WHEN WALL STREET couldn’t get enough of Enron, one journalist started asking questions that eventually led to one of the biggest corporate collapses in history. Bethany McLean, author of Enron: The Smartest Guys in the Room, argues that despite the millions spent on compliance post-Enron, very little has changed.
While her story, published in Fortune magazine in 2002, was arguably the first public questioning of Enron’s financial statements, McLean plays down its significance.
“I picked up on a scepticism that was growing under the surface,” she said on a recent visit to Sydney. “That call from my source [a respected Wall Street analyst] could have come any time, but what made me write the story wasn’t the call from the source. It was the vein of scepticism I was picking up and the fact that no one would criticise the company on the record but there was questioning going on underneath, and that was a sign to me that something was really wrong.”
Many were caught off guard by Enron’s rapid collapse, that was caused in part by the web of relationships the company had created with Wall Street, the government and the market in general. But why the lack of questioning? “It was a mixture of greed, because people were very much incentivised to go along with Enron, whether it was the accounting firms and the fees they were paid, or the investment banks and the money they made from Enron,” McLean said. “I think it was also the fact that Enron was a very intellectually intimidating company. If you asked questions, they would accuse you of not getting it and everyone wanted to get it so they all went along with it.”
McLean’s involvement in making the scandal public, and the mountain of research she undertook for her book has made her an expert on Enron, and accounting fraud generally. But like many others, she sees the legislative response to Enron — the US Sarbanes-Oxley Act — as flawed and unlikely to prevent a repeat performance. “It aims to do a good thing by making CEOs and CFOs more accountable for their financial statements,” she said. “But I think a lot of the detail and crossing of Ts and dotting of Is is not only beside the point but it’s dangerous in that it allows everyone to think it’s all OK. In reality, nothing has really changed under the surface.”
Additionally, Enron did not actually break the law, just pushed it to its boundary. “This was a company that pushed and twisted the rules and operated within the letter of the law while totally breaking the spirit of the law,” she said. “So are more laws the answer? I don’t think so. The other part of it is the issue of human nature and the role that self-delusion played at Enron. A new law like Sarbanes Oxley won’t deter a CEO or CFO from committing fraud because most of the time people who are committing fraud don’t admit to themselves that they are committing fraud. It’s a much more twisted process than someone sitting in a dark room saying ‘here’s how I’m going to do it.’”
And, despite the new focus on governance, risk management and ethics and the millions spent on compliance post-Enron, it’s unlikely anything has fundamentally changed. “There’s still immense pressure on companies to make their numbers and there’s unhealthy obsession with stock prices and that’s a result in part of stock option culture where CEOs and top execs are rewarded for short term stock rises,” McLean said. “It’s all very unhealthy now and for it to change institutional investors and boards would have to change. I hear rumblings from those communities, but we haven’t seen any outright change.”
The movie based on McLean’s book Enron: The Smartest Guys in the Room is out now.
Stuart Fagg is the Editor of Risk Management magazine, Lawyers Weekly’s sister publication.