It was like the surgeon general's accepting a public-health award named after Typhoid Mary. Here was Federal Reserve Board chairman Alan Greenspan, renowned for rectitude, accepting the Enron Award for Distinguished Public Service. This wasn't during Enron's glory days, when the company had a stock-market value in the tens of billions, but on Nov. 13. That was only a few days after Enron endured a public disgrace by admitting that it had filed five years' worth of misleading financial reports. And it was three weeks after Greenspan had gotten a call from Enron chairman Kenneth Lay, who desperately wanted Greenspan to intervene with credit-rating agencies to help the stricken company survive.
The ceremony had its awkward moments. Consider the answer Greenspan gave during a Q&A session to a student who asked how to succeed in this difficult job market. "The best chance you have of making a big success in this world," Greenspan said, "is to decide from square one that you're going to do it ethically." Greenspan, through his spokesman, told NEWSWEEK that he hadn't had Lay in mind when he gave that answer, a Freudian slip if there ever was one. What was Greenspan doing there in the first place? His press aide explained that he had committed a year earlier to former secretary of State Jim Baker to accept the honor. The James A. Baker Institute of Public Affairs awards the prize, which is funded by Enron. (Baker had once been a consultant to Enron, sponsoring its interests in Kuwait not long after the gulf war ended. But that's another story.) Greenspan turned down the $15,000 sculpture accompanying the prize--imagine that sitting in the Fed's lobby--and declined the $10,000 honorarium.
The Greenspan story may be the most startling example of how Enron managed to ensnare seemingly everybody and every company worth snaring. Now that we're in the all-Enron-all-the-time news cycle, we're getting answers to "Who knew what when?" Revelations from last week: people at Arthur Andersen, Enron's outside accountant, were worried about the Enron numbers they were certifying, but did nothing. Ken Lay got a prescient letter from a whistle-blower in August warning that "I am incredibly nervous that we will implode in a wave of accounting scandals," but in September he was still telling employees that the stock was "an incredible buy." (It's since fallen to almost nothing.)
The focus is now shifting to the next obvious questions: what's being done to prevent another Enron? And will anything really change once attention moves on, as it inevitably will, to the next scandal? Harvey Pitt, the head of the Securities and Exchange Commission, is proposing to set up a new oversight body to police the accounting profession. Business heavyweights want to beef up corporate-governance rules to force boards to pay more attention to what managers are doing. Politicians are calling for rules to limit the amount of company stock that people can hold in retirement accounts to protect workers from riches-to-rags stock plunges like the one that's turned some Enronites from paper millionaires into people having trouble paying food bills during their golden years.
But for all the table-pounding calls for change now, urgency has a tendency to dissipate. There have been plenty of accounting scandals before--Sunbeam, Cendant, Waste Management, to name some recent fiascoes--but nothing seems to have changed all that much in response to them. Corporate America and the accounting profession have a remarkable ability to frustrate fundamental reform. Shortly before he came to the SEC, chairman Pitt, representing Arthur Andersen as his client, fought fiercely against tougher regulation of accountants. His current proposal is far milder than the reforms he helped defeat not long ago. Those would have made accountants accountable to federal regulators, not to a self-policing body, as Pitt proposes. And Sen. Joseph Lieberman, who's holding hearings and demanding post-Enron reforms, led the assault on the Financial Accounting Standards Board when it tried to close the most glaring loophole in the accounting system: letting companies hand out millions or billions of dollars' worth of stock options to employees, but not counting that cost as a charge against profits.
While politicians and theoreticians struggle with the idea of reform, real and immediate solutions to particular problems tend to come from people like Enron whistle-blower Sherron Smith Watkins, who warned Lay about accounting problems. Watkins, 42, who recently became a mother for the first time, has a highly developed moral sense and was incredibly courageous. But even having the right person in the right place blowing the whistle about the right thing won't change a place like Enron that didn't want to change.
As we now know, thanks to subpoenaed documents that have become public, Watkins warned Ken Lay last August that the company had inflated its reported profits with suspect accounting. Watkins, besieged by interview requests, wouldn't talk to us. But we can reconstruct her story with now public documents and with information from her lawyer, Phillip Hilder of Houston. Like many of her fellow employees, Watkins, an Enron vice president, was worried on Aug. 14 when Enron's chief executive and resident numbers whiz, Jeffrey Skilling, abruptly resigned. Watkins, who has a master's degree in accounting and is a CPA, got a company-wide invitation Lay sent everyone to a meeting at the Houston Hyatt Regency on Aug. 16. The message also urged employees to send him letters, anonymously if necessary, if they thought there was something he should know. Watkins dropped off an anonymous one-page letter before the meeting. Lay's speech inspired her. So she wrote a detailed six-page letter and gave it to Lay after meeting with him on Aug. 22. It's not clear how much Lay knew about Enron's financial shenanigans at the time--although ignorance is no excuse for the chief executive officer.
"Ken Lay was professional and concerned, and he promised to investigate," lawyer Hilder said, adding that "the company has treated her in a professional manner, and she is still employed there."
But what effect did her note have? Not much. As we see from other internal documents that have become public, Watkins's letter was turned over to En-ron's outside law firm, Vinson & Elkins, which investigated the charges. The firm dispatched a nine-page letter to Enron saying that Watkins's concerns did not, "in our judgment, warrant a further widespread investigation by independent counsel and auditors." The V&E letter hedged, though, by warning of public-relations and legal dangers if some of the deals Watkins warned about became public.
The V&E letter was dated Oct. 15. The very next day, Enron revealed that it had lost more than $600 million in the third quarter. That touched off the very meltdown that Watkins had feared.
Meanwhile, it turns out, Watkins had aired her concerns with a former Andersen colleague at the Houston office, and asked him for a financial-sanity check before delivering her letter to Lay. (We know this from an internal Andersen memo that's become public.) But no one seems to have done more than to create a paper trail that showed their concern. Meanwhile, yet another disclosed document shows that earlier last year, some Andersenians were considering having the firm drop Enron as a client because Enron's aggressive accounting was making them nervous. But Andersen kept the account, which brought in $52 million in 2000 and had the potential to rise much further, thanks to Enron's voracious appetite for consulting services.
Andersen is under intense pressure for having certified Enron's bogus numbers. It's also being investigated for shredding Enron documents. And it fired the head partner on the Enron account two days after he talked to federal investigators. It sure looks like Enron and Andersen--each of which claims to have fired the other--are trying to stick each other with the blame.
But even as one part of the federal government is investigating criminal charges against Andersen for document-shredding, among other things, the FBI is relying on Andersen's information-systems expertise. Last summer Andersen undertook the job of reforming the FBI's record-keeping. That was after the FBI admitted losing thousands of documents in the Timothy McVeigh case, which briefly delayed his execution. "This study, by a firm of Andersen's caliber, will provide valuable information to enhance the institutional integrity and performance of the FBI," Attorney General John Ashcroft said. Andersen's report is due soon.
The key to the Enron mess is that the company was allowed to give misleading financial information to the world for years. Those fictional figures, showing nicely rising profits, enabled Enron to become the nation's seventh largest company, with $100 billion of annual revenues. Once accurate numbers started coming out in October, thanks to pressure from stockholders, lenders and the previously quiescent SEC, Enron was bankrupt in six weeks. The bottom line: we have to change the rules to make companies deathly afraid of producing dishonest numbers, and we have to make accountants mortally afraid of certifying them. Anything else is window dressing.