 Dr. Robert Howell, Professor of Business Administration, Tuck School of Business at Dartmouth, led a discussion with the members of CEO Roundtable on the lessons learned from the Enron debacle.
Dr. Robert Howell, Professor of Business Administration, Tuck School of Business at Dartmouth, led a discussion with the members of CEO Roundtable on the lessons learned from the Enron debacle. Dr. Howell has a unique perspective and insight into this case of corporate greed and cheating. A former student of his first reported the Enron story in Fortune magazine and he knows about the efforts of Enron executives to prevent the story from being published.
Dr. Howell went beyond the headlines in his discussion with the CEOs to explore important issues
- Is the Enron situation an exception or an indication of more general problems?
- Should the problems at Enron have been discovered earlier? By who?
- What can be done to prevent or reduce such misbehavior by corporations in the future?
Some of the conclusions of the discussion were:
- Enron is not a unique example, nor the most grievous. Other, better known and larger companies cost their shareholders much more in lost value during the same period, including Cisco, Xerox and Lucent Technologies. Nor was Enron alone in using "overly aggressive" and fraudulent accounting practices. Financial reporting practices, policies and standards have become hopelessly complex and no longer reflect business reality. This complexity encourages the greedy and those who live off the greedy to commit crimes and hide.
- The problems at Enron should have and could have been discovered much earlier by many. "Enron was really a systematic failure of all the checks and balances we have on corporate governance: integrity of management, board of directors, audit committee of the board, outside auditing firm, Wall Street analysts, and ultimately the press. All of us failed." Steve Shepard, Editor in Chief, Business Week. Dr. Howell used publicly available numbers from Enron to show that the warning lights should have been flashing in every investment analyst's office even if Andersen Accounting was acting in collusion with Enron management. The reported revenue growth did not stand up to simple financial analysis.
- Reforms will be driven by the Enron case and others:
- Public oversight of the Audit profession
- Faster, less political rule making process
- Broader, rather than narrower, statements
- Separation of auditing and consulting
- Disclosure of audit-client relationships
Even with these reforms we are not confident that much will change. Too many groups and professions benefit from the opportunities inherent in the complexity of the current accounting and financial reporting practices. Current financial reporting practices do not reflect the reality of how business operates in the new environment. For example, intangible assets are more important than tangible assets in most industries today, but are not accounted for in financial statements. Dr. Barrie Greiff, the retreat leader, commented that mental health professionals have a term for the current situation, "mutual madness." When everyone is gaining from sick behavior no one will change.
Dr. Howell has written extensively on the need to radically change our accounting practices and standards. He can be reached at Robert.A.Howell@dartmouth.edu. |
