Publish or perish?
(Certainly in the context of this thread.)
The Anti-Capitalistic Inquisition
- Thread starter PoundTheRock
- Start date
(Certainly in the context of this thread.)
Enron is not as a big deal as everyone made it. Their mistake was NOT 'hiding debt', their mistake was panicking when people came to call. Their actual mistake was quite small and trivial...it's just been blow WAY out of proportion.
For the record, their 'off side' and trivial mistakes are related to their treatment of their Off Balance Sheet Special Purpose Entities. These are companies that are set up for short term transactions, like synthetic leases, who are wound up at the end of the transaction. Enron was using these SPE's to conceal it's debt. But hey, lots of companies do this - for example, when TELUS does a Sell and Lease back - it's doing the same form of transaction and is not 'offside'. Enron, being enron, rammed 16 billion $ of debt through the SPE's. Still, not illegal, they followed Federal Accounting Standards Boards rules by the book - just because FASB rules weren't 'up to speed'..hey is that enron's fault?
Anyways, the mistake they made, was some of the SPE's were not securitized properly. Enron owned 10% of the economic interest in the SPE's, at that time the FASB rules stated if you own under 10% of the economic interest in an SPE, you don't have to consolidate the entity into your balance sheet. So they were off by a few percentage points.
This was actually where the canadian banks came in. They where giving out loans to a Fortune 500 company's offshore subsidiary, and by so doing were filling the economic interest gap of the other 90%, and making a reasonable amount of money by the transaction. But the banks responsiblity is to its shareholders - to ensure that every loan it makes, it can receive repayment on. Enron was providing this general security against it's stock which was both liquid, and stable...so how are the canadian banks to have known?
For the record, their 'off side' and trivial mistakes are related to their treatment of their Off Balance Sheet Special Purpose Entities. These are companies that are set up for short term transactions, like synthetic leases, who are wound up at the end of the transaction. Enron was using these SPE's to conceal it's debt. But hey, lots of companies do this - for example, when TELUS does a Sell and Lease back - it's doing the same form of transaction and is not 'offside'. Enron, being enron, rammed 16 billion $ of debt through the SPE's. Still, not illegal, they followed Federal Accounting Standards Boards rules by the book - just because FASB rules weren't 'up to speed'..hey is that enron's fault?
Anyways, the mistake they made, was some of the SPE's were not securitized properly. Enron owned 10% of the economic interest in the SPE's, at that time the FASB rules stated if you own under 10% of the economic interest in an SPE, you don't have to consolidate the entity into your balance sheet. So they were off by a few percentage points.
This was actually where the canadian banks came in. They where giving out loans to a Fortune 500 company's offshore subsidiary, and by so doing were filling the economic interest gap of the other 90%, and making a reasonable amount of money by the transaction. But the banks responsiblity is to its shareholders - to ensure that every loan it makes, it can receive repayment on. Enron was providing this general security against it's stock which was both liquid, and stable...so how are the canadian banks to have known?
howard hughes also, in a machiavellian way, used the government to his advantage as well. he used mcarthyism to manipulate his hollywood business ties into doing what he wanted, intimidating them with the fear of blacklisting. the movie shows that too, a bit (willem defoe's part).
Quote from Holmes:
Howard Hughes and the movie "The Aviator" is a good example of this.
Sherlock
I confess that I am not very familiar with the specifics of Enron's demise. However, were not these "special entities" essentially formed (or at least used) to illegally conceal the trading losses that the company incurred? If so, then that is decidedly different in both substance and form than the conventional sale-leaseback as a means of off balance sheet financing, as you described in your example. Further, off balance sheet financing does not actually "hide" debt, as you suggested. The specifics of, say, a capitalized lease (and even a material operating lease, for that matter) are outlined in the accompanying notes to a company's financial statements. These notes may not be as prominent as the statements themselves, but they are there. Did Enron disclose its liabilities in this manner? If not, then your assessment is faulty in my opinion. Even contingent liabilities must be properly disclosed. Enron's trading losses were far more than merely contingent. Were they properly disclosed in one form or another? And what was the sum total dollar value of Enron's "trivial mistake?"
I admit that the sums being bandied about are staggering. I will also admit that I am not familiar with the specifics of the Merck case. However, was it not shown that the company knew more about the drug than it was letting on, and that its use was riskier than what they disclosed? If so, then it was playing financial chicken of "positive expectancy" with human lives. All drugs have side effects. However, those side effects should be properly disclosed so that a potential user can make an informed decision. When you allow a company to play a game of probability with human life and not at least disclose the nature of those probabilities, then that company is engaging in immorally (and illegally) commoditizing human life. Perhaps if one of your family members died because she was exposed to greater risk than she thought she was taking on, then you might choose to view it differently.
No one can offer perfection. However, everyone should provide full and proper disclosure. Companies negligently engaged in financial chicken at the expense of human life should be discouraged from doing so. Neither pharmaceuticals nor any other type of company should be allowed to play with human lives unless those humans also know the odds of the game. I think that making it punitively expensive should only be the first tier of the remedy. Otherwise, you may find yourself unsuspectingly driving the next Pinto tomorrow or taking the next Vioxx.
Interestingly, there appears to be a parallel with Enron, as per the prior post. Can you see the underlying theme? Enron's inept trading caused financial problems. However, it was their improper disclosure that cause the legal problems.
