by Sylvain Comeau
Enron may be a financial apocalypse, but this makes it an ideal case-study
subject in many classrooms. As soon as the biggest U.S. bankruptcy in
history hit the news, Accounting Assistant Professor Maureen Gowing knew
it would be perfect for her senior undergraduate course in accounting
I use stories in the news as often as possible, to illustrate the
theories that I teach. One theory in particular says that accountings
job is to create and maintain trust. Enron, as it is being portrayed by
the media, is an ideal example to ask the question: Were the accountants
doing that job?
Gowing, who emphasizes that she doesnt know any more about Enron
than anyone else who is reading the papers, is particularly interested
in the auditing by accountants of a companys financial disclosure.
That is one of the most high-profile tasks of accountants. The job
of the auditor is to be professionally skeptical, applying certain tests
to the numbers they are given, in order to be satisfied that the numbers
represent fairly the financial situation of the company. That was [Enron
auditor] Arthur Andersens job.
Charges are premature
Gowing argues that there is simply not enough hard evidence to justify
convicting the firm of failing to do their job or even being complicit
in financial wrongdoing within Enron. For one thing, Enrons business
activities were cryptic and labrynthine a puzzle for any auditor
without expertise in hedging.
While Enron started out as an oil company, its main business in recent
years was hedging. Hedging is a complex web of transactions in which companies
bet one way on the financial markets, while simultaneously making what
amounts to side bets to reduce their losses in case they are wrong.
In the congressional hearings on Enron, the issue of transparency
comes up over and over. In the accounting context, transparency means
that an outsider looking at a companys financial disclosure understands
what the numbers mean. One of the big problems with Enron is that the
business proposition of the company hedging through the use of
financial instruments called derivatives is not a transparent activity.
In fact, Gowing says that most people do not understand hedging or derivatives,
and probably would still be baffled even if someone tried to explain it
Yet, accountants have to create standards and regulations of disclosure
that would tell an outsider, transparently, the value of those activities.
Thats very, very difficult.
Gowing says that as more and more publicly traded companies increase their
hedging to keep the financial risks they take within acceptable limits,
that lack of transparency is everyones problem, not just that of
auditors. But in this case, the auditors are in the position to be blamed,
particularly by former Enron employees who lost everyting because they
tied up all their retirement savings in now worthless Enron shares.
When people lose everything, there is a tendency to want to retrieve
something; Arthur Andersen, as well as Enrons investment bankers,
may be the target of lawsuits because they have a lot of money, while
Enron itself doesnt have any left. One has to feel for those people
who lost their life savings, and we all have some sense that there is
something profoundly wrong when this kind of thing happens, but we dont
know what that is yet.
To say publicly that any one of the major players in this drama
is a crook before you have appropriate evidence amounts to slander. Remember
that those hurling the accusations are protected by privilege in the congressional
hearings we are not.
The bottom line for Gowings students is that they will face a heavy
burden of responsibility if they are put in a similar situation.
What I ultimately tell my students is that they will be held personally
accountable. That is what the situation with Enron and Arthur Andersen
is highlighting more than ever. Whether its right or wrong, when
businesses unexpectedly fail, auditors pay a high price.
Andersen has reportedly offered an $800-million settlement. Thats
a huge amount of money, but the bankruptcy has been estimated to have
cost over $90 billion.
Tellingly, Gowing says she will not be writing any papers on Enron until
a lot more evidence on the case emerges.