The growing scandal over the collapse of Enron has many a lesson for credit unions.
Not the least of which is the fallacy of the audit. Or the urgent need for campaign finance reform. Or the fool's gold of derivatives. And that's just off the top of my head.
The auditor is supposed to be an objective observer that lends an opinion on whether an entity's financial report comports with generally accepted accounting principals, or GAAP, which is meant to provide full and accurate disclosure of that entity's financial condition.
But the audit has become so much more than that. Publicly traded companies frequently use audits to puff up their financials, to goose their stock price, if you will. Others use the audit to hide bad news. Many use it to justify tax schemes.
Enron was guilty of all three. I mean, these guys used more than 1,000 well-hidden partnerships, many of them offshore, to hide billions of dollars in transactions from their investors-their owners. The auditors actually signed off on this convoluted scheme. Then they used these offshore partnerships to erase their federal tax liability for four of the past five years.
They paid zero in income taxes during that time, even while their auditors were attesting to financial reports claiming they were earning billions of dollars in profits!
Of course, what were the auditors supposed to do? Arthur Andersen earned $25 million in audit fees from Enron last year. But they earned $27 million in consulting fees on such issues as how to structure those offshore partnerships and to avoid taxes.
As I learned early on, you can get an auditor to do pretty much anything you ask, as long as you pay enough. And if he won't do it, you can find someone else to sign off. After all, you're paying them. I learned this lesson on both the micro level, the personal, and the macro level, big corporations.
My apprenticeship in the credit union movement, during which I spent three years writing a newsletter called The Credit Union Accountant, as dull as it was, served as a real education on this subject.
Lessons From RISDIC
Credit union observers learned this lesson in a big way after the RISDIC scandal in which one of the most respected auditing firms, Ernst & Young, was found to have signed its name to some pretty shoddy financials at both the private deposit insurer, the Rhode Island Share Deposit Insurance Corp., and several of the credit unions insured by RISDIC.
Or take the S&L scandals. Auditors were found to have certified fraudulent financial reports in dozens of cases. Ernst & Young, again, was found to have been one of the biggest culprits and paid dearly in civil damages, as a penalty.
Of course, much of what Enron perpetrated on the public, its employees and its own owners, the stockholders, would not have been possible if the company had not bought its regulators and lawmakers, both state and national, with millions of dollars in campaign funds.
The company poured more than $10 million into state and local elections over the past decade. Those dollars helped build influence that contributed to Enron's ability to get friends appointed to everything from the Federal Energy Regulatory Commission, its federal regulator, all the way to the White House.
And it paid off in Congress with the blocking of key legislation that would have tightened oversight of financial derivatives, as well as a pending bill that would have given this company that hadn't paid taxes in four of the past five years a rebate of $248 million on its income taxes.
Arthur Andersen also used the campaign finance spigot to its own advantage. If weren't for the millions of dollars paid by the auditor ($15 million in contributions and lobbying fees over the past decade) and its sister accounting firms, proposals to restrict consulting work for auditing clients may have been successful. Maybe Andersen would not have been blinded by the millions in consulting fees paid by Enron and would have blown the whistle on this public farce long ago.
I don't know what the solution is to the growing scandal over campaign finance. The pending bill banning so-called soft money, is not it. But it's time that lawmakers take a good look at reigning in the excesses that seem to grow yearly.
New Year, New Example
And finally, the financial markets continue to spew their fiery rage on those who would reduce them to mathematical equations. Each year seems to provide us with a major example. Whether its Capital Corporate FCU (CapCorp), or Long-Term Capital Management, or Enron, these companies hire financial wizards to buy and sell billions of dollars in securities based on mathematical probability.
Much of the time, the dice turn in their favor. But the world and all of its variables cannot be reduced to mere probabilities. Too often an unforeseen incident upsets all the equations.
It may be a plunge in the Russian ruble. Or downturn in mortgage rates (CapCorp). Or a war in the Congo. And the geniuses are left holding the bag.
Along with you and me.
Credit Union Journal Washington Bureau Chief Ed Roberts can be reached at 202-434-0334, or at robertscuj aol.com.