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Of accounting standards
Most of us are aware of the Enron debacle, a most talked about corporate failure of recent times. On December 2, 2001, Enron, once the America's seventh-biggest company, filed for bankruptcy. Only days earlier, its bonds had been downgraded to junk. Enron crisis had also cast serious doubts on the existence of top rated audit firm, Arthur Andersen, and more to say, generally about role of accounting principles followed by audit firms as well as corporate business houses. While the Enron story is now somewhat outdated, the lesson that we have learned from this debacle will stay valid over a long period of time.
Enron was in tremendous pressure to generate profits, to exceed all its peers, to jack up share prices and to upgrade its corporate positioning. These however are not unfamiliar practices in the corporate world. Then, what went wrong? It was running too fast, possibly on a thin rope, without building the required capacities as well as fundamentals. Such behaviour made Enron to compromise its accounting principles, hide losses, overstate the results to investors and adopt unethical management practices.
Investors did not under-
stand Enron's books due to company's shifting of many debts to off balance sheet vehicles, where the accepted market practice necessitated debts to be consolidated into the main accounts. It should have also avoided the practice of investing staff retirement funds in company shares. In the wake of serious concerns regarding Enron's financial statements, the company revised its financials of 1997 to 2000 downward. However, the investors desired that possible merger with the rival company, Dynegy, would have restored confidence and thus halted the unwinding of Enron's book. Dynegy took a closer look at Enron's book and with some surprise to all, decided not to proceed. This made the bankruptcy of Enron inevitable. Dynegy's boss remarked "Enron never understood that business is not just about numbers and the balance sheet: it's about your brand, and the confidence you inspire”.
Apart from Enron's tragedy, the whole corporate world was shocked by the shady practices followed by one of the world's top 5 audit firms-Arthur Andersen. It was said that for partners and professionals at Arthur Andersen, there was only one way to move up: fig-
ure out new ways to keep Enron happy. More than 100 Andersen staff were devoted managing this relationship, which was worth more than US$50 million a year, enough to keep a leading audit firm from blowing the whistle. Several top Enron executives including its chief accounting officer had come from Andersen. Andersen even cut a deal to handle some of the internal' auditing work for Enron along with vetting its public reports for the trading firm's audit committee. All these money- making partnership made Andersen blind to everything that happened at Enron. "If they had somebody who said we can't sign this audit, that person would get fired” - said a former Andersen staff. With emergence of market economies and intensifying pressure to produce everrising earnings and stock prices, the corporate world began to push the accounting boundaries like never before. Auditors were thrown into the role of an enabler, more like a business partner and used to 'clear' corporate failures with green pen'.
What did we learn from Enron? Hiding debt or financial fundamentals can be suicidal for any company. Questions are being raised
about the practices of moving financial obligations to off-book vehicles, inflating profits or jacking up share prices. Investors and bankers may learn not to trust companies that report mysteriously spectacular profit growth; auditors will be warier of bosses' pressure to sign dodgy accounts; rating agencies and regulators may be more nervous about companies that do not come clean with their activities. Besides, regulators will also be careful before being taken away by market reputation of a company.
There are perhaps many cases in Bangladesh that are similar, if not worse, to Enron. A jailed business tycoon, in his testimony to the law enforcing agency (on his alleged role in tax avoidance, despite his companies being practically profitable) said that he did what his accountants told him to do. We came to know of these incidences because they were published in national dailies. But most of such malpractices do not get reported. Therefore, it is essential that a proper standard of corporate disclosure is enforced in the country. Non- disclosures may help organisations to understate and overstate profits for the benefit of certain segment and more importantly, result-
ing in the deprivation of some segments including the general public and the government. By adopting malpractices in disclosures, companies also put themselves in
increased risks and the auditors' with all possibilities sign their own suicidal note!
The writer is a banker and economic analyst.