The Hindu Business Line : Lessons from a fallen giant

At the usual Friday roundtable at the Chennai Coffee pub, Rinku, the scribe, was in high spirits. "It's on me," he said, in a rare display of generosity. "What's the occasion," asked China. "My Uncle is picking the tab," he said. "My New York-wala uncle is in town. He was in a generous mood today and I, being the opportunist, talked him into paying for this. Now that there has been some ruling in the Enron case, he is hoping to recover some money he lost in the pension pie."

"Wow! Was he working for Enron?" asked Wafers, the freshly qualified CA. "No. He was working for Microsoft. But with Ex-Enron CEO Jeff Skilling required to dole out Rinku's uncle, he will pick some money!" snubbed China. . Wafers was hurt but she let it pass. And she asked, "Do you think he will receive something?" China said, "Jeff Skilling, has been sentenced for 24 years. But the former CEO intends to appeal against the ruling." Rinku responded, "True. But we are being optimistic."

She was in Class XI when the Enron scandal broke out. She hadn't bothered to know much about it, but now she intended to. Sometime during the week she would ask Prof Google. But first, she felt China could give her an insight. "Can you explain Enron to me, China? Wasn't Enron a rather respected global company?"

"Yeah. Enron was a power major that operated globally and dabbled in other businesses too. In 15 years flat Enron grew from scratch to become America's seventh largest company, employing 21,000 staff in over 40 countries. It was named `America's Most Innovative Company' by Fortune magazine for six consecutive years, from 1996 to 2001. It was on the Fortune's `100 Best Companies to Work for in America' list in 2000."

"Wow. And from there it managed to collapse?" asked an astonished Wafers.

Rinku added more mystique to the Enron saga. "Wafers, you will understand this better. Enron profits grew exponentially in the late 1990s. However, it turned out that much of the recorded assets and reported profits were exaggerated, or even nonexistent, by putting debts and losses into entities controlled by Enron but formed `offshore' that were not included in the company's financial statements". Wafers asked, "Would it be that the unprofitable transactions were, courtesy creative accounting measures, hidden in transactions between Enron and related companies?" China applauded.

"Yup. Many of Enron's debts and losses were not reflected in its public financial statements. The hidden losses and debts were so voluminous that it had to file for bankruptcy immediately." Digesting these inputs, Wafers asked, "How was Rinku's uncle affected? He was only an employee not a shareholder"

China answered, "Enron invested the employees' pension funds in its own stock and when the news of the bankruptcy broke out, the Enron stock price collapsed bringing down with it the worth of the pension fund. And now the courts have ruled that Skilling will bring in money to pay off Enron employees.

"What were the auditors doing? Aren't they supposed to prevent such a fraud?" commented Rinku, casting an accusatory look at Wafers.

Wafers was about to get into a discussion on how the auditors were only watchdogs and not bloodhounds and how their role was to express an opinion on the accounts and not go on a fishing expedition to detect frauds when she realised that she was in that group forming a majority of one. Rinku closed out saying, "The courts found auditors Arthur Andersen guilty."

Wafers remembered how her partner in her CA firm had commented that "even the mighty can fall". She had then learnt lesson number one in business: Size was no insurance against failure. After all, A&A was the first name in the public accounting profession. The scandal sounded its death-knell as trust had taken a knocking, and in the profession of audit and assurance (ha, again an A&A) trust is the middle name.

Even as she was ruminating over these, China remarked, "That's not all. A core team of persons who had inside information about the frauds were also accused of indulging in insider trading just before the frauds were exposed. Those were the select unscrupulous ones who came down in a golden parachute when the whole airplane was burning."

"What is insider trading?" asked Rinku. Wafers replied "insider trading is the illegal practice in which an insider who, by virtue of his position, is privy to price sensitive private information which is as yet not public and makes use of this information to trade in the company's stock." She felt she had got the textbook definition bang on.

"Ah! That explains why my uncle wells up in anger at the mention of certain names," said Rinku. China remarked, "Well, in the US, at least the justice system works." "Kenneth Lay, a buddy of the nation's President, was indicted. The company with high-level political connections was exposed. Can we dream of such events in India? The wealthy and influential can get away with murder in front of a crowd."

Wafers picked up lesson No. 2, that is, in the US, Oliver Goldsmith's quote "the law grinds the poor and the rich men rule the law" was not true.

"Don't forget, Skilling intends to appeal against the order. Moreover, even in India there have been cases where the wealthy and influential who were acquitted by the higher courts had been found guilty by the lower courts." said Rinku. "Considering that the scam broke out in 2001, the trial and judgments were speedy, compared to Indian standards," remarked Wafers. "Not to mention that some of the guilty have been asked to fork out millions from their personal funds."

The saga did have lessons for the corporates, regulators and auditors. The introspection following the scam culminated in a whole new look at areas of corporate governance globally and things have changed in India too, for the better. Today, corporate governance, also known as Sarbanes Oxley, does not receive mere lip service. That was China speaking.

It was 11 p.m. and the coffee pub had to pull down shutters.

Racy@TheHindu.co.in

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