Washington Post Editorial January 27, 2002
SUMMONING UP contemptuous rage at the Enron hearings last Thursday, Sen. Richard Durbin (D-Ill.) declared, "When the corporate insiders at Enron realized the ship was sinking, they grabbed the lifeboats and left the women and children, their workers and investors, to drown." But this scandal is actually much worse than that. The bad guys did not merely grab lifeboats; they deliberately created the leaks that brought the ship of Enron down. What's more, the bad guys included not just Enron executives and Arthur Andersen's accountants but also, to a different degree, many of Mr. Durbin's own colleagues in Congress.
Start with Enron's managers. Until last week, it seemed likely that Enron had taken on too much risk; that it had hidden this risk from shareholders by parking it in secret partnerships; and that senior executives had urged investors to buy stock even when they themselves were selling out. But fresh details suggest worse than this. Enron's executives apparently used the secret partnerships not just to hide risk but also to steal money from shareholders. The small group of financiers and insiders that invested in the partnerships reaped returns higher than ordinary shareholders could dream of; one deal paid out 212 percent in just over three months. This was a way of siphoning money that should have been declared on the company's balance sheet. The money belonged to Enron's shareholders. They were robbed.
Next, consider Arthur Andersen. The company claims that one rogue partner was responsible for shredding documents in an apparent coverup. But the supposed rogue, David Duncan, did at least advise Enron against issuing a misleading statement about its earnings; it was Andersen headquarters that recommended he destroy the record of his misgivings. Yet even if other Andersen employees were involved in shredding, that would actually understate the scandal. For Andersen was colluding in a different kind of coverup years before the bankruptcy, starting in 1997 when it signed off on financial statements that it knew to be wrong. What's more, Andersen may well have done the same at other companies; the Securities and Exchange Commission has alleged that the firm's partners saw but failed to prevent problems at two other companies, Sunbeam Corp. and Waste Management Inc. Some Andersen managers seem to have made a business decision to condone misleading financial statements, figuring that it is more profitable to placate top executives than to protect investors. In consequence, shareholders again got robbed.
Now consider Mr. Durbin's colleagues. During the 1990s Congress repeatedly squashed attempts to tighten rules on auditors. Sen. Joe Lieberman (D-Conn.), who chairs the Senate committee that held Enron hearings on Thursday, fought in 1994 against proper accounting for stock options. Rep. Billy Tauzin (R-La.), the chair of Thursday's House hearings on Enron, opposed a plan to bolster auditors' independence from managers in 2000. Sen. Chris Dodd (also D-Conn.), who now proposes reformist legislation, led a battle in 1995 to limit auditors' liability. These and other members of Congress would like you to forget this, or perhaps to believe it was an honest error; "we were wrong," Sen. Robert Torricelli (D-N.J.) declared on Thursday, in a show of graciousness. But in Congress there was never a fair argument over the merits of audit regulation. The merits by and large were on one side, and the campaign dollars were on the other. Of the 248 members who sit on committees that plan to hold hearings on the scandal, an extraordinary 212 received money from Andersen or Enron.
All the players in this scandal -- Enron's managers, its auditors, the lawmakers -- helped to create the conditions for Enron's collapse. That collapse cheated investors of their savings and cost thousands of jobs. It has also called into question the whole premise of stock market capitalism, which is that investors scrutinize honest financial statements and then allocate capital to the companies that will use it best. If financial statements aren't honest, then capitalism is in trouble. Corporate leaders, auditors and lawmakers need to put aside venality-as-usual and start thinking of remedies. The past pattern -- in which audit scandals have yielded brief breast-beating but no action -- must not repeat itself.