Sucheta Dalal :Lessons from Enron's implosion (21 January 2002)
Sucheta Dalal

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Lessons from Enron's implosion (21 January 2002)  

The dreadful disclosures about Enron’s deep inroads into the US political system and its policy making apparatus are of immense significance to those who have been worried about the aggressiveness with which US companies push their business interests in the third world. Enron’s political patronage in the US — all through official cheque payments — was extremely broad based and covered top political appointees. No wonder then that US ambassadors (remember Frank Wisner and his successor?) and trade delegations had no compunction about forcefully pushing the interests of Enron and other companies. At the same time, US companies, arrogantly parried even suggestions about questionable practices by citing the US Foreign Corrupt Practices Act. US companies portrayed their existence as a guarantee of their good behaviour. (I particularly remember a press conference by General Electric’s India chief Scott Bayman, in the mid 1990s when asked about the controversial Enron deal).

In fact, the world will soon realise that it has a lot to be grateful for the wide sweep and outrageousness of the Enron debacle. For some time at least, US politicians and companies will no longer be able to patronise anybody, especially us corrupt nations of the third world, about supervision, disclosure practices, accounting standards or even the avowed meticulousness of Wall Street analysts. The Enron flameout has dragged their moral superiority down with it.

Writing about how the political storm brewing over Enron has “raised the lid off crony capitalism, American style”, Paul Krugman paints a horrific picture in the New York Times about how Bush’s cronies have swung political deals that would put our worst politicians to shame. He cites the example of the chairman of the Republican National Committee, who continues to draw a seven-figure salary as a lobbyist even in his present job. He talks of how Kenneth Lay (who was threatening India with sanctions just before the scandal erupted) “had allegedly told the head of the Federal Energy Regulatory Commission that he should be more cooperative if he wanted to keep his job. (He wasn’t, and he didn’t)”. Of how Dick Cheney “has devised an energy plan that looks as if it was written by and for the companies that advised his task force” and how Cheney, “in clear defiance of the law, has refused to release any information about his task force’s deliberations”. Krugman’s list of crony deals includes companies close to the Bush administration that gained billions of dollars from deals swung in their favour or rules changed to their benefit.

One of the most shocking examples is that of the Carlyle Group, exposed by Red Herring magazine. Carlyle buys “down-and-out defence contractors” and resells them when their fortunes “miraculously improve after they receive new government business”. Carlyle’s not-so-secret turnaround formula is in the form of George H W Bush, former US President and father to the present. Among the group’s investors, until late October last, was the bin Laden family.

But apart from Krugman’s disclosures about how patronage by US business controls policy making, the Enron debacle has several implications for business practices that are being touted in India as the recipe for efficiency, transparency, accountability and profitability of the corporate sector. One important lesson would be the fallibility of Wall Street’s famous research skills. Enron proved that when the going is good, Wall Streets’ analysts are as gullible as the small Indian speculator. They failed to probe Enron’s shady accounting practices or question its illegal “partnership” companies until it imploded. Surely, some market intelligence or close contacts would have rung alarm bells? After all, an Enron employee had certainly seen the end coming.

Another issue that needs debate is the liberal use of stock options and performance bonuses. This carrot has the effect of causing employees to fudge bottom-line numbers, inflate targets and exaggerate profit estimates. In this, the fund managers make common cause with corporate executives in writing up fictitious earnings only to boost the stock price and line their own pockets.

A third issue that needs scrutiny is the manner in which business influences policy decisions. The US example has shown how California, exhorted by business lobbyists, messed up its energy policy through mindless deregulation. Californians were told that deregulation was entirely to their benefit since it would increase competition and drive down power tariffs. In fact, it did exactly the opposite and led to brown outs, public protests and finally a rollback of policy.

India too has pushed through several bad policies under the guise of helping the common man. Until recently, one had more-or-less relied on public interest litigation and the judicial activism to counter political connivance in policy making. However, an unlikely fallout of the Supreme Court’s landmark judgement in the BALCO case may lead to courts refusing to entertain the most anti-people moves by refusing to intervene in policy matters. Ironically, the two-time clearance to the scandalous Dabhol power project is exactly in this category. Despite more than 26 litigations filed against it, the courts refused to go into crucial issues pertaining to tariff calculations and granting of key clearances. The rest is history.

A fourth issue is the emulation of the US accounting practices or Generally Accepted Accounting Principals (GaaP). Clearly, there are several gaps in the system providing ample room to hide plenty of shell companies and their shady accounts. Even companies like Cisco and GE have been accused of accounting fiddles. We will have to fine-tune our auditing and accounting standards without blindly copying US systems.

Finally, a positive lesson that needs to be learnt is that the Bush administration, for all the patronage that it had received, did not rush off to bail it out. Everything about Enron is now in public domain and every bit of paper that exposes yet another scandalous fact makes it to the media at lightning speed. Similarly, the fact that Andersen is one of the big five accounting firms will not save it from the enormous costs and consequences of failing to do its job. Beyond the titillation of the Enron scandal, this ought to be our most important take away from the episode.

-- Sucheta Dalal