Enron: We repeat the lessons not learned

November 30th, 2011

Mark Williams, an expert in risk management, teaches finance at BU’s School of Management. A former Federal Reserve Bank examiner, he is the author of Uncontrolled Risk: The Lessons of Lehman Brothers. He offers the following comment on the 10th anniversary of the collapse of Enron.

“It has been 10 years since the dramatic Enron bankruptcy but the DNA at the crime scene remains unchanged. Management fabricates revenue or expenses, stock gets inflated, boards remain asleep, investors are duped, billions lost, jobs destroyed, regulators scramble to catch up, Congress holds postmortem hearings, and few executives go to jail. The art and science of corporate misdeeds remains robust.

“Since Enron, new inductees into the Corporate Hall of Shame include WorldCom, Tyco, Global Crossing, Adelphia, HealthSouth, Parmalat, Countrywide, Lehman Brothers, Madoff, Olympus, and MF Global. The common defective gene includes poor corporate governance, conflicts of interest, or weak risk-management controls. It appears the building blocks of strong business – trust, honesty, and integrity – are optional when financial tricks can be used to generate oversized bonuses.

“White collar crime is enemy number one and needs to be attacked with the same vigor as blue collar crime. Defrauding investors with a computer is as dangerous as robberies at gunpoint. As measured in economic cost, corporate fraud comes at a significantly larger price tag.

“The existing deep recession, the worst since the Great Depression, is directly attributable to fraudulent corporate practices and proof positive that Enron-esque behavior has devastating social and economic consequences. The recession has cost the global economy trillions and has dampened the hopes of the over 13 million unemployed Americans. Such improper corporate behavior should not be tolerated.

“Corporate accountability can be improved. Regulation and enforcement must be shaped for the betterment of society and not skewed towards the benefit of business. Penalties and sentencing guidelines must be stiffened. Regulators need to aggressively enforce laws. The sophistication gap between regulators and those they regulated also must be closed through greater resources – human and economic capital. Regulators need better risk training and how to spot fraud early so it minimizes the financial consequences. New whistleblower laws tied to economic incentives are a strong step forward and have the potential to better ferret out corporate fraud.

“The crooked E might have died on December 2, 2001, but its offspring are alive and well. Renewed focus on strengthening laws and fighting corporate misdeeds will help restore the trust that this decade of executives have helped to destroy.”

Contact Williams at 617-358-2789; williams@bu.edu

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