Enron Scandal, a Glaring Showcase
of Corporate America's 'Culture'

By Harry Kelber www.laboreducator.org

The shady financial practices that finally bankrupted the Enron Corp., the nation's seventh largest company, are still being used by hundreds of the most well-known and respected corporations.

The story is still unfolding of how Enron faked its profits and failed to report billions of dollars in debt in order to make its stock attractive to unsuspecting investors. It's one of the worst business scandals in U.S. history and is being investigated by numerous Congressional committees. Here are some highlights that have surfaced:

. While CEO Kenneth L. Lay was comforting Enron employees by e-mail last August 14 that "I have never felt better about the prospects for the company," he and former top executive Jeffrey Skilling had already cashed in $160 million worth of Enron stock.

. Enron's 11,000 employees, whose 401(k) retirement funds were exclusively in company stock, were not permitted to invest their savings elsewhere. They watched in agony as they saw the price of their stock, worth $90 at its peak, evaporate to less than a dollar a share. For 4,500 employees, there was an additional calamity: they lost their jobs.

. Enron and its auditor, Arthur Andersen LLP, shredded thousands of pages of documents that would have shed light on how Enron and its outside accounting firm collaborated to set up phony partnerships in which to bury company debt, inflate profits and thus cushion Enron stock prices.

. Enron paid no taxes in four of the past five years. Its battery of hired lawyers and financial experts created 881 off-shore sham subsidiaries to avoid taxes and even claim a rebate.

. As incredible as it may seem, 212 of the 248 Senators and House members on the 11 Congressional committees investigating the Enron scandal had received political contributions from Enron or Arthur Andersen.

Enron Was a Corporate Icon

The off-the-books, manipulative practices that led to the downfall of the energy trading giant have served as a virtual guidebook for corporations that dare not tell investors or employees the truth about dwindling profits and rising liabilities. By hiding billions of dollars in debt in a variety of phony partnerships, shadowy subsidiaries and so-called "entities" that are not reported on their balance sheets, companies can bolster the price of their stock and attract new investors. Some airlines, banks and high-profile
companies in telecommunications and electronics have adopted these questionable practices.

With ever-growing government deregulation in industry after industry, companies like Enron developed their own self-serving rules to enhance their attractiveness, often skirting the edge of legality. As many as 723 companies have been compelled to restate and lower their earnings since 1997, according to Business Week. (Jan. 28 issue)

Enron's outrageous deceptions of its shareholders and employees were aided and abetted by a coterie of executives. accountants, directors, lawyers, bankers, financial analysts, regulators and members of Congress, all of whom found it to their advantage to turn a blind eye toward the company's fraudulent practices. And then there was the White House, with President Bush always ready to do a favor for his good friend (and biggest political contributor), Enron's CEO, Kenneth L. Lay. Why wouldn't Enron executives figure they could do whatever they wanted to enrich themselves - and get away with it?

Enron paid its accounting firm, Arthur Andersen LLP, $52 million last year, not only for its auditing work, but for its consulting services. As accountants, Andersen had an obligation to be objective in examining the company's actual balance sheets, making sure that all financial transactions were duly reported. But as well-paid consultants, their role was to make Enron profits and stock prices appear much more attractive than they really were and to become an accomplice in Enron's fraudulent projects.

Major accounting firms now earn as much or more from consulting and other non-audit services for their clients than actual auditing. There's an obvious conflict of interest (as with Andersen and Enron) that can be damaging to shareholders, employees and the public. Accounting firms thus have an incentive to go easy on a client in order to safeguard their consulting fees. Although they consider their dual role perfectly legal, how can the investing public trust their company reports?

Enron paid its law firm, Vinson & Elkins, more than $30 million a year to create a network of partnerships and other entities that could absorb mountains of company debt without any evidence on its balance sheets. It also advised executives on how to avoid damaging disclosures to the Securities and Exchange Commission. Actually, Enron had little to worry about the SEC. Its chairman, Harvey Pitt, formerly represented all of the Big Five accounting firms. He has publicly declared that instead of punishing companies that violate the law, he prefers their cooperation and self-policing efforts.

Enron Conned Big-Time Investors

The most amazing aspect of Enron's rise and fall is how it induced 50 mutual funds, insurance companies, banks and major corporations to invest in its fund-raising entity, Osprey Trust, that raised $2.4 billion to finance the company's energy-related projects in Europe and South America. Osprey's funds were siphoned off to several private "partnerships" and were never reported on Enron's balance sheet.

When Enron's complex network of partnerships began to unravel, Osprey's investors saw their equity drop as much as 60%. Since Osprey debt was backed by Enron assets, it was inevitable that its stock price would fall at an accelerating pace. How much workers' pension money will be lost in the Osprey debacle has yet to be determined.

The Enron scandal demonstrates that workers can lose all of their retirement savings when their private pension plan is heavily loaded with company stocks. It means that their retirement income is dependent on the fluctuations in the price of the company stock, especially if they are not permitted to diversify their holdings. At Enron and numerous other companies, the retirement plan became a gamble rather than a guarantee of income security.

Over the years, Enron lobbied successfully for deregulation of energy trading rules. It wanted a free hand to run its sleight-of-hand business operations - and it got it. Company executives played a major role in writing the Administration's energy bill to reflect Enron's needs.

The White House has tried to distance itself from Enron, explaining that it refused to even consider a bailout of the failed company in response to telephone calls to Vice-President Dick Cheney, Treasury Secretary Paul O'Neill and Commerce Secretary Donald Evans. But it should be noted that at the time those telephone calls were made, the media was reporting Enron's collapse and its stock was in free fall, heading to a dollar a share. Any hint that the White House was contemplating a bailout would have set off a firestorm of protests.

Right-wing politicians and conservative pundits are trying to spread the word that the Enron affair is an aberration that should not reflect adversely on other well-run companies. On the contrary, many of the practices that brought Enron to grief are enshrined in Corporate America's code of conduct. Greedy, profit-scheming CEOs who play tough with their workers have become role models.

How Congress Can Restore Trust

After Enron, Americans don't know which companies or banks or pension funds to trust. They are stunned by the realization that a single company was able to exert so much political power in Washington. To reclaim their faith in our economic and political system, Congress must enact laws that will make future Enron scandals improbable. Here are some legislative priorities for Congress:

. Enact an election finance reform law that will forbid "soft money" political contributions. Corporate donations to lawmakers are little more than legalized bribery for past and future favors.

. Protect the retirement plans of employed workers by restricting company contributions of stock to no more than 10% of the total income.

. End the conflict-of-interest practices of the accounting industry by eliminating its dual role as consultant and adviser to clients.

. Review and revise deregulation measures that permit improper behavior by companies.

. Forbid off-the-balance sheet transactions. Guarantee transparency of company operations to shareholders and employees.

. Restore provisions of the Glass-Steagall law which prohibited commercial banks from operating as investment companies.

With so many of its members tainted by Enron largesse, will Congress still be beholden to its political benefactors? The upcoming vote on election finance reform will answer that question - and decide whether Americans have a government they can trust.
posted by IBEW 1613 Thursday, January 31, 2002

Negotiation sessions will begin this week, Wednesday, Januaruy 30th. Stay tuned to the Negotiations Update for current reports!

Printable posters to show your support, are now available: Poster1 - Poster2
posted by IBEW 1613 Sunday, January 27, 2002

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