Money, lies and lives put into jeopardy -- it sounds like an episode of "MacGyver" but it is, in fact, all pieces of a story pulled from recent headlines.
Enron's collapse has shown the American public that scandal can emerge from places other than Capitol Hill and Hollywood. Unfortunately, however, the details of this collapse are obscured by legal and financial jargon that renders the inner-workings of Enron Corp. as huge and enigmatic in death as the company was in life.
Enron's collapse didn't just affect the thousands of people who placed their trust and their funds in Enron's ability to succeed. It also affected the reputation of one of the nation's most important institutions - the accounting firm.
Money makes the world go round, and those who keep track of its comings and goings must be entirely trustworthy. But Enron and the legal entanglement involving the conduct of its auditing firm, Arthur Andersen, have cast doubts upon the reliability of the accounting industry.
So what really happened? And how did the events of the past few months affect the mindset of the individual American investor?
These questions can best be answered by a brief overview of the Enron case, as well as the role Arthur Andersen played in Enron's downfall.
Enron started as a power company in Houston that delivered natural gas to both public and private companies as well as citizens. Under the guidance of former Chairman Kenneth L. Lay, the company expanded to become a giant energy broker, trading electricity and other commodities. The company was aided in this expansion by the deregulation of the electrical power industry, brought about in part by lobbying from Enron officials.
Unlike many other brokers, Enron entered into the contract between the buyers and sellers of electricity, making a profit from the difference between the buying and selling price. Over time, these contracts became more and more complex.
There were indications of imminent problems over a year ago. According to Washington Post reports, an e-mail to Lay from Enron Vice President Sherron Watkins detailed the reasons why she believed Enron "might implode in a wave of accounting scandals." In early 2001, Andersen executives met to discuss whether Enron should be retained as a client in light of its risky behavior - not only were Enron's financial transactions complicated, but the company made risky investments.
On October 16, 2001, Enron announced that it had a $638 billion loss for the third quarter. In addition, Enron had overstated earnings for the last four years and in severe debt. Further investigation showed that Enron executives allegedly had enriched themselves at the expense of Enron and its investors.
On December 2, 2001, the largest electricity and natural gas trader in the world filed for Chapter 11 bankruptcy protection. This filing constituted the largest bankruptcy filing in American history.
So how did Arthur Andersen become involved in the legal scandal? Andersen is no two-bit hack with a calculator; the company is one of the "Big Five" in the accounting industry, which also includes Deloitte and Touche, Ernst & Young, PricewaterhouseCoopers and KPMG. Together, the Big Five audit a majority of Fortune 500 companies. Andersen audited Enron and provided substantial consulting advice.
Reports from a special investigation commissioned by Enron's board of directors state that all parties involved with Enron, including Andersen, were aware of Enron's apparently shady financial transactions. Allegations also have been made to the effect that both Enron and Andersen employees committed criminal acts by shredding sensitive documents.
Enron fired Andersen in mid-January 2002. In its defense, Andersen maintains that it hadn't served Enron since the company filed for bankruptcy.
Enron's collapse had huge implications for the accounting industry. In the eyes of the American public, it appears that some employees of Andersen allegedly had to make the same choice that many professionals have had to make - between loyalty to truth, and the lure of wealth. The role of the auditor is to monitor company financial transactions. When a firm decides to renege on its duty, accountants face little public accountability.
Although it is clear that weaknesses in the industry allowed Enron's alleged bad behavior to continue for much longer than it should have, no one is quite certain where these weaknesses lie.
"It is just too soon to speculate," University Accounting Prof. Robert Sack said. "There's just not enough information."
Nevertheless, the average American investor perceives the industry's reputation as severely tarnished. According to the Washington Post, shareholders and boards of directors of many companies are increasing the pressure on firms to allow shareholders to more closely examine the company's relationship with their auditors.
Reform initiatives have been proposed that, if implemented, could force an accounting firm to forgo highly lucrative work in order to ensure there no longer is any conflict of interest. Of the Big Five, only one, Deloitte and Touche, made any initial protestations. Since then, Deloitte and Touche has announced plans to separate its accounting and consulting businesses in order to ensure that further conflicts of loyalty do not occur.
There is one question that all American investors have been asking. Is there any reason why the public should not be able to trust their accountants?
"There is no validity to that belief," Sack said. "In the vast majority of cases, the public can trust not only the accountant but the firm in which they invest."
"Of course, if 99 percent of the firms are above board, it doesn't make you feel good that one percent is bad," he said. "Planes go up and down every day, and when one crashes and two hundred people die, you still get scared. But is it safe to fly? Of course."
"Less than 0.5 percent of audits ever fail," University Accounting Prof. Paul Walker said. "Of course, it's clear that mistakes were made but there's no doubt that there are some fantastic auditors out there"
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