The trials of the principal actors in the ongoing Enron saga of greed, financial and accounting juggling, should make us all pause and ask ourselves — do our own “Enrons” exist, but have not yet been “outed”? The fall of Enron and its chief executives — once dubbed as the “smartest guys in the room”, started with some basic research by a brave financial journalist who began to question that Enron’s stock was in fact overvalued. Clever financial analyst money until then had predicted otherwise — Enron was a rising star, and Chairman Kenneth Lay and Chief Executive Officer Jeffrey Skilling were the smartest guys in the room. And why not? They had brought into being one of the most innovative oil trading corporations in US history which seemed to do no wrong.
Enron had led the way in the buying and selling of energy futures whose values they were allowed to include as part of their own assets. An analogy is like allowing a water truck owner, who is delivering water for a customer, to believe that he owns the water he is carrying inside his truck. What was more incredible was that Enron and their accountants were permitted to consider the hypothetical future value of anything they owned as a current reality. Enron started to believe it had a Midas golden touch — they marketed weird and wonderful financial products, such as derivatives, based on anything the smart boys could think of — from Internet bandwidth to the weather. Bankers loved them. The credit rating agencies seemed to follow suit, and the business media fell all over each other to hail the new Kings of financial capitalism.
Enron could not go wrong — their reputation spread fast and far outside the USA and a credulous business community bought into their myth of creating profits out of thin air-just like magic. Who could explain the attraction of Enron to solid, conservative and prudent financial institutions such as Saudi Arabia’s Al-Rajhi Bank, who lost around $50 million in the ensuing debacle? Other Middle East institutions bought into Enron, encouraged by flying Investment bankers to add Enron assets to their balance sheets. This rises questions of regional risk management analysis and experience — how could regional institutions resist when the Big Boys of the financial world were rooting for Enron? A bubble in asset valuation grew and grew, and all it took was one persistent reporter to question such valuations and ignore the glossy brochures and fancy corporate headquarters, but went after more mundane accounting numbers and asked the simple question “Why”? Funny enough, the Enron Corporate Motto was “Ask Why”?, but no one dared, it seems, ask why, or if they did, they were fired.
How can such things happen in a modern day that has instantaneous access to information, data analysis, and multiple sources of cross-checking and supervisory regulators? The simple, but awful truth is that the majority of societies have a need to believe in the rich and the powerful. The richer and more powerful is a corporation, the less inclined we are to ask the simple question “Why”?
In the Middle East, and Saudi Arabia in particular, which is going through a frenzy of initial public offerings (IPOs) and private placements, professional financial investigative journalism is both a duty and a must to avoid unquestioning belief in the mega corporations. One should start with the basic question of “Why 30 percent IPOs, why not 51 percent?”, and why are the public excluded from effective Board membership and closer scrutiny of these minority sale IPO’s? Such journalism is still rare to find, because, in the end, it requires one to refuse to take people at their own estimation of themselves. Investigative toughness and a nose for a story should be installed in financial journalists without fear or favor, and only in this way can our “own Enron’s” be kept in check. They will be found out before they do untold damage to business confidence, tumbling stock markets and to millions of ordinary citizens who are left impoverished by their fraudulent actions. Just ask Enron’s American traumatized and pauperized pensioners who have been left to themselves.
We have not had our “Enrons” yet in Saudi Arabia, and let’s hope that, mercifully, it remains this way. The Saudi regulatory authorities are beginning to put more bite into local stock market manipulation, but more needs to be done to ensure that no exotic accounting and juggling of accounting figures takes place, especially for the high and mighty corporations. It is gratifying to note that more regional and Saudi universities are adding ethical accounting policies to their curriculum — if only the Enron executives and their accounting firms had enrolled in such courses...
(Dr. Mohamed A. Ramady is visiting associate professor finance and economics at King Fahd University of Petroleum and Minerals.)