Re: [OPE-L] old books and new books

[tony tinker <tony.tinker@xxxxxxxxx>]

ENRON RIP?

 

            Let's take a moment's silence, to mourn over the corpse of the Enron finale -- and ponder its accounting significance.   

 

            First, many colleagues have, over the years, pleaded with progressive accountants to give them a clear answer to a simple question, "How do we find the dead  bodies buried in financial statements?"  In Enron, we see why there is not straightforward: Enron's accountants, auditors and consultants (KPMG and Arthur Andersen) buried bodies elsewhere (in Special Purpose Entities called SPE's).  

 

            Parking your problems elsewhere is a time--honored accounting ruse, which falls with a family of disappearing tricks, variously referred to "off-balance" accounting, two-sets of books, private slush funds, etc.   These are devices for 'disappearing' high-risk investments, heavy borrowings, substantial losses, and slush fund payments in legal entities "outside" of the financial statements of entities like Enron.   Hence, our usual 'statistics of performance' for assessing firms like Enron are rendered meaningless, because their financial statement have been washed-clean of any trouble.   The practice has been blessed by the accounting firm's trade-association institutions (the Financial Accounting Standards Board, AICPA, etc) with the acquiescence of the SEC.  Insider investors (Lay, Skilling, et. al) who knew the "real" condition of the firm, not only had an "edge" over outside investors (who continued to be suckered with the false information) but they could profit handsomely at the expense of these victims, by continuing to balloon the deceit (with the full authority of the "independent" auditing profession).

 

            A couple of corollaries are likely to pass unacknowledged by the media: First: the court rejected the defense that the defendants abided by accounting rules (bolstered by the testimony of at least one academic apologist, Professor Jerry Arnold from USC).   Indeed, the court's decision showed that following the accounting firms "self-made" rules, was no defense at all.  Academic apologists take note.  

 

            Second, Enron-like disappearing tricks are not new, and are alive and well. The 1977 Foreign Corrupt Practices Act, was an attempt to force the disclosure of hidden slush-funds used to bribe officials; bribes that destabilized the governments of our trading partners ( Japan, Netherlands, Italy, etc).  Over time, the enforcement of this legislation lapsed. 

 

            Off-balance sheet practices are pervasive today: the Federal Government uses them to understate the federal deficit (social security for instance).   Even colleges like my own Baruch College, funded by tax-levied monies, are on the game.  For instance, Baruch (a CUNY entity) uses a privately registered entity,  Baruch College Fund, to supersize the salaries of select faculty. Baruch's own SPE takes removes the college from the Freedom of Information Act requirements.   It is more difficult to obtain salary information from this public institution than tapes from a Nixon Whitehouse.

 

 

Professor Tony Tinker
Co-Editor: Critical Perspectives on Accounting
Co-Editor: The Accounting Forum
Fellow of the Association of Chartered Certified Accountants
Baruch College at the City University of New York
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