Play the Enron Blame Game!Who destroyed America's seventh-largest company? Point the finger at your favorite culprit.

Notes From The Fray Editor:

REW-OEM updates us on the Teapot Dome scandal; GI gives us the useful phrase "capitalism's enronoscopy"; and JAFO says we are like Romans watching helplessly as their empire began to crumble. Ltl Abner says "Blame Everyone!... We all are guilty as sin for allowing this to happen!" The Fax has a rather shocking idea for a revenge game, and Hyperbili found a way to blame Gary Condit. Tillman Alexander shines a theological light on the question of blame vs responsibility. Dira Necessitas wants to add more names, including Clinton, the Kyoto Treaty, and the Government of India.


Reader Comments From The Fray:


Accident theory is usually used to describe and analyze technological system failures like the Three Mile Island and the Space Shuttle Challenger disasters. However, I think it is equally useful in analyzing the failure of Enron. For example, the purpose of internal audit is to insure that company internal controls are functioning properly and if not, the failure of controls is reported directly to the audit committee which is independent of company's management. This is a "backup system" which failed because the outside auditors, Arthur Andersen, were also the internal auditors.

In unraveling the Enron debacle it becomes clear that the business failure occurred due to a whole cadre of system failures and there is ample blame to be spread around. Although this spreading of blame looks like a pointless exercise in "passing the buck" it can be useful in understanding how the failure occurred and what can be done to strengthen the capital markets. As in the above example, the SEC can prohibit accounting firms hired as external auditors from providing internal audit services to the same company.

--EBG

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The Enron board could not blame Arthur Andersen for its "sketchy" bookkeeping, because the auditing firm did not keep Enron's books. Enron's books, as are any company's, are the responsibility of management. Management is responsible for putting together an accounting department, choosing which accounting methods (depreciation, for example) and estimates (usefule lives for depreciable assets, for example) it will use to present its financial information. The auditing firm' responsibility is to review the reasonableness of management's choices and to comment on them, especially if the auditor doesn't believe the methods and estimates chosen by management is a true depiction of the company's financial health.

Management is responsible for making good choices among the available methods and estimates and the auditor is responsible for being familiar with the choices available to management and being able to recognize whether those chosen by management are appropriate. Both sides failed in this regard and both share responsibility for this fiasco.

As an auditor, I can guess what happened. Arthur Andersen, afraid of angering its client Enron and jeopardizing its lucrative audit contract, decided against putting a comment in its Enron audit report that could have said simply, "Enron is also engaged in numerous financial transactions which, quite frankly, we don't understand, and therefore exclude those transactions from our unqualified audit opinion."

--erieguy

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