ENRON: A FINANCIAL 9/11
Adopting International Accounting Standards
For a Globalized World
Joan M. Veon
Many people recognize and refer to September 11 as changing America forever but most don’t think of Enron as having the same effect.While its fall from grace has been vilified as a failure of our national accounting and securities system, its demise is more than that for it provides the excuse—opportunity--to move the United States from national accounting rules to a new set of international accounting rules to facilitate the reality of the current global financial infrastructure which now exists.
Various financial and economic borders between countries have been in the process of being torn down over the last thirty to sixty years.As the world has become more integrated or globalized, new international organizations have been formed above the nation-states to deal with global economic changes.They include the International Organization of Security Commissions-IOSCO started in 1975 to bring together the Securities and Exchange Commissions from around the world to discuss the growing integration between nations through securities and derivatives. Their goal is to facilitate changes in the global economic and financial system.Just like the UN that brings political ambassadors together to discuss differences of opinion and areas of commonality, IOSCO is considered the “UN of Securities Commissions.”For years, the United States has played a leading role in the development and evolution of this organization.
The other, which compliments IOSCO, is the International Accounting Standards Board-IASB.This organization has been working on global accounting standards since 1995 when its predecessor, the International Accounting Standards Committee-IASC, agreed with IOSCO to develop global accounting standards which would facilitate a global stock exchange and mergers and acquisitions between foreign companies so that they can understand each others balance sheets. In 1995, over 55 million shares of non-registered foreign stocks traded in the U.S. on the Nasdaq.
There has been a struggle between U.S. Generally Accepted Accounting Principles—GAