Enron and Corporate Culture
Clearly, Enron defrauded its employees, stockholders, and creditors. It exaggerated its profits by transferring debts and losses to allied companies. The management encouraged employees to buy Enron stock which they knew would soon be worthless. The proceeds helped finance millions of dollars in bonuses they paid to themselves just before the collapse. They laid off 4,000 workers and filed for bankruptcy in December, and in January they shredded company papers.
Having invested the bulk of their pension plans in Enron stock, many employees faced retirement without the reserves they had counted on. Enron froze the assets of the pension fund, so employees could not sell their stock as they watched it plummet in value.
Instead of acting as the watchdogs that they were purported to be, Enron's auditors, Andersen CPAs, were complicit in this trickery. Shortly after the bankruptcy, Andersen shredded records of its audits. The accepted practice would have been to save them until after the statute of limitations had passed.
What happened to the famous checks and balances in the American economy, which were supposed to see that such a tragedy could not occur?
Fifty years ago I passed my CPA exams in the State of New York. My first two jobs were with the then two largest accounting firms in the world: Haskins & Sells (now absorbed into Deloitte Touche) and Price Waterhouse. With H&S I audited the books of the Hearst Corporation for nine months every year. We published a consolidated statement, showing the assets, liabilities, income, and expenses of the Hearst organization as a whole: all the newspapers, all the magazines, all the art works, even a castle. It would have been unthinkable to deceive investors, bankers, and others by hiding liabilities or losses. Using principles established by the Financial Accounting Standards Board and the American Institute of Certified Public Accountants (both private organizations), we certified the statements as correct "according to generally accepted accounting principles." We were the watchdog of transparency.
What has happened in the meantime? CPA firms have discovered that consulting services are more profitable than auditing, so they have advised the very firms whose books they audit. Fifty years ago, the total independence of the CPA firm from the client was a mark of our integrity. (We could advise on improving the accounting system but not on financial management.) Now there is a conflict of interest. How can a CPA firm certify the statements of a company to which it has given financial advice? Andersen even kept some records for Enron, so it was auditing its own accounting. That would have been a total "No-No" in my day.
(Note: At age 30, I took a PhD in economics and changed my profession).
Profit of the Manager or Profit of the Company?
Economists have long known that corporations do not necessarily seek the greatest profit. Instead, each officer within the company wishes to acquire the greatest power and wealth that he or she can, within the constraints of possibility and cost. Doing so may or may not coincide with the greatest good for the company or the stockholder. For this reason, checks and balances are set up within the company. A "system of internal control" makes sure that no official can embezzle funds without some other official knowing. But no system of internal control is 100% foolproof if the managers collude. The job of the auditor is to uncover such deceit. If, however, the auditor is himself or herself part of the deceit (again, unthinkable in my day), no system will work.
Was Enron Politically Connected?
Enron lavished millions of dollars upon Congressional campaigns for both parties, and it contributed significantly to the Bush campaign. In return, it had the ear of prominent politicians, whose policies it influenced. As a result of lobbying, in 1997 Enron received an exemption from the Investment Company Act of 1940, which enabled it "to structure financial operations [in South America and Europe] to both conceal them from investors and shift debt off their books" (New York Times, 1/23/02). To avert bankruptcy, it called on its political supporters, including the President, for help in securing more bank loans. So far as we know, no help was given nothing can be proved.
What to do about it? Two paths
Historically, Europeans and their American descendents held themselves accountable through checks and balances, privately agreed upon but legally enforceable. Thus unions would negotiate (privately) with employers and make contracts (legally enforceable). Only after private organizations had determined the rules of trade (such as debt settlement, quality of goods, safety in factories, and bankruptcy procedures) were they written into law. Late in the nineteenth century, however, government (Congress and President) began taking over these negotiations on behalf of the citizens to be "protected." The Act to Regulate Interstate Commerce (1887) and the Sherman Anti-Trust Law (1890) were among the first of the new genre.
When Alexis de Tocqueville visited the United States in the mid-19th Century, he was impressed by Americans as joiners. Civic associations sprang up everywhere social, intellectual, political, and recreational. Knowing one another through these associations was a major force in developing the trust that Americans have felt for each other.
