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Enron's Collapse Has Wider Symbolism for US Businesses - 2002-02-13

The collapse of the energy trading company in Texas, Enron, continues to be felt in U.S. financial markets. It is the largest corporate bankruptcy in U.S. history. Some financial analysts worry that the apparent fraud at Enron - where top executives made millions selling stock while thousands of employees were losing their retirement savings could scare some investors away from the stock market.

Enron stock that was once worth $80, is today worth less than one dollar. Enron workers, who were encouraged to buy shares in the company, have - in many cases - lost everything. Several of the company's top managers, who touted the stock, sold and made millions, before the shares began their rapid descent last October.

Enron's auditor, the accounting firm of Arthur Andersen, is suspected of helping the managers falsify financial statements, reporting as profits what were really losses. Some Andersen employees systematically shredded what may have been incriminating documents.

Congress is holding hearings on the Enron debacle, trying to find out what happened to a company that until recently was hailed as one of the most innovative and successful U.S. corporations. Rick Malone is a financial analyst at Ferris Baker Watts in suburban Washington. Mr. Malone blames the popular practice of giving top executives stock options for much of the scandal.

"The upshot of these hearings is that we've given these CEO's [chief executive officers] and the top management [of these companies] the right to coin money at the expense of shareholders via the stock options. They're going to do everything they can to juice up earnings in the short-term, so they can get the stock price up so they can cash out their stock options. And the hell with the long-term best interest of shareholders. That's what Enron is about. It's about stock options and their ability to make hundreds of millions of dollars," Mr. Malone said.

Stock options - in effect free shares - are commonly given to top executives as an incentive to make the company grow, thereby boosting the share price. But in the case of Enron, elaborate gimmicks in the form of special purpose partnerships became instruments for making it falsely appear the company was prospering. Rick Malone said the gimmicks made it almost impossible to decipher Enron's annual reports to shareholders.

"I have read hundreds of annual reports over the years and theirs is among the worst. I mean not that I could see that they were committing fraud - I didn't bother to work all the different footnotes and lines to see. I could tell it was way too complicated for me. I wasn't smart enough to be able to understand it. And I don't think there is any analyst out there who could," Mr. Malone said.

Mr. Malone has said he long ago concluded that Enron wasn't an energy company. It was rather a brokerage firm disguised as an energy company.

Mr. Malone is confident the Enron case will result in needed reforms in U.S. corporate governance. Don Rowe, publisher of the Wall Street Digest in Sarasota, Florida, agrees. He says, "There will be accounting changes. There will be the necessary changes to prevent this from happening again. The sad thing is the deterioration of the pension plan for the employees. You had far too many high-ranking executive selling stock at high levels who knew about the problem and did nothing to protect the pension plan. That's really serious," Mr. Rowe said.

Paul Volcker, the respected former Federal Reserve Board chairman, has been asked by the Andersen accounting firm to help reform its practices. He says the Enron scandal has sent the U.S. accounting industry into crisis.

Current Fed chairman Alan Greenspan is hopeful that the steps taken will restore damaged investor confidence. U.S. capital markets, he says, depend on accurate information that is honestly presented. With Enron, in effect, American business is on trial and the investment community is awaiting proof that such corruption will be exposed and the perpetrators punished.