Classes use Enron downfall
as case study
By Tim Williams
Daily Cougar Staff
While Enron's implosion continues to be
topical fodder for congressional investigation and talk-show debate, UH
classes preparing the auditors, energy industry executives and corporate
lawyers of tomorrow use the Houston-based conglomerate's demise as a case
study of ideas and rules that previously seemed restricted to
textbooks.
Enron Corp.'s disclosure last fall of billions
of dollars in liabilities from offshore partnerships after four years of
posting net income gains caused its stock price to
plummet by nearly 99 percent over two
months.
Enron was trading at 37 cents per share
Friday, down from $32.20 on Oct. 16, the day before the Wall Street Journal
ran the first article questioning the partnerships.
The partnerships served to provide funding
to an assortment of businesses and projects Enron held and continues to
hold as subsidiary companies.
Some companies succeeded while others sank,
but through its partnerships Enron reported only gains, keeping part of
an estimated $50 billion debt off its books in
what is called "off-balance-sheet" reporting.
What made these partnerships, or "special
purpose entities," problematic was that Enron did not keep at least 3 percent
of SPE ownership outside its own control, said
Scott Whisenant, an assistant professor
of accounting.
Designed by the Emerging Issues Accounting
Board, the 3 percent rule is a standard that auditing firms like Arthur
Andersen use to judge corporate transactions
against, Whisenant said. Because Enron
partnerships failed to meet the 3 percent minority ownership minimum, Enron
had to roll them under its corporation, he said.
"When they were rolled up there were tens
of billions of dollars in liabilities," he said.
The added debt meant it would cost Enron
more to borrow money from investment institutions where its previously
good debt rating allowed it to fund its unprecedented
growth from a stagnant natural-gas provider
to a high-tech commodities broker. It was a knock-out punch for a company
that thrived on its ability to borrow cash for new
ventures.
"The interest in working in energy trading
has waned," Michelle Foss said of Enron's most celebrated venture.
Foss is the executive director of the Institute
for Energy, Law & Enterprise at UH's Bauer College of Business and
teaches a class commonly called "Energy Inc.," which
partially focuses on the energy market
Enron is credited with creating.
The class is available to master's of business
administration students and divided by their area of interest, Foss said.
Where there were 20 to 25 students in the
energy-trading segment last fall, there
is only one student this semester, she said.
The class is made up of older students,
two-thirds of whom have worked in energy, she said. "These are business
students that know exactly what is going on."
The other side of the Enron dilemma is
Arthur Andersen's role in auditing past corporate reports that painted
a rosier picture of Enron's financial health than reality
would have done.
Student questions in UH law and accounting
classes have revolved around Arthur Andersen's liability.
The firm's reputation was solid and an
asset before Enron, Whisenant said.
"Arthur Andersen is very conservative.
It's not the type of firm that would cave to a company's demands," he said.
Andersen failed to have an appropriate
level of objectivity in auditing Enron, Whisenant said.
In its audits of Enron's financial status,
Andersen was responsible to the shareholders. But Enron was paying lucrative
consulting fees to the firm as well.
"Imagine how you and I would lose objectivity
if Enron was sending us a $25 million check," he said.
Enron later fired Arthur Andersen after
allegations surfaced that it shredded company audit records.
Despite the current negative attention
auditing firms are getting, students remain interested in the field, he
said.
"Auditing as a career is safe. You've got
to have an auditor in good economic times as well as bad," he said.
Critics of the current auditor/corporation
relationship are looking to the government to fix the conflict of interest.
Since corporations are formed pursuant
to state law, it will be at that level that people may see changes, said
Douglas Moll, an associate professor of law.
Corporate lawyers and investment bankers
want to make the chief executive officer happy because he or she hires
and fires them, Moll said.
It was the lawyers, investment bankers
and other board members who waived company rules to allow Enron executives
to run partnerships, he said.
"Does this call for the law to get involved
in conflicts of interest?" he said.
Many times the company benefits from what
are perceived as conflicts of interest, such as when an individual with
a stake in a company sells it a piece of land it really
needs for expansion, he said.
State statute doesn't outlaw it, and if
it did, management would lose flexibility, he said.
Enron is a very small slice of the overall
corporate environment, so much so that Moll said his law students aren't
discouraged from entering corporate law.
"From a student's perspective, corporate
law is something they might want to do because there is a need for ethical
lawyers," he said.
