The Enron Story & Its Lessons The sudden collapse of the Enron Company the 7th largest company in America and one of the largest energy companies in the world, is certainly one of the greatest financial collapses the world has seen and should teach several lessons to investors. Financial institutions and agencies, investment bankers, lawyers, politicians, the Justice Department, official Washington, Wall Street and the media are all currently circling and positioning themselves in the expectation of finding one of the greatest financial and political scandals of the new century. The first lesson is that large corporations, their stock price and fortunes can collapse almost overnight without much warning to employees and shareholders. For example, despite a financial situation that had to take quite some time to deteriorate to the point that it did, Enron apparently never reported any earnings loss for any of the preceding quarters before suddenly going bankrupt. Enron apparently shifted debts to mysterious partnerships it created, some run by insiders. Employees 401 K plans went up in smoke, up to 60% or more of these holdings were made up of Enron stock. 29 top Enron officials sold off 1.1 billion of their stock holdings, approximately one half their holdings. Another lesson is that investors cannot depend on accounting audits of any company even when performed by major accounting firms. The "Materiality Standard" used by auditing firms in reporting irregularities still leaves significant loopholes which allow creative reporting and accounting practices. Not only did Arthur Anderson LLP, Enron's auditing firm not report certain earnings irregularities it had apparently discovered some time ago, but it has now announced that it has destroyed a significant amount of accounting and auditing documents related to the situation. The big five accounting firms are now apparently extremely concerned about investor confidence in them and possible tightening of regulatory investigations into their practices. Reports are that they are scrambling to find some resolution to the problems. Arthur Anderson has been implicated in other public accounting scandals including the Sunbeam situation. Investors should investigate and research the relationship between the auditing firm and the company. In this case Enron had many former Arthur Anderson employees on its staff, providing a very cozy relationship between the auditor and the employer. Even more interesting the Auditing firm was also a major accounting and financial consultant to Enron, a type of double-dealing presenting amazing potential for conflicting interests according to many experts. In fact some of the conflicting relationships between auditing firms and their clients such as existed in the Enron case would not be public knowledge but for a recent SEC rule requiring the reporting of such relationships. Arthur Anderson made hundreds of millions of dollars in auditing and consulting contracts with Enron. Enron supposedly paid Anderson approximately one million dollars a week for its services. SEC oversight although extremely vigorous can still be a lot better. Investors cannot completely rely on the SEC and other securities oversight agencies. Public and private companies and their auditors, accountants and consultants are experts at manipulating information about their financial and other operations. Investors must therefore always be on guard and perform continued due diligence on their own behalf into the companies they invest in. Maybe traditional influence peddling has lost some of its effectiveness in the new age of investigatory reporting. Even though Enron was the single largest contributor to the Bush Presidential campaign contributing over $2 million dollars and even more to the Republican party, no one apparently gave help when they apparently called the Bush administration for help. In other words government bailouts may not be as sure a thing as in the past. Enron was politically tied to the current administration in so many ways that even the attorney general has recused himself from the investigation into the matter. 82% of Enron's political contributions went to Republicans. However, even during the Clinton administration Enron was the beneficiary of over 4 billion dollars in assistance for its worldwide business operations from agencies like the Export Import Bank. Enron apparently had approximately 874 offshore operations which they could use to manipulate their financial operations. One lesson for employees is that they should diversify their pension and employee stock holdings derived from their employers' companies. Thousands of Enron employees lost life and retirement savings in this disaster, while some of the insider shareholders profited immensely. Investors should limit their holdings in the securities of their employer to no more than 10% to 20% of their portfolios. To effectively accomplish this employees should carefully investigate the various methods available for establishing their retirement contributions and stock options, and not blindly follow the guidelines of their employers' recommended plans. In the Enron case employees were apparently stuck with restricted stock while the Insiders were making millions on their stock holdings while touting the stock although they apparently knew about the failing underlying fundamentals of the company. The full story and all of its lessons are still not fully known, stay tuned more is sure to come. |