Posted on 01/11/2002 7:45:03 PM PST by ken5050
There are two distinct aspects to the Enron mess; the political mudslinging, and the criminal fraud aspects of the case as pertains to the company and its auditors, Arthur Anderson. Oddly, in all the verbiage that has been written to date, very little has been written that begins to explain the TRUE nature of the financial fraud at Enron. More oddly, it is not that difficult to understand. For those who would like some insight, I will attempt to clarify, in lay terms, three points which, I believe, will ultimately be crucial as the investigations commence. So, if you'd like to learn, and understand a few things, read on.....
BTW, from what I've read, and it's not definitive, the freeze in the plan was several months.....the few days you referenced refer only to making ongoing contributions.....not to switching assets withinin the plan....It was, I believe a several month hiatus...but, the truth will come out......I'll admit, my supposition is based mainly on the smell test..it doesn't smell right that Enron would decide to reconfigure the plan at just that time.....Occam's razor, ya know......
First, the movement of the assets to Enron partnership at inflated valuations. The entry for this, correct me if I'm wrong, would be a credit to the asset for it's currently depreciated rate on the books. There would then be a debit on Enron's books as a receivable, am I right? The difference in the sale price and the asset value on Enron's books would be booked as "income" on Enron's books, as a "gain on sale"-correct?
I understand this perfectly. By over-valuing the assets transferred to Enron's alleged "partnership" entities, Enron has a huge income on their books that totally did not exist. As you've stated, but I would like you to re-affirm for me, Arthur Andersen violated every accounting rule in the books by letting this pass. The only thing I can think is that there was out and out bribery by Enron executives to Arthur Andersen's partners because this is so not how it's done.
I've been audited and worked for all of the big six accounting firms, at that time the big eight and once upon a time, the big ten. These auditors normally don't let anything slip by. Something like these entries should have been caught immediately. There's absolutely no excuse for it and if anyone bites a big one on this I see it as Arthur Andersen major league.
A minor correction to your missive would be your comment that Enron employees' ability to move their Enron stock was tied up for several months might be incorrect. I say "might" be because I'm basing it on a press release by Enron itself, posted on this very forum. Enron says their employee assets were frozen for only a period of time from October 29 through November 12. That's hardly a couple of months though the freezing of this 401K movement was ominous and I agree with you that it was no accident that those employees had no access to their 401K plan at the WORST possible time to have their ability to move their Enron stock blocked. Still, Enron claims it was only for this two week period.
And how were the executives allowed to move THEIR stock so readily? Perhaps their stock was not tied up with the 401K plan, but stock they received as part of their normal compensation? It's an important point. If the executives simply moved their stock NOT tied up in the 401k administrator transition, then it's not illegal but would add fuel to the timing of the 401k administrator change as being suspicious. And very mean I might add. To tie up their employees' stock while selling their very souls...every damn one of them should spend time in the hoosegow. IF they did anything illegal and as of now I'm wondering if beyond being a bit unethical, they broke any laws at all.
My conclusion so far is that Arthur Andersen should be taking a bigger beating on this than anyone. The executives can claim ignorance of all things accounting and it's a legitimate argument that they paid Arthur Andersen big bucks to cook, er, I mean, audit, their books.
Those big 6 accounting firms make me ill at any rate. Any experience I've had with them, they're hip deep in with company management and tend to forget the little guy investors they're supposed to protect.
The political fallout from all of this is a subject of another discourse.
Finally, what's the solution to this? How can such terrible actions and behavior be avoided in the future? What laws could congress make to keep this from happening? I'm reading of thoughts of making employee 401K plans restrictive...ie only 1/3 in stock, 1/3 in money market, etc. Which is how most people of normal intelligence should be spreading their investments but I've read of quite a few Enron employees who put ALL of their retirement money in Enron stock. Should we pass laws to protect people from themselves? Should we require executives selling off large amounts of company stock to be held to some sort of reporting standard? Should we make it illegal for companies to NEVER block movements of 401K monies no matter how many new administrators are being planned?
The top Enron people ecercised their stock options, and/or sold stock that they had already excersized, as the grants expiured, but hadn't sold, mainly to av oid the tax liability...as you know these were ISO's and there in no tax due on an ISO when the option is exercised, only when the sgtock is sold.......and beacuse the options aren't in the plan, they weren't tied up..
I just heard about the press release you referenced, and I for one, don't believe it....first, IMHO, it would be impossible for TPA's to sign off on an exchange of that magnitude in so short a time....it just isn't done.....I'd wager that the short delay refers to the inability to make ongoing contributions..that was suspended for a short while.....again, this is all informed speculation on my part, and I may be wrong......we shall see...
