The Enron corporate collapse, the worst in US business, may well turn out to be one of the greatest corporate frauds the world has seen. It has certainly had the most grievous consequences. Thousands of employees have not only lost their jobs but, because they were conned by their management into investing in their own company, they have lost their pensions in well. They face a most uncertain future. In addition, hundreds of thousands of individuals and organizations around the world have lost money.
There is little chance of recovering very much from the assets of Enron. But claimants against the company did believe that they might stand a good chance of suing Enron’s accountants Arthur Andersen. However, it quickly became apparent that Andersen was guilty of far worse than professional error. As the criminal indictment just filed in the United States makes clear, within hours of the Enron collapse, Andersen employees around the world were busy shredding documents that might have established the firm’s complicity in Enron’s fraud. The chances of recovering much from Andersen have been reduced dramatically following the criminal charges. Big clients are quitting the firm in increasing numbers. The US government itself has banned any new work for the company. Andersen’s senior partners have said that the firm is unlikely to survive commercially and an application to seek Chapter 11 bankruptcy protection seemed inevitable. There is, therefore, unlikely to be much compensation from the organization which was responsible for endorsing Enron’s financial activities.
Attention is now turning to the international rating agencies, which did not give any clear indication that Enron was in serious trouble, until the firm’s woes were becoming public. The moment the news came out, Enron’s rating was slashed to below-investor grade, junk level. This was, however, far too late to have any meaning. The ratings agencies are relied upon to give accurate assessments of creditworthiness. Their judgment underpins the entire complex system of international corporate and national borrowings. Their failure to predict Enron’s troubles comes on top of their slowness to spot the credit crises in Russia and before that in Asia. They have argued in their defense that they rely heavily upon figures given in the public domain, thus figures verified, in Enron’s case, by Andersen. This is ingenuous. Analysts who study a company’s behavior and monitor its markets can generally spot circumstances that annual reports and accounts can conceal. It seems highly likely, however, that if compensation is sought from the ratings agencies, they too will seek Chapter 11 and then go bust.
Therefore, even before the full details of Enron’s own misbehavior become public, there is considerable corporate wreckage building up. It seems almost certain that in financial terms, there are only going to be losers from this debacle.
However, good can come out of this criminal mess. If the lessons learned from it are translated into effective regulation that is applied across the entire international financial system, not least to the professional firms, whose probity is such a key element in a properly functioning transparent market. If this happens, there may be no more Enrons.