Here's an article, wrote by the assistant professor of accounting and director of the Personal Financial Planning certificate program at Moravian:
http://www.moravian.edu/news/magazine/spring02/enron1.htm
A few quotes from it:
"In terms of "audit failure," many of the accounting problems with Enron fell within GAAP guidelines. Unfortunately, many audit failures that resulted from clear violations of GAAPâthose associated with Waste Management, Lucent Technologies, Cendant, and Sunbeam, to name a fewâreceived far less media attention"
"A reading of accounting standards related to SPEs (with Enron, this included the partnerships, the arbitraging, and the off balance-sheet debt) would show that Enron technically complied with GAAP. Its main problem was lack of disclosure and, perhaps, a certain creativity in assigning guarantees of debt behind its SPEs. And under GAAP, the assets and liabilities of an SPE aren't included in company consolidation reports if independent third-party investors contribute at least 3% of the entities' total capital and exercise voting control. By accepting part of the SPEs' total capitalization from independent third parties, Enron not only was able to avoid inscribing its liabilities on the books but also did not have to eliminate intercompany sales, thereby inflating its revenues.
Information regarding the off balance-sheet risk associated with Enron was included in the disclosure notes of its financial statements"
So it looks to me like this was a problem with the regulators not staying on top of things and also, of analysts being too lazy to dwelve deeper into a company's financial statements. Enron looks like a scapegoat for their incompetence, and to say things like "they were within the letter of the law, but not the spirit" is just unprofessional in my opinion on part of any lawmaker. They should do their job and write the laws properly, keeping on top of technological and other advancement.
http://www.moravian.edu/news/magazine/spring02/enron1.htm
A few quotes from it:
"In terms of "audit failure," many of the accounting problems with Enron fell within GAAP guidelines. Unfortunately, many audit failures that resulted from clear violations of GAAPâthose associated with Waste Management, Lucent Technologies, Cendant, and Sunbeam, to name a fewâreceived far less media attention"
"A reading of accounting standards related to SPEs (with Enron, this included the partnerships, the arbitraging, and the off balance-sheet debt) would show that Enron technically complied with GAAP. Its main problem was lack of disclosure and, perhaps, a certain creativity in assigning guarantees of debt behind its SPEs. And under GAAP, the assets and liabilities of an SPE aren't included in company consolidation reports if independent third-party investors contribute at least 3% of the entities' total capital and exercise voting control. By accepting part of the SPEs' total capitalization from independent third parties, Enron not only was able to avoid inscribing its liabilities on the books but also did not have to eliminate intercompany sales, thereby inflating its revenues.
Information regarding the off balance-sheet risk associated with Enron was included in the disclosure notes of its financial statements"
So it looks to me like this was a problem with the regulators not staying on top of things and also, of analysts being too lazy to dwelve deeper into a company's financial statements. Enron looks like a scapegoat for their incompetence, and to say things like "they were within the letter of the law, but not the spirit" is just unprofessional in my opinion on part of any lawmaker. They should do their job and write the laws properly, keeping on top of technological and other advancement.
bobbyod,
If that is so, then clearly I am out of my depth, both in terms of the specifics of the company's problems and accounting principle nuances.
However, permit me a possibly naive observation or two. If I understood correctly from the passages you quoted, the company did not disclose its guarantees of transactions. These are contingent liabilities and must be disclosed, especially if those guarantees are significant. So, if they did not comply in this regard (if I understood the text correctly), then how could they have disclosed all off balance sheet risk, as noted in the final sentence of your quote? Further, those special entities, if memory serves, were assigned major trading losses. Therefore, if the referenced guarantees were in connection with those losses, then those liabilities take on much more immediacy than mere contingencies. So, my question is: how could the writer of the article have it both ways? How could he assert that Enron disclosed its off balance sheet risk, and at the same time suggest that its main problem was a lack of disclosure in respect of guarantees? Further, did not an accounting firm go down in flames as a result of this debacle? Why would that have been the case if there had been no material accounting improprieties?
But let me repeat that I know I am out of my depth insofar as Enron and its accounting is concerned. Just thinking "out loud" here and making off-the-cuff observations.
According to my understanding of the laws at the time, they did not have to disclose the off balance debt, all they had to disclose in their financial statements notes was the existence of those SPEs but not actual hard numbers. As long as their stock price stayed up, they should have been able to meet their guarantees for the SPEs, the problem was their stock price did not reflect the true debt Enron had, and once investors found out, it led to a domino effect.
Regarding why Andersen went down, it looks to me like it was more because of the way they handled themselves after the investigation started, acting guilty, shredding documents, instead of cooperating openly with the regulators.
Here's one more link that explains it in more detail:
http://www.hoylecpa.com/cpe/lesson001/Lesson.htm
A quote that captured my attention:
"Financial analysts who did not carefully read the footnotes and research the financial position of all of the special entities would not have known about the missing information. In fact, since the special entities were not publicly held, the information about them could only have been obtained through Enron. Thus, analysts could not have discovered the full truth unless Enron provided the information"
Regarding why Andersen went down, it looks to me like it was more because of the way they handled themselves after the investigation started, acting guilty, shredding documents, instead of cooperating openly with the regulators.
Here's one more link that explains it in more detail:
http://www.hoylecpa.com/cpe/lesson001/Lesson.htm
A quote that captured my attention:
"Financial analysts who did not carefully read the footnotes and research the financial position of all of the special entities would not have known about the missing information. In fact, since the special entities were not publicly held, the information about them could only have been obtained through Enron. Thus, analysts could not have discovered the full truth unless Enron provided the information"
OK, but to most people that kind of behavior would suggest a cognizance of guilt of one form or another. The firm's efforts were fairly orchestrated in their attempted cover-up, and I doubt that it was merely an attempt at PR.