WI Enron caused sharper regulation of US Finance

Could their have been a radical reaction to the outrages of Enron in dealing finance and energy?

Possibly it coming clearly before or without the September 11 outrage
 
So, you're saying there might have been more of a public reaction if it had come before Sept. 11th ?

Any other period, it would have dominated the national conversation for longer. Still doesn't matter, given the deregulatory fanaticism of the time. I think the main consequence is that it might save Governor Davis from taking a fall over the power issue.
 

Towelie

Banned
Didn't Sarbanes-Oxley come after the Enron scandal?

The issue with Enron was falsification of accounting records in an effort to decieve shareholders. SarBox for the most part took care of that. In fact, the compliance costs with SarBox were severe enough that the Democrats in 2006 actually started accusing the Bush administration of onerous competition killing overregulation in their successful midterm campaign (Pelosi in particular made a big issue of this).

But as for wider spread regulatory efforts, it would probably if anywhere come from conflict of interest related grounds (i.e. oversight, auditing, and ratings groups being tied too closely with those they should be watching). I suppose that this was doable.
 
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I'm not sure I understand the question.

SOX did sharply increase the amount of regulation that companies have to go through for their financial statements.

If you want harder than that, you need to go after the auditing firms. Rework the audit reports so findings need to be disclosed rather than confidential, and possibly even seperate the auditors from being able to bid for jobs in the first place, to completely make them seperate from the company. Continuing, ban audit firms from engaging in ANY unrelated services to the companies being looked at. How effective this would be, and whether it really makes much difference is up for debate, but they are a good place to start if you are looking for harsher regulations.
 
. . Continuing, ban audit firms from engaging in ANY unrelated services to the companies being looked at. .
That's what we need, something good and straightforward. That if you're Deloitte Touche and you do the CPA auditing of financial statements, you can't also sell the same companies the much more lucrative 'consulting services.'

Sarbanes-Oxley is about executives and board members signing off on ethics statements, which helps some and some people take more seriously than others.

But the executives still push for numbers, and that's the tension.
 
That's what we need, something good and straightforward. That if you're Deloitte Touche and you do the CPA auditing of financial statements, you can't also sell the same companies the much more lucrative 'consulting services.

SOX did ban much of that (or laid the groundwork for the professional rules that did). The current rules limit services to certain items which are thought not to impair independence of the auditor. Its a bit more complicated than that, and I don't want to turn into an auditing teacher so I won't go too deep into that stuff, but if we are talking about enforcing higher standards flat out banning auditors from providing even the form services is a place to start. The bigger one though IMO would be to seperate the actual audit from bidding. While it isn't really feasible forcing every firm that plans to audit into say a pool of CPA firms and then assigning audits randomly (maybe based on size of the firm and the auditee) would be a way to go about that.
 
While it isn't really feasible forcing every firm that plans to audit into say a pool of CPA firms and then assigning audits randomly (maybe based on size of the firm and the auditee) would be a way to go about that.
Still the human nature issue that if the leader of the audit team is too much of a hard-ass, or really just too much of a by-the-book type of person, the company might really punish.

Unless senior managers are more mature than average.
 
As I understand about Enron, it was a combination of:

1) questionable but defendable accounting methods of keeping risks of subsidiary firms in footnotes and addendums, and

2) just flat-out hiding of shit and criminal behavior.

Is this generally correct?
 
Is this generally correct?
How do you mean?

Erm, sort of. I'd basically strike off that first part actually, at least change to to eliminate the "but defendable". IMO there really is no defending it.

What basically happened was Enron was...erm...aggressively applying accounting law (never, EVER trust someone aggressively applying the law) in ways that were unethical at best. The best well-known of the shit they got up to involved revenue recognition. If Enron built something, say a power planet, that was expected to have X revenue over its 20 year life what is supposed to happen is that money is only recognized when it actually comes in. Say you think it will make $100,000,000 over that 20 years, but it only makes $2,000,000 in that first year, you only recognize the $2,000,000. You might add a footnote about expected useful life and all that stuff, but none of that matters. What Enron actually did was to recongize that entire hundred million dollars in the first year. You can probably already see part of the issue here. You only get $2,000,000 in, but you are saying you have it all now. But that's not the problem (well not entirely), no the bigger problem (from the perspective of Enron anyway) is that the next year they have...say 5,000,000 in revenue from it. Revenue that has already been recorded. So you can't put it down again, because that's definitely something someone will notice. So you have to keep doing this kind of crap until it balloons completely out of control. Eventually you are going to simply start running out of projects to claim revenue on, and then your fake stock price collapses.

