Saturday, January 26, 2002

Enron Losers

So who loses in the Enron debacle? The news is full of weeping and wailing about the poor stockholders and the poor employees, who have lost millions while the Big Shots cashed in their stock for huge profits. They're not necessarily losers. When something gets this large, it's Government Bail-out Time. When a small company goes bust, nobody cares. When a company gets as big as Enron, it simply can't be allowed to go bust. At the very least, the employees will almost certainly get some kind of reprieve. As to the stockholders, tough bananas. Anybody promising "guaranteed results" is probably running a Ponzi scheme of some kind. There will be all sorts of lawsuits against anybody who has money; the outcome is not at all certain.

The potential big losers here are the Enron execs, especially Enron CEO Ken Lay, the Bush administration, and Arthur Anderson, Enron's auditor and financial advisor.

Enron Execs

Kenneth Lay, Enron CEO, and others are probably headed for jail. They'll spend a couple of years in a Federal country-club prison and retire with their multi-hundred-million dollar profits. There are two things that they might be charged with: misrepresenting Enron's financial state and "insider trading". Misrepresenting the financial state is basically plain old fraud. They said everything was hunky-dory when things were really falling apart. Bad.

"Insider trading" is one of those technical crimes that can be really hard to define, like off-sides in hockey. However, bailing out of the stock based on unpublished and totally unexpected bad news is a definite no-no.

The Bush Administration

Much as I dislike them, the Bushies seem to be playing this one exactly right. Yeah, Enron asked for favors, but didn't get any.

There are, however, a couple of unanswered questions.

  • Georgie Bush says the last time he saw Ken Lay was a year and a half or so ago at a charity fundraiser. Probably true. However, there are such things as telephones. Nobody has asked about the last time he talked to Ken Lay. Note that Ken Lay "communicated with" Cabinet members. This is a whole lot more general than "seeing" him.
  • What about VP Cheney? It seems that he talked to the Enron folks a lot in putting together the Administration's energy policy. This could get interesting, especially since Enron's business model translates into English as "fishing in troubled waters". With stable energy prices and sufficient supply, Enron doesn't make any money.

Arthur Anderson

An accountant friend of mine tells me that AA will probably go out of business. Some of their execs will probably go to jail too. Shredding documents? Accountants are the ones who are always telling their clients to keep every scrap of paper.

However, AA accountants have a very good reputation in the profession. While AA may go away, the folks who work for them probably won't be out of work very long. Especially since a lot of companies are going to be looking really hard at their current accounting procedures.

Two Sets of Books

The traditional form of accounting fraud is "keeping two sets of books". This means that the accountant shows one set of numbers to Management and another set of numbers to the tax people or to investors. Very illegal. Also very difficult to do -- there are a lot of numbers that have to be "cooked", and they're kept in a lot of different places.

What the nightmarishly complex accounting schemes that AA cooked up did was act as "two sets of books". It enabled Enron execs to shuffle money from place to place so that it showed up on whatever line of the balance sheet they wanted it to. Unfortunately, they overdid it. It got so complex that nobody could figure out what was going on.

The whole point of accounting, after all, is to give management a picture of what is really going on with company finances. Without this, management would be working blind. I suspect that the collapse at Enron really did take everybody by surprise. With proper accounting, this shouldn't happen. Unexpected losses, shifts in values of investments, etc, should show up in time for management to take notice of them. With Enron, this simply didn't happen.

The Biggest Loser

The accounting profession as a whole.

For years, the accounting profession has claimed that their internal procedures are all that is necessary to keep their clients honest. That stance is crumbling. The latest revelations are how various professional organizations for accountants have lobbied Congress to keep them from passing laws that would have outlawed some of the more odious practices that the Enron collapse has uncovered. In particular, the practice of having the same people set up all the fancy derivatives, shadows, etc, audit them is right straight out. Auditors are supposed to be independent fa cryin' out loud. I'm sure that the professional groups will be slapping together all sorts of new rules to try to stave off Government regulation. I suspect that it won't work, and that accountants are going to find themselves looking at a whole lot of new regulations, written by people who have no idea of what accounting is. Just like everybody else, in other words.

Learn to pound sand like the rest of us, guys.

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