Since early December, the word “Enron” has become a part of everyday vocabulary, making daily headlines in the news and garnering increasing attention from both the political and business realms.
Enron filed for bankruptcy protection on Dec. 2 after revealing that it had overstated its profits by nearly $600 million since 1997 and hidden some $500 million in debt. The bankruptcy announcement-the biggest corporate bankruptcy in U.S. history-sent Enron stock value down to less than a dollar per share, wiping out investors and thousands of employees’ retirement savings.
On Monday, four Saint Louis University professors discussed and explained what sent the billion-dollar energy company into a downward tailspin during a panel entitled “Who Shot Enron?” The panel, held in the Kniep Courtroom in the School of Law building, featured law professors Thomas Greaney, Carol Needham and Connie Wagner and finance professor Michael Alderson.
Greaney began by giving a brief summary of Enron’s collapse and the reform proposals that have consequently emerged. Greaney referred to an investigative report, chiefly known as the “Powers report,” that pointed out how more than one party is responsible for Enron’s fall, including: Enron management’s failure in its oversight duties; the board of directors’ failure to assure accurate reporting; and the accounting firm Arthur Andersen’s failure to question its audit findings. “In the end,” Greaney said, “we may find that all of the suspects had a hand.”
Consequential reform could include changes in the following: the securities and accounting industries, pension reform, rules governing corporations’ boards of directors, bankruptcy-reform legislation and campaign finance reform.
From a financial perspective, Alderson explained the three key concepts to understanding Enron’s collapse: derivative securities, balance sheets and the share evaluation process. “Enron was important to other businesses because it was a well-capitalized entity,” Alderson said.
The company had also manipulated its balance sheets, overstating its earnings to both financial experts and investors. For many years, Alderson added, market investors were expecting high future earnings growth. “It was in Enron’s best interest to hide their losses and to appear to have a stronger financial position than they did,” he said.
Key to Enron’s losses was certain special purpose entities, or partnerships created to transfer assets between entities created by the same company.
Wagner spoke about the corporate law issues that relate to the Enron case, focusing on the role of federal security regulators and securities law. “Enron precipitated a crisis of confidence in the system,” Wagner said.
Wagner briefly explained the Securities and Exchange Commission’s role in regulating securities law, including requirements for public companies to disclose information and punishment for fraud. “The SEC very rarely gets involved in looking at financial statements,” she said. “The SEC relies on auditing by public accounting firms.”
Needham talked about ethical issues that relate to the situation, asking questions such as, “How much due diligence did the board of directors do? Was it enough?” She also considered the perspective of outside auditors and how much responsibility they bear.
Needham said that such ethical issues will likely call for efforts to impose tighter regulations on accounting practices, switching auditors every five or six years, and divesting consulting practices from auditing practices to avoid conflicts of interest. “This didn’t just affect Enron shareholders,” Needham said. “A lot of people across the country are being hit by this.”