Even without the rest of their idiocy the whole thing was going to collapse in 5-10 years at most.

But that's where we get into the next issue with recognizign that $100,000,000 in revenue. The next year you don't make $5,000,000. You make $2,000,000 because...eh, let's say the price of electricity went down. And then the next your you make $3,000,000. The year after that $2,500,000. And then it becomes clear the $100,000,000 that has already been recognized simply isn't going to appear. So what is the Enterprising young fraudster to do? Why you make a fake corporation, shift the asset over into that, and suddenly there's no evidence you've actually lost money on the power plant. Your bottom line is intact and everything looks great. Except you have still paid for the power plant. That money is spent, and you now have even less coming in. So far from being wonderful the company has taken a HUGE loss on that deal.

Just to pick out an example, it spent hundreds of millions on high-speed internet connections in 2000, and the money made on this was approximately nothing.

Now we come to the auditor failure, or as I like to call it, "how to commit professional suicide". Arthur Anderson was not independent of Enron. At all. The firm made a LOT of money consulting with the company (I am too lazy to look up the figures, but it might have been 42% of profits). Basically every service that AA could provide was given to Enron in exchange for these fees. AA had offices IN Enron headquarters, regularly hung out with them, and many of Enron's top managers were former AA employees. Basically its something even an Intermediate student should look at and hear the alarms going off in their heads. AA constantly ignored warnings from employees about questionable practices. One employee even tried to explain exactly how the whole thing was happening, and there was absolutely no follow-up.

And then just to really rub salt in it all that evil witch managed to make it look like her boss knew little about it, and she was hailed as a hero for whistle-blowing.
 
Do you think that some of it was just very superficial perceptions that Ken Lay looked like he would be a decent boss, or was shown in media photos smiling, whereas Jeff Skilling looked like a first-rate bastard?

And/or once the 'mainstream' media hit upon this narrative at the beginning, for whatever reason, they just mindlessly stuck with it?
 
and then in the first half of 2002, the scandals at WorldCom and Tyco broke.

So, yes, it seemed like it would have been a ripe time for reform. And we did get some, but not enough or not the right kind.
 
WorldCom, Tyco, Enron--R.I.P., Forbes, July 2, 2009

http://www.forbes.com/2002/07/01/0701topnews.html

" . . . a bull market in scandals: Enron , Tyco , Global Crossing , WorldCom and Xerox ; and by the continued fallout from the stock market bubble–especially in Internet and telecom stocks. . . "
So, we can add Global Crossing and Xerox to the list. Don't remember hearing the name of Xerox back then.

Here's the problem I have with thinking Sarbanes-Oxley is enough. A company can all too easily become what I'll call a "compliance" company, and merely a compliance company. Oh, yeah, they're preach ethics. At the same time, they'll push and reward their managers for hitting numbers. People are quick enough on the uptake to figure out what's really rewarded. At times the unspoken message, if you're going to do this stuff, you better make damn sure you don't get caught. The managers get better at separating the paper reporting requirements from what's really happening. and then, ? when it finally explodes, it's even bigger ? Not an expert, but something like this seems more than just possible. Actually, rather surprising it doesn't happen more often.

I have observed in a number of life areas that the gap between theory and practice can be pretty big and significant! and that the gap is bigger in practice than in theory ;)
 
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Towelie

Banned
Sarbanes-Oxley did what it needed to do in terms of holding executives personally responsible for the accuracy of accounting information passed on to shareholders. And the collapse of Arthur Anderson (trimming the Big 5 to the Big 4) did indeed put some distance between the accounting and consulting sides of a firm's operation with a client.

The problem was that it simply was a reaction to something that happened, and the issues of conflict of interest, competing interests impinging on the duties of regulators and watchdogs, and the feeling that everything in Finance was one big fraternity when by definition, there should be to an extent an adversarial yet still constructive relationship between those who make money and those who watch over them, was never dealt with and still hasn't been.

You can't draw a line from Enron to Bear Sterns to as of late, Wells Fargo. They were all different situations that went badly, and for different reasons. You can however see that the same issues that compromised the bond ratings agencies in the mid 2000s were there with the lack of daylight between Arthur Anderson's accounting and consulting services, and the same issues of tone at the top that allowed Enron to defraud the people to whom it bears all responsibility, its shareholders, were there with how Wells Fargo wanted to aggressively push sales.
 
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