off-balance sheet" transactions. While some of this may have been done improperly, current rules do allow companies to hide debts and other obligations. Even Wall Street analysts were unable to figure out Enron's statements.
Walking the minefields
No one knows how many Enron-type time bombs are ticking at other companies. But if the accounting rules permit deception, it's sure to take place. And if the public concludes that corporate financial statements are not to be trusted, confidence in the stock and bond markets is sure to be undermined.
That's not what we need as we try to recover from a two-year stock market slump.
Finally, it's already clear that 401(k) retirement plans need major reform. Thousands of Enron employees' retirement accounts were devastated when the company's share price fell from $90 to less than $1. Company rules had prevented most employees from selling Enron shares held in 401(k)s, even though Enron executives were locking in fortunes by unloading shares as the company's troubles mounted.
Bills recently introduced in Congress would limit employees' risk by placing a cap on the amount of the employer's stock that could be held in 401(k)s, or by giving employees the right to sell those shares.
While that would be an improvement, it wouldn't resolve the broader problem that investment choices in most 401(k) plans are just too limited. Participants are left with too many eggs in too few baskets, an especially serious problem if the boss offers poor investment choices.
There's a simple solution: 401(k)s should be changed to work like individual retirement accounts, allowing participants unlimited investment choices.
Because Enron was so big the seventh-largest U.S. corporation at its height it's tempting to see this mess as unique. In fact, political influence peddling, accounting shenanigans and abuse of employees and shareholders are widespread.
Perhaps the Enron case is big enough to produce some sorely needed systemic change.
No comments
Commenting is turned off for this story.