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)

Whose Opinion (Advice) Is This?

Whose Opinion (Advice) Is This?

The Problem

At a time when we are quite aware of the need for and value of transparency in the reporting of the activities of corporations (thanks most recently to the Enron affair), we could quite usefully extend this transparency metaphor to other parts of day-to-day life. The print press, TV, radio, and internet are filled with opinions and advice from all sorts of people. Many of these pass for expert status just based on affiliation with universities, institutes, and think tanks.

Increasingly we must ask ourselves, “whose opinion is this?” Who is being served by the expertise?

Although many in the academic and chic cultural world (not to mention the various right-wing types in political and religious quarters) may think that relativism is the creation of post-WWII French philosophy, most of the rest of the world knows full well that “truth” is in fact relative, that is, relative to who is paying. No surprise, the “experts” know this too, and regularly seek to hide or obscure who is paying. Now, even the pinnacle of prestige in the medical world, The New England Journal of Medicine, has had to strengthen its guidelines that seek to separate research performed at arms length from the pharmaceutical/medical industrial complex from that more directly controlled.

A Step Towards a Solution

What can we do to provide a substantial increase in the transparency of our information sources while keeping things simple?

We should begin to demand that every expert, commentator, think tank institute, or university laboratory reveal the sources of 80% of the funds supporting its research/organizational activities. In the vast majority of case the list of sources will not exceed three or four. This protocol will provide a revealing base of background information without substantial burdens.

A Caveat

Although the protocol proposed here will increase the transparency of our sources of information, it will not relieve us of the work of making sense out of the data and theories presented in any given situation. Just because a given piece of research is funded by “bad people” does not mean that the data is not meaningful and the analysis correct.