By DAVID MOON, Moon Capital
February 3, 2002
This past week, I read about an action that, if implemented, would be the
most effective tool in preventing future 'Enron situations.' The action
was not a government proposal, nor was it a new regulatory authority. It
did not involve more stringent accounting standards or disclosure
requirements. It was not the result of a consultant's study or Senate
hearings. It was, in fact, a very selfish decision made by one company
that could benefit the entire US market place.
Delta Airlines is considering replacing Arthur Andersen as its auditor.
When you go to a web site and look at a company's earnings, how do you know
the number reported on the web site is accurate? The INDEPENDENT auditors
confirm that the reported annual earnings figures conform with generally
accepted accounting principles. That's why we can trust the numbers ' a
big accounting firm with lots of really smart people have reviewed the company's
books and tell us the numbers are okay. When an auditor loses the complete
trust of the investment community, the audit is compromised. It may, in
fact, be worthless.
Investors are going to start noticing auditors. It used to be that an
audit by one of the five biggest accounting firms was considered as good as
gold. Not any longer. Accounting firms are going to have to take
their auditing role more seriously and be truly independent. We do not
need a federal law to prohibit accounting firms from doing consulting work and
performing a company's audit; the company should just have to clearly disclose
it. Investors can then view the audited financial statements with the
appropriate amount of skepticism.
Part of the cause of the Enron collapse is irresponsible greed. Not
just the greed of a company executive who pushes the envelope so often that he
loses sight of the edge of the table. Not just the irresponsible greed of
an auditor who, either wittingly of unwittingly, serves as accomplice.
Part of the problem is irresponsible investor greed. It is a terrible
shame that many Enron employees had retirement plan money invested in Enron
stock and had no ability to divest themselves of it. (This is a classic
issue about property rights; who owns the retirement plan assets, the employee
or the employer?) But there were also millions of investors, including
willing Enron employees, who asked very few questions and showed little
skepticism when Enron stock increased from $36 to $90 in ten months. Many
of these people were getting rich (or so they thought) on a company whose
business they could not explain ' or even understand.
To be sure, the company's financial statements were misleading and
incomplete. But the much-discussed fact that Enron executives were selling
hundreds of millions of dollars in stock prior to the price collapse was public
knowledge. Anyone with access to a computer mouse could have easily known
that the top Enron executives were not buying the stock in 2001; they were
When irresponsibly greedy investors are making money, they don't ask
questions. They don't look at the warts. Imagine if the front page of a
company's annual report included the following disclosure: 'These financial
statements were reviewed by an accounting firm who was also paid a lot of money
to help develop our business strategies. The company owes a ton of money
that doesn't show up on these financial statements. The top management of
the company is selling a lot of stock, even while you read this.' As long
as the stock price was going up, there are plenty of investors who would ignore
this sort of warning. Hear no evil, see no evil.
There are twelve senate and house committees and sub committees that have
announced Enron investigations. Approximately 250 senators and congressmen serve
on those twelve committees; more than 200 of them have received campaign
contributions from Enron or Arthur Andersen. These hearings may provide
plenty of bombshells, but do not expect them to be fair and unbiased.
The Enron situation is a perfect example of almost everything going
wrong. No law can prevent that.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).