Auditor failures and gatekeeper roles in Enron and Parmalat

ENRON

The objective of this study is to answer the questions of: (1) In what ways did the failures by the auditors and other gatekeepers contribute to the failures of Parmalat and Enron? (2) In what manner could it be ascribed to the corporate vulture and lack of ethics from a global perspective? (3) What lessons can be learned from the failures by the gatekeepers that might prevent failures of other companies in the future? And (4) What insights can you derive from the films and links regarding the causation of these scandals?

Enron

In the case of Enron, the company was so overwhelming successful and in essence did business with all other companies, that no one thought to question the company. The company was filled with former nerds who wanted to make a name for themselves and who were willing to do anything it took to make it and to make money. There was an overall lack of ethics in Enron's company with individuals being encouraged to make as much money in whatever way that they could make it for the company. Quite simply, ethics did not play a part in the methods used by Enron to make money.

As noted in the book "Enron, the Smartest Guys In the Room," the employees at Enron were held to be so much smarter in the world of corporate finance than anyone else that their methods and their balance sheet was for a very long time unquestioned. However, when Bethany McLean, a reporter for Fortune Magazine, and who had a background working at Goldman Sachs examined the balance sheet of Enron, a lot of questions began to surface.

In March 2001, McLean noted that the financial statements of Enron were almost impenetrable. It is stated in a CNN report "Remember when it seemed outrageous to suggest that Enron shouldn't be the golden child of Wall Street? Before the congressional hearings, before Arthur Andersen was indicted, before the SEC and DOJ got involved. Fortune's Bethany McLean asked whether a company that traded at 55 times earnings should be so opaque." (CNN 2006, p.1) Stated specifically by McLean was "It's in a bunch of complex businesses. Its financial statements are nearly impenetrable. So why is Enron trading at such a huge multiple?" (McLean, 2001, cited in CNN, 2006, p. 1)

III. Analysis

To understand how Parmalat got away with its practices so long it is necessary to understand the Italian regulatory process. Heller states "CONSOB, the securities exchange regulatory agency, is a toothless tiger -- underfinanced, powerless and in a continual war with the Bank of Italy. Milan Borsa regulation is perfunctory. Local accounting rules and practices, which look strong on paper, are weakly enforced. And, alas, official corruption is endemic." (2003, p. 1)

This too was the problem in the United States with Enron because as noted by McLean the SEC is very busy and overloaded and simply does not have time to check everything closely. Enron was so well-connected and played its cards so well, that no one thought to question them. Both Enron and Parmalat covered their tracks with creative bookkeeping and financing. Investors were coming out so well on their investments that they felt no need to question these companies.

When Lay and Skilling were questioned about their balance sheets they were dismissive and at one point Skilling was even insulting to those asking the questions losing his temper which according to McLean was unheard of in corporate America relations with its investors. There were also techniques utilized by Enron to make the company's reports even more glowing than they were and specifically, Wall Street analysts were on the payroll of Enron and when the company would have its meetings with its investors via conference call once per month, the Enron-paid Wall Street Analysts would take part in the conference and ask questions that rendered answers that served to ensure investors that everything was going wonderfully leaving investors with a false sense of security even when things begin to unravel for Enron. There was a failure on the part of regulators to follow the balance sheets and investments of Enron.

In addition, there was ethical failure throughout Enron, both actively and in omission of those in charge at Enron to closely check what was really going on with the company's investments and the means utilized in realization of earnings for investors. Those working for Enron were encouraged to do whatever they had to do to make more money for the company and in fact, ethics just were not part of Enron's repertoire whatsoever.