A letter from Bud Shivers in response to my January “Lessons From Enron” posed some good thoughts for follow up. There is a lot more to be learned about the true culpability as this story plays out, and much of the substance is presently being obscured by political demagoguery, but further lessons are surfacing. Enron highlights the degree to which the investment banking industry has been headed in the wrong direction since the major firms began offering their shares publicly a couple of decades ago. The concept of privately owned, general partnership governance of these firms served us well. Conversely, the perverse incentives created by the pressure for stock performance has produced conflicts of interest among corporate finance, research, and retail sales, and has certainly contributed to the quarterly earnings-driven management of client companies. As to the accounting profession, I see two problems manifest here: (1) the profession has not properly adjusted its practices to the growth and development of the “virtual” firm, such as Enron, for which the attest function is less a matter of validation of historical cost and revenue recognition and much more a validation of risk management processes, and (2) the conflict of interest inherent in the attest and management consulting functions, which has severely damaged the objectivity of the independent audit.
Alan Greenspan has made some interesting comments about the legacy of Enron. Essentially, he said that the result will be a transformation of corporate governance, which I agree is long overdue, and that the critical standard for these “virtual” companies is reputation. If he is correct, this may also mean a return to the days when investment banking, accounting, and commercial banking were conducted based on the concept of the “trustee” by partners with full liability and a significant personal financial stake in their stewardship. In the meantime, as we continue to make the conversion from “defined benefit” based to “defined contribution” based retirement funding, we are certainly in for much more government oversight and intrusion, at least until the governance and self-regulatory functions catch up with the markets.