In 2000, Robert Putnam published Bowling Alone, decrying the sharp decrease in these associations. Americans now sit in front of TVs, he says, and sign checks for organizations in which they do not participate personally. This decrease, Putnam feels, has led to a decline in social trust. On top of this great loss, I add that we have relinquished many of our cherished checks and balances to government regulators. Unions did not protest that Enron was mismanaging employee funds; no stockholder association observed that their members were about to be defrauded; bankers did not pay attention that the CPAs were derelict.
Government regulation is often desirable, even necessary. But regulators do not know how to run Enron, or any other business. We have seen how governments in less developed countries have not only been incapableof managing businesses properly, but how they too - like Andersen - have misused their power. In Argentina (see Letter #31), China (Letter #1), and Russia (Letter #4), political managers have milked state-owned enterprises. Most politicians are far more concerned for their own power than they are in "protecting" their charges. "Protection" then becomes a path to power rather than power a way to protect. Are we sure this will not happen (or is not happening) in the United States?
So, how can we see that the Enron scandal will not be repeated? The main outcry is to give government more power to regulate companies, stockholders, and CPAs. The way I would prefer would be to renew our sense of civic obligation, to strengthen our associations and checks and balances, so that our society works from a balance of power rather than a central focus of power that we "trust" to be benign.
In this way we would return to individual responsibility, checks and balances in the culture (not only the law), and bargaining through civic associations. Instead of controlling campaign contributions, we would take away the powers of government that special interests "buy." Unions would once again be the watchdogs for employees, bankers would not lend to companies that did not live up to accepted practices, employees would organize and manage their own health care and pensions. Advisory organizations would be set up to help them. Some income redistribution (such as a negative income tax) might be necessary so poor people could pay for their necessities.
Is this a Quakerly way to live, or have I misjudged? Please let me know what you think.
Yours in friendship,
Readers' Comments:Please send comments on this or any TQE, at any time. Selected comments will be appended to the appropriate letter as they are received. Please indicate in the subject line the number of the Letter to which you refer! The email address is tqe-comment followed by @quaker.org. All published letters will be edited for spelling, grammar, clarity, and brevity. Please mention your home meeting, church, synagogue (or ...), and where you live.
Your letter is very timely, and useful and your experience as a CPA is enlightening. I agree it would be preferable to encourage civic mindedness again, but how do we do that? Maybe World War II engendered a feeling of community that has not been repeated since, and would be difficult to foster.
Virginia Flagg, San Diego (CA) Friends Meeting.
The reason lobbyists and political contributors are powerful is that politicians have put themselves in the position of controlling so much of the economy through laws and regulations. It is a conflict of interest, of course, but it feathers their nests. Until the public understand this and realizes that the "protection" that the current regulatory system provides is chimerical in all too many cases, nothing will change--no matter which political party is in control.
Ken Allison, Episcopalian, Paradise Valley, AZ.
How many times in recent years have we heard, "I didn't do anything illegal?" Reading your comments on Enron, etc., I realized how disingenuous this was, especially when made (as it usually is) by people involved in the making of the laws in the first place. This is the new process: If you want to do something unethical, write a law that allows or ignores it, then say that you didn't do anything illegal. If it is mentioned in the law, change it or get an exception. "It was perfectly legal ..." In any case, get permission from someone else to do something you know is wrong. Then it's okay you can ignore your own conscience.
Gusten Lutter, Mountain View Friends Meeting, Denver, CO.
"Timeo Danaos, et dona ferentes." Translated here, I would never trust the New York Times. It may be right, but government is now in the incessant business of granting and denying exemptions, and whether lobbying (as opposed to perfectly proper presentations to the deciding agency on the merits) were determinative is likely to be tricky. The New York Times' resolution of the issue can be somewhat discounted: even though the officials must have belonged to the Clinton administration, the episode relates to campaign finance, and the New York Times, like the Washington Post, is very eager for more restrictions (on everyone except the media).
Two related issues:
As I was noting over the weekend, it is not clear to me that any buying of government influence, no matter how defined or how much may go on, has actually been relevant to this case.
Stephen Williams, Bethesda (MD) Friends Meeting.
I thought I'd never see another classical liberal Quaker after Hoover died. They get in shorter supply the closer one gets to Lake Michigan.
William Urban, Peoria-Galesburg monthly meeting.
The "cult of quarterly income statements" to drive up stock prices led directly to Enron hiding debt off their balance sheet and the debacle that has followed. Enron ignored Parkinson's Law for Company Presidents, "If things are so bad you have to lie about them, they will be even worse when you are found out."
Gordon Johnson, Episcopalian, Arlington VA.
I am a member of Sweden YM, although I feel more united with the original Quaker message as today is expressed more clearly by New Foundation Fellowship. Trained as an economist, I used to be politically active as a classical liberal (libertarian), or anarcho-capitalist in Sweden, which, to me, ought to be the political agenda of Friends. It is the only agenda I feel is compatible with Friends rather individualistic view on religion, the only agenda that values individual freedom enough. I am somewhat surprised by how modern Friends can unite in favor of semi-socialistic views, when respect for the individual ought to follow from their religious views.
Petter Brolin, Sweden Yearly Meeting.
I really enjoyed reading your perspective, as usual. But I think you made a stronger argument for the regulation of CPAs, disallowing conflict of interest practices, than for the conclusion you presented. I may have just missed their subtlety, but for me, the beginning and middle of your letter did not present the steps that would lead to the conclusion.
Ann Dixon, Boulder (CO) Meeting of Friends
What is a negative income tax? I commend you on your timely selection of essay material. Being an advocate of the poor makes you a man after mine own heart. I shouldn't have to ask this question if I had been observant, but how do I access your previous articles?
Dennis Bentley, Morganton, NC (no Friends Meeting in my town).
Answers: (1) A negative income tax is one where low-income people receive money from the government instead of paying it. The tax progresses as one's income rises, first to zero and then to positive amounts. (2) To access previous letters, visit http://tqe.quaker.org. Jack
I definitely enjoyed TQE #34. I agree with you about culture. I've noticed that some Wall Street Journal editorialists take the position that it's silly to expect auditors to be honest watchdogs, which I find very disturbing. The one thing the WSJ tends to come through on (in my opinion) is the old JP Morgan values of character and probity that they are so ready to toss them aside now seems like a very bad sign.
Geoffrey Williams, Bethesda (MD) Friends Meeting.
I, too, am a CPA and not practicing auditing. I have taught accounting and auditing at the college level. The more I learned my craft, the more I realized that creative accounting" (It's an art, not a science!) was what the businesses of the world wanted, not the best picture of what was actually happening to a business's numbers. I ended up resigning from the American Institute of CPA's in 1978, after I discovered how badly the numbers were being "crunched" to create the image that management wanted.
Free Polazzo, President, Friendly Systems, Inc., Anneewakee Creek Friends Worship Group (Douglasville, GA)
In a First-Day school class I was trying to counter the contention in the book I was given that hungry countries should grow food rather than more valuable exports. I had them suppose that people in a hungry country discover that they can make a hat that is popular in Europe and America and that the market value of the hats exceeds the market value of the food they could have produced with the same labor. At that point, one of the young ladies said "As soon as they showed a profit, a greedy American company would swoop in an take over their business."
We discussed her point, and I made many of the comments that I think you would in that situation. But what got my attention is that a high-school sophomore raised in a nearby meeting had been conditioned so thoroughly that I could elicit such a knee-jerk reaction to my simple example. I shouldn't be surprised. Over the last few years I have met many adult Friends around here who believe that all corporations are evil and that multinationals are even worse. It is natural that they would inculcate this in their children. I suspect that this view of the world economy has become a feature of the First-Day school curriculum wherever I am not teaching.
Asa Janney, Herndon (VA) Friends Meeting
Let me make some specific recommendations along the lines that Jack suggests. Convict the nogoodniks. White collar crime, is a crime. I think it might be wise to forbid Arthur Andersen from doing any more audits of public companies. I think that the SEC might already have that power. We need to be doing a better job of recognizing outstanding ethical behavior in business. There is a lot of it out there. We need to encourage it. I am
Lee B. Thomas, Jr., Friends Meeting of Louisville (KY).
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