Accounting for Enron
Risk-managers and bean-counters have taken over the corporate world.
The collapse of the Enron corporation illuminates two things about the character of contemporary capitalism.
What are thought of as non-financial companies now make much of their money through financial manipulation rather than by making things or providing services. And as accountants become increasingly influential, corporations are run not by the risk-takers, but by bean-counters and risk-managers.
Although Enron was often referred to as an ‘energy company’ the firm’s main business was essentially devising and manipulating risk-management tools. These are instruments that can be used to insure firms against adverse changes in the financial environment – although they can also be used for speculative purposes. It was its preoccupation with risk management that led The Economist to dub Enron ‘a hedge fund with a gas pipeline on the side’ (1).
In polite parlance Enron was often known as an ‘energy trader’ – the second part of the term refers more to supplying and manipulating financial instruments than dealing in energy itself. A mainstream example of the kinds of tools Enron was offering include instruments that could protect customers against changes to oil or gas prices. Enron was also proud of its invention of ‘weather derivatives’, which allow users – including a London restaurant chain – to insure themselves against bad weather conditions (2). But increasingly its products were purely financial – without any connection to the energy market at all.
Enron was also obsessed with manipulating its debt. It established 3500 ‘special purpose entities’ to take debt off its mainstream accounts – or ‘off balance sheet’ – with names such as Osprey, Raptor, Rawhide and Zenith (3). Although this practice was legal in America it obscured the company’s real level of debt to all but the most dedicated observers. When the size of Enron’s debt began to become clear in October 2001, the firm’s share price plummeted. The biggest bankruptcy in American history was not far off.
In all these practices, Enron was not unique, but an extreme version of what has become normal in both America and Britain. Today’s corporations are obsessed with managing the risks that they face. It has become a central feature of corporate life rather than a specialist activity (4). The twin concerns of the ‘classic’ capitalist – to produce useful goods and to make profits – have been qualified with an important caveat in recent years. Businessmen no longer engage in the self-confident pursuit of profit. Instead, every calculation of profit is carefully balanced against the potential risks in an enterprise. In the jargon of today’s cautious business world, this process is known as the pursuit of ‘shareholder value’.
Managing debt is also an obsession of modern corporations. A study by Smithers & Co, a respected economic consultancy, estimated that the level of debt in special purpose entities in the USA has roughly doubled since 1995 (5). Although the precise form of the debt is different in Britain, as it has different accounting practices, the principle is the same.
The obsession with risk and debt has come to the fore in an environment in which financial flows were already playing a key role. With an atrophied real economy a huge amount of spare capital flows between different firms and the financial markets, which can take the form of credit in some institutions and debt in others (6). This situation helps to illuminate the reasons behind another key preoccupation that has come out of the Enron affair – the fear of a ‘crisis of accountancy’.
Many have seen the Enron affair as indicative of the failure of the accounting profession. The inability of Andersen, one of the world’s top accounting firms, to spot problems when it audited Enron’s books has prompted a feeling of crisis. As a Financial Times editorial argued: ‘It is difficult to overstate the damage done to the profession by the bankruptcy of Enron’(7).
Concern is not limited to the USA. Despite widespread protestations that the British system is different to the American one, the Treasury has ordered an internal review of British accounting practices (8) – which is likely to mean that Britain’s army of 250,000 qualified accountants will come under closer scrutiny (9).
What commentators have missed is that accountants – or, more precisely, the accounting mentality – is more influential than ever before. The notion that corporations should be run by people who feel passionately about their products or aggressively pursue profits is out of fashion. Today’s businesses are managed by individuals who are obsessed with the minutiae of manipulating financial accounts.
The accounting mentality is perfectly suited to today’s cautious business climate. The modern accountant-businessman is preoccupied with manipulating the accounts of the businesses he runs: its assets and liabilities as well as its profits. Although this activity is often referred to as ‘financial engineering’, it has nothing to do with engineering in the conventional sense of the term. Indeed, the reason that the accounting profession is in crisis is precisely because it has failed to keep up with changes in the character of business. As financial types have taken control of mainstream businesses, accounting practices have fallen behind.
The Enron affair demonstrates the extent to which finance and financial manipulation have become central to modern capitalism. Business is no longer about the confident pursuit of profit – whatever its limitations – but about ‘financial engineering’. In the world of cautious capitalism, the accountant is king.
Daniel Ben-Ami is the author of Cowardly Capitalism: The Myth of the Global Financial Casino, John Wiley and Sons, 2001 (buy this book from Amazon (UK) or Amazon (USA)). He is also a contributor to Cultural Difference, Media Memories: Anglo-American Images of Japan, Continuum International Publishing Group, 1997 (buy this book from Amazon (UK) or Amazon (USA)).
In the wake of WorldCom, by Phil Mullan
Confidence goes bust, by James Malone
Enron: and on and on, by James Malone
(1) ‘Upended’, The Economist, 29 November 2001
(2) ‘Buying a financial umbrella’, The Economist, 15 June 2000
(3) ‘Enron ties itself up in knots, then falls over’, Andrew Hill and Stephen Fidler, Financial Times, 30 January 2002
(4) See The Timid Corporation, Ben Hunt, Wiley, forthcoming
(5) US Market Update, Smithers & Co, 6 February 2002
(6) For more on this, see Cowardly Capitalism, Daniel Ben-Ami, Wiley 2001. Buy this book at
Amazon (USA) or Amazon (UK).
(7) ’The day of reckoning’, Financial Times, 21 January 2002
(8) ‘Brown orders review of UK accounting’, Lea Paterson, James Doran and Gary Duncan, The Times (London), 6 February 2002
(9) Figure from ‘We are a nation of accountants’, Prem Sikka, Guardian, 20 February 2002
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