Accounting for Enron need now

l. The probability of discoveryis low enough and the estimated damage too great; there- fore we find a way to quietly and quickly reverse, unwind, write down these posi- tions/transactions.

2. The probability of discovery is too great, the estimated damages to the company too great; therefore, we must quantify, de- velop damage containment plans and disclose.

I firmly believe that the probability of discovery significantly increased with Skilling's shocking departure. Too many people are looking for a smoking gun .... There is a veil of secrecy around LJM and Raptor. Employees question our accounting propriety consistently and con- stantly. This alone is cause for concern .... I have heard one manager-level employee from the principal investments group say, "I know it would be devastating to all of us, but I wish we would get caught. We're such a crooked

" 1company....

Another group of Enron insiders who were in position and had a responsibility to protect investors from fraud was Enron's Board of Directors, and particularly the Board's audit committee. In theory and in law, the board's primary responsibility is to represent the interests of shareholders. In practice, the board seemed less than vigilant in fulfilling these responsibilities. Enron's board approved of Andrew Fastow's violation ofthe corporate conflicts of interest prohibi- tion when he negotiated contracts between Enron and the SPEs in which he was heavily invested and from which he profited tremen- dously. As Benjamin Neuhausen, one of An- dersen's Enron accountants, claimed, the "idea of a venture en ti ty managed by CFO is terrible from a business point of view. Con- flicts of interest galore. Why would any direc- tor in his or her right mind ever approve such a scheme?"

The final line of defense against corporate fraud should be government officials and reg- ulators. Arthur Levitt, chairman of the SEC throughout the 1990s, strongly criticized the

Ethical Issues in Finance and Accounting 413

dual auditing and consulting activities of the big accounting firms as involving conflicts of interest. Congress ignored his advice, appar- ently convinced by the lobbying efforts of the accounting profession to allow audit firms to continue working as consultants to the firms they audited.

The federal government was also actively dismantling a wide range of financial regu- latory protections during the 1990s. During the first Bush Administration, the federal government deregulated the energy indus- try, ostensibly to spur economic growth ac- cording to free market principles. One of the leading advocates for this deregulation was Wendy Gramm, who at the time was chairwoman of the U.S. Commodity Futures Trading Commission. Gramm's husband is Phil Gramm, then U.S. Senator from Texas and a member of the Senate banking, fi- nance, and budget committees that sup- ported this deregulation. Senator Gramm had received over $100,000 in campaign con- tributions from Enron during his last two Sen- ate campaigns. When Wendy Gramm left government in 1992, she joined Enron's Board of Directors as a member of their audit committee.

Questions

1. What responsibilities did DavidDuncan owe to Arthur Andersen? To Enrori's manage- ment? To Enron's stockholders? To the ac- counting profession?

2. What are the ethical responsibilities of a cor- porate attorney, such as Nancy Temple, who works for an "aggressive" client wishing to push the envelope oflegality?

3. Under what conditions should an employee such as Sherron Watkins blow the whistle to outside authorities? To whom did she owe loyalty?

4. Towhom does me board of directorsowetheir primary responsibility?Can you mink of any lawor regulations that would help ensure mat boards meet their primary responsibilities?

414 Ethical Issues in Finance and Accounting

5. What responsibilities do government regula- tors owe to business? To the market? To the general public?

6. Are accounting and law professions or.busi- nesses? What is the difference?

NOTES

1. From a report released by the U.S. House of Representatives Energy Committee, February 2002.