The whole question of finanacial and accounting standards, if not addressed, will ultimaely threaten the viability of our capital markets....looks at the Nasdaq bubble the last 5 years.....what was perpetrated on the investing public with the dot.boms....is a huge fraud...the lawsuits are grinding through the legal mill, and it won't be pretty...
So far as I can see, the folks on this forum have a waaaay better understanding of what's going on with Enron than any of the so-called news pundits. For what it's worth, I agree with you about that Enron release. I've worked for plenty of companies who have transitioned to a new plan overseer. Usually the funds in the old plan are left there while all new contributions are put into the new plan. The employees can then "roll-over" their investment in the old plan into the new one. There might be a period of time when the contributions would not be deducted from an employee's paycheck though I don't see why. It's the roll-overs that I think were held up and those things do take quite a bit of time. Once a rollover is started there is no way to access it and change the investment's composition. It would seem, if our suspicions are correct, that Enron is spinning this thing. I don't believe that two week period as being a limit for employees to move their money but as a period when they could possibly not contribute to the new plan.
As for AA, the legal remedy for what is soooooo obviously bribery is only the ability for the company and/or stockholders to sue the CPA firm that verified those awful statements. At least as far as I know. Seems to me this might be the issue congress has to address-any firm certifying erroneous information to the investing public should be guilty of CRIMINAL conduct. Not to mention "destroying" those documents, a statement that makes me laugh unbelievable. Accounting firms do NOT ever, not ever or ever or ever and you'll have to trust me on this if you don't believe, destroy ANY documents relating to a client, on down to the lowest auditor's work papers. Accounting firms rent huge warehouses to store their clients' workpapers such is how important this sort of thing is.
AA needs to go down. Big time.
I could go on and on about how the liberal media is spinning this to be a Republican issue but...hey, another missive. It got so bad on CNN this morning that I had to change the channel because my sticking a huge middle finger directly in front of the TV was not shutting them up.
The important thing is that folks on this forum need to KNOW and understand the truth because it looks like the Democrats are banking on sound bytes (Texas, Oil, contributions to Bush campaign, a few phone calls to Bush cabinet members) to get the public riled up. If anyone is guilty of giving Enron a Lewinsky it was the Clinton administration. The Dems know this but seems to me they are going to risk it. The spin on the Sunday talks shows should be veerrrrry interesting.
Just a couple of questions. Can the free market provide effective self-regulation in a case like this? Or is government regulation needed?
Thanks again for sharing your knowledge.
Lois....yes. With emphasis on the word "speculating". Obviously I have no proof of such a thing. But there is no way those entries moving assets to "partnerships" at inflated valuations and booking the differance as "gains on sale" could have been overlooked by the dumbest accountant in the universe. *I* would have spotted such a thing and quite frankly, *I* would have refused outright to make such an entry and this as an accountant for the company! How on earth could a huge CPA firm not see this? NOT possible.
Add to this the convenient destruction of all Enron documentation by AA.....go on. By me, it HAD to be an outright bribe and nothing less.
Yeah, Lois, accounting firms do "cover up" things a bit at times to keep their clients. But NEVER on this grand a scale. It's so....so.... OBVIOUS. I'm standing on my allegation that this was a direct money-changing-hands transaction, bribery in the first degree. It could not possibly be an innocent oversight. Enron paid AA almost 25 million in auditing fees...perhaps a few million of that an incentive for them to cook the books.
I could be wrong but I totally think not.
The entire audit profession took a major hit on this. Auditors have to maintain professional skepticism, and sometimes open the filing cabinet drawer to see if there really is a piece of paper with a customer's signature in there. (That refers to Penn Square, the Enron of the 60's or 70's). By the way, the firm that blew that one survived for a while, then got name-changed several times from one of the Big 8 to one of the Big 5.
And to address another poster's comments: the first rule of financial investments is Diversify, Diversify, Diversify. There are laws that allow companies to violate this basic principle, and guess who wrote those laws?
Yet, I recall reading that the Clintons hardly knew him before hiring him to work in scandal defense; he was no long time friend, but someone recommended to them as a lawyer. He went on to make a pile writing a book.
In 2000, he wrote op-eds and appeared on TV to challenge the Democratic theme that Bush wasn't qualified to be President based on his being a fraternity brother with GW in college. Over the summer, he was on TV calling for Condit to resign. Here he is coming right out of the box acquitting Bush before the investigation.
Put it all together and its interesting. Probably the Dems are putting it together and will soon be raising hell about Davis presenting himself as the Democratic side or being presented as the Democratic side.
Personally, I think he's just out for himself, wherever it takes him. Theres something creepy about a fellow like Davis being an arbiter of truth.
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