Thanks to Michael for giving me the chance to guest blog. It was fun 2 years ago. Hope you out there find my stuff somewhat interesting.
I am a tax guy. Unfortunately, from my blogging point of view, in the US, the only interesting discussion going on about taxes these days is about the estate and gift tax, and I have little to add to that debate. (Yes, we should not be Mexico…)
But, in the other area in which I know something, law and accounting, lots is happening. The ongoing option backdating scandals make it clear that much still is wrong with the accountability of corporate managements. So, for now, accounting seems more worth writing about.
Which gets me to Enron. Many have noted the importance of the recent convictions of Lay and Skilling: The convictions restored some faith in justice. More importantly, for my purposes, they saved public capitalism. If Lay and Skilling had been able to get away with what they did, it would have seriously undermined the public’s faith in the capital markets.
But another aspect of the convictions has not received public scrutiny and merits discussion: how the convictions were achieved.
(My analysis is based on public reports and various blogs by reporters who were present at the trial.) The prosecution quite smartly did not attempt to try Lay and Skilling on their misleading accounting. After all, the jury would not have understood. Instead, the prosecution’s case was that Lay and Skilling are real smart guys who must have known of Enron’s problems, yet they said all was well. The company went belly up. Thus, Lay and Skilling must have lied. Do not pass go. Go to jail
OK, good for the prosecution. Right way to win! But, what does that say about modern investing? If the best lawyers and experts could not explain Enron’s accounting to a jury, the average individual Enron shareholder could have had no idea what she was investing in. This strikes me as a bad thing. Which is where we will pick up tomorrow.
I thought the Kurt Eidenwald book did a good job going through those complex scams and interrelated accounting domino effects (and I hope/assume it was an accurate depiction) – but on a certain level I can see the issues with not even attempting this with a group of jurors and expecting them to follow this for a conviction.
I thought the Kurt Eichenwald book did a good job going through those complex scams and interrelated accounting domino effects (and I hope/assume it was an accurate depiction) – but on a certain level I can see the issues with not even attempting this with a group of jurors and expecting them to follow this for a conviction.
Karen, I took an additional point away from the Eichenwald book: In its later years, most of Enron’s profits were from phoney mark-to-market accounting. (The absence of associated operating cash flow was masked using “pre-pay” transactions, borrowings disguised to look like receipts of operating cash flow. These transactions are behind the huge settlements with banks. Eichenwald does not go into pre-pays in any detail.) The SEC had blessed the basic contours of Enron’s use of mark-to-market. Explaining to the jury how Enron went beyond the SEC’s authorization would have risked real confusion. George
I was forgetting about the use of *mark-to-market* accounting for posting of their fake “profits” on deals. I was thinking about the Fastow deals and interrelated effects…but thanks for that reminder! (See it was awful complicated! ) *smile*
Enron employees, on the other hand, culled from each other within a cutthroat competitive environment, should have had an inkling of certain questionable practices. Which suggests their own greed made them willfully blind.
In the heady irrational exuberance days, it didn’t surprise me how many investors and the greater group of daytraders were unaware of sound accounting practices. But from what I observed, funny numbers were all the rage, not just within boardrooms but at most brokerages.
Thus, it doesn’t surprise me that prosecutors chose the path they did. But I am discouraged that colleges and high schools aren’t required to do a better job with this, as well as basic economics.
Kevin, I agree completely. The reason that I wrote an accounting for lawyers book was so that Miami educated lawyers would know this stuff and the other books focused more on bookkeeping than economics. My colleage, Rob Rosen, had pointed out to me how most young lawyers feel they know too little business.
As to the Enron employees, I feel little sympathy for those who got their stock years before the crash and then cried over the lost fake value earned in the run up. On the other hand, those who bought toward the end relying on Lay’s promises and those locked in in the pension plan because of the changing of the pension manager deserve some sympathy.