Tag: accounting systems

Free Markets – free? markets? – lessons not learned

“Free market” has always struck me as a rather strange phrase. Never more so than in this period of financial market disasters. The phrase ‘free market’ continues to be used reflexively. Just as commentators go right on speaking of Wall St. as a source of capital and innovation, few want to ask out loud why we need most of  Wall St.’s “services”; few people are openly using the most obvious words to describe these services as gambling; and, we go right on using this phrase, “free market” to describe an economy that is not free and in many sectors not a market. A recent exception to this are the comments of Ben Friedman, a professor of economics at Harvard, who said, speaking on the PBS Newshour1  of the continuing high percentage of our “best and brightest” going to employment on Wall St., “…it’s all the more troubling when I think that, after they leave us, so many of them go into activities that are not economically productive for the country, for society, even, just narrowly, for the economy.”

  1. http://www.pbs.org/newshour/bb/business/jan-june10/makingsense_06-04.html []

Enron, Trust and Malfeasance

January 23, 2002 (revised 1/29/02)

The collapse of energy giant Enron over the last six months has produced a surprising level of outrage especially for a cynic like me.

As this drama continues to unfold, I have been trying to understand how Enron structured their business and made money. Until just last night I was operating on the belief that the cleverness and sophistication of Enron’s managers simply outstripped my analytical skills. But, as I have been following the writing in the NY Times and Wall St. Journal, slowly it has come to me that they don’t understand the maze of structures and deals employed by Enron for years either.

Then, last night, on the Jim Lehrer News Hour on PBS, Paul Solman, one of the regular financial reporters, gave his analysis of what has been going on. After listening to Solman’s report, it is clear that Enron has been engaging in massive deceit, deception, and downright criminal activity for years.

Now, I must admit to some familiarity with the habits and attitudes of managers. I am used to the aggressive behavior of managers trying to stretch the accounting systems to make the most recent quarter look good. In fact, I have participated in such activities. But, Enron has engaged in a long-term shell game aided and abetted by its accounting firm, Arthur Andersen, LLC. The failure of the government (the SEC) and more importantly, the audit companies, to provide oversight, transparency, basic facts, and above all the application simple commonsense ethics to a huge company’s activities is outrageous. It undermines the credibility of the economy. If Arthur Andersen, one of the oldest and most prestigious audit firms can be so blind over so many years, what are we to make of their, and other audit firms’ reliability for oversight of all the other firms so many of us hold in our 401K funds?

It will be interesting to see how the government and the financial institutions of capitalism react to this. It is a basic tenant of the capital and equity markets that timely, transparent information is essential not only to the best and highest use of our capital resources, but also to the maintenance of trust in a reasonably fair play space.

You can see the Solman report on the PBS web site (opens in a separate window)

And, from Friday January 25, 2002, here is more Solman on Enron (opens in a separate window)