Enron used to be one of the world's largest publicly traded companies. Its assets at various junctures were valued at anywhere between $30 billion and $40 billion: greater than the gross national product, for some years, of Malaysia. Enron's primary bread and butter used to be energy trading. Enron would purchase and then sell various forms of energy, and although it had many other related business, ranging far and wide from telecommunications to consulting services, most of their business concentrated on energy trading.
Enron's management was quite stable for many years. For example, it was major news when Mark Palmer was promoted to vice-president of public relations with primary responsibility for Enron's public relations departments worldwide. His job was to implement Enron's public relations strategies over all of its subsidiaries, like Azurix Corp., Enron's then new water company. He was promoted from within the corporation, and has been criticized recently for making several key poor public relations decisions that helped contribute to the current dilemma. But top management - Ken Lay, et al. - stayed remarkably constant over the past 10 years.
The fallout from Enron's collapse will influence our business systems and economy for years, maybe even decades. More importantly, the collapse will shape the American business community's psyche in ways we have only begun to imagine. When an entity that large implodes, there are bound to be side effects and repercussions through almost every facet of the economy. The hardest hit sectors, of course, will be institutional investing and accounting and auditing practices: a thorough examination of how company 401(k) retirement funds are managed will be necessary to determine why so many aging working Americans suddenly lost almost every penny of their 401(k)s - their hope and their family's hope for their retirement years, just around the corner - when Enron collapsed. Accounting companies who combine their services with consulting services - not just Arthur Anderson: every accounting firm does it at least to a certain extent, Anderson just happened to get caught - will need to be checked and after years of congressional grumbling, this time it may actually happen.
Enron has collapsed, yes, but as a business community we can profit from it in the long run as long as we take the proper steps to ensure that it doesn't rear its ugly head again. Success depends primarily on better corporate governance laws and ethics: directors of corporations need to be more involved in their companies' asset management, accounting firms need to be prevented from offering clients consulting services on the very fruits of the accounting services they provide, 401(k) plan managers need to answer to funds diversification rules and law firms that oversee corporations' asset management and tax liability options also need to be held accountable to modified American Bar Association rules of ethics. The path to effective change will be long and bumpy, but it will be necessary if we are to successfully avoid another Enron.
Directors are charged with overseeing the big picture steering of a corporation. The company's executives handle the everyday choices - which vendors to contract, who to hire and fire, how to manage office space and daily operational resources - but it is the corporation's directors who are often ultimately responsible for merges and acquisitions, executive hiring and firing, accounting company selections and law firm selections. One of the most astonishing dilemmas emerging from the Enron mess is current revelations that many of Enron's fourteen directors had no idea that their company was on the verge of collapsing. Some of the directors knew of the plans to hide losses in several layered limited liability partnerships, thereby artificially beefing up bottom line profits for shareholders, but many may not have known of the scheme at all.
This indicates to even the layman that better communication and coherence is needed from corporations' directors. Often directors are on the boards of three or four companies and they limit their involvement to a few phone calls a year and two directors' meetings and a shareholders' meeting. Often, they know very little about the company's everyday management and investment decisions. Some of the directors take a very active role and because of their colleagues' lack of involvement, they function as the company's dictatorial staff.
Self-dealing may be the single largest corporate governance concern today. Corporations law specifies that transactions in which directors stand to benefit outside their relations with the company on whose board they sit must fully disclose all the aspects of the proposed transaction and carefully detail how they will benefit from the transaction - only then may they get approval for self-dealing. Enron's directors and the directors for many other corporations do no such thing. Self-dealing was hidden to such an extent that Enron was able to hide tens of billions of dollars in limited liability partnerships named after Star Wars for years. The asset hiding garnered some directors and executives tens of millions of dollars each and ended up sinking their company and its shareholders.
Auditors are supposed to be watchdogs for just this very sort of collapse, but yet arguable the largest of the big-five accounting firms was at best unaware of Enron's impending collapse and at worst, complicit in one of it's largest client's self-dealing and under-the-table asset hiding transactions. The problem lies in the combining of consulting services with the auditing services. Accounting firms that are not "full-service" now lose clients and lose money.
The Wall Street Journal calls the full-servicization of auditing firms turning from watchdog to lapdog. And that is exactly what it is. Auditors are supposed to be independent, their services retained for a fee. The auditors are supposed to be accountable to the shareholders; they are the last line of defense against directorial and executive fraud, self-dealing, and cooking of the books. How can they possibly perform that function when they are also being paid to help maximize profits at that same company? The two goals are in some ways antithetical. Even more notably, they use the information gathered through their role as auditor to further their consulting practices.
In the Anderson/Enron case, not only did the auditors not stir the pot enough, they arguably knew exactly what was going on and even had a role in at least approving and maybe even suggesting the asset hiding techniques, as is evidenced by their infamous paper-shredding. As a result, Anderson will undoubtedly have to pay dearly, at least for this debacle:
The idea of limited partnerships to hide assets is technically legal, but only when they are between the corporation and another party, to share the liability. Two of Enron's largest money-losing partnerships, Chewco and LJM, however were between Enron and its own officers, which is illegal under the SEC's codes. Anderson charged $5.7 million in fees just for setting up Chewco, so their arguments that they were dupes just like the rest of us may fall on deaf ears.
Two other problems in the Enron collapse were lack of 401(k) diversification and Enron's law firm Vinson & Elkins' complicity in the schemes. Enron's employees' entire retirement funds were invested in Enron stocks and so the innocent victims lost virtually all of their retirement savings with the collapse. Legislators are discussing ways to ensure that companies' 401(k) plans are diversified more. The fund managers are sophisticated, but the ultimate end users of 401(k) plans are often not sophisticated: they only know that the savings program is intended to save them money before taxes. They often know very little about where their money goes; they simply anticipate that they will make at least a little money. At the very least, they don't anticipate losing all of their money. Vinson & Elkins is arguably as guilty in Enron's scheming as Arthur…