The Enron-Andersen debacle

By John N. Doggett

Enron once was the darling of Wall Street. In early 2000, Fortune ranked Enron as the most innovative company in America for the fifth year in a row. Enron also ranked first on management talent and second on employee talent.

On Dec. 31, 1989, Enron’s market value was $3 billion. By the spring of 2001, Enron’s market value had grown to $80 billion. Today, Enron is bankrupt.

The problem, it now appears, is that nothing was as it appeared. The problem, it now seems, is that much of what Enron said was a lie. Enron, sadly, was built on an Alice-in-Wonderland house of phony cards. And Andersen either couldn’t see what was happening, or was actively involved in a cover-up.

Tens of thousands of Enron employees and retirees lost their life savings and retirements because of what Enron’s leaders did and Andersen’s auditors didn’t do. School teachers in Texas will have their retirement checks reduced by as much as $1,000 a month because of what Enron’s leaders did and Andersen’s auditors didn’t do. Pension funds, banks, corporations, universities, charities, insurance companies and individuals in every part of the world lost $80 billion because of what Enron’s leaders did and Andersen’s auditors didn’t do.

Enron is not like K-Mart, another American company whose stock is in a death spiral. K-Mart may soon fail because it couldn’t keep up with Wal-Mart and Sears. Enron has failed because it couldn’t tell the truth and Andersen’s auditors didn’t warn us.

Enron was a large company, but what is striking is that it was also a large law firm. At its peak, I’ve been told, Enron had more than 400 lawyers in their general counsel’s office. In fact, their legal staff was so large that they were the second largest law firm in Texas. A typical Fortune 500 firm of their size, by the way, would have approximately 50 attorneys in the general counsel’s office.

It is now clear why Enron had such a large internal legal staff. On Thursday, the New York Times reported that Enron created 881 offshore partnerships in three Caribbean countries so they could stiff the American taxpayer. Although they claimed to be one of the fastest growing and most profitable companies in the world, they paid no federal income tax during four of the past five years.

At the same time that they were dodging taxes, however, the top 24 executives and board members of Enron sold $1.1 billion in stock.

After these executives and board members lined their pockets and stiffed us tax payers, they then prevented Enron’s employees and retirees from selling their stock late last year until it was too late. They did that by switching Enron’s pension plan administrator just as they were announcing record losses.

By changing plan administrators, they were able to prevent plan members from selling Enron’s stock for 30 days. At the beginning of that 30-day waiting period, the stock was worth $25. By the time the waiting period was over, the stock was worth a buck.

There was no legitimate business reason to prevent employees or retirees from selling their stock at that time. It was too late to stop the hemorrhaging. Enron’s leaders had already called politicians to warn about Enron’s potential bankruptcy. Enron was dying. The only benefit Enron’s leaders could gain was the mean-spirited knowledge that they had screwed those employees who believed that they had been telling the truth.

It would be one thing if Enron had just used aggressive accounting measures. But a story in Thursday’s Wall Street Journal suggests that senior management of Enron just plain lied. After obtaining $115.2 million in financing to sell videos over their broadband Internet system with Blockbuster, Enron claimed $110.9 million in revenues even though they hadn’t generated one cent in cash and had no paying customers. That’s not aggressive, that’s lying.

If you think that Enron and Andersen’s failures will not affect you directly, think again. Because of what Enron did and what Andersen did not do, investors around the world are asking the unthinkable question. They are asking whether they can trust the “audited financial statements” of America’s “best” companies.

Because of what Enron did and Andersen did not do, the trustworthiness of investing in the American stock market has now been placed in doubt. I cannot overemphasize how damaging this turn of events is to the economic well being of every person on this planet.

Because if you can’t trust audited financial statements of American firms to be accurate, then how can you trust the American stock market? And if you can’t trust the American stock market, how can you trust the products or services made by American companies?

As an American and a journalist, I will grant the leaders of Enron and Andersen the benefit of the doubt and the “presumption of innocence.” If guilt is proven, however, no prison will be too harsh, no prison term too long to ever repay the rest of us for the damage that these people have done.

Because this was no “white collar” crime. If guilt is proven, we will know beyond a reasonable doubt that the leaders of Enron and the auditors of Andersen waged a systematic and deliberate attack on the very foundation of America’s economy. And the punishment for that crime must be so severe that no one will ever be tempted to do things the “Enron-way” in the future.

John N. Doggett

John Doggett is a business school professor, management consultant and lawyer who lives in Austin, Texas. In 1998, Talkers Magazine selected John as one of the 100 Most Influential Radio Talk Show Hosts in America . In 1997, Headway Magazine selected John as one of the 20 Most Influential Black Conservatives in America. Read more of John N. Doggett's articles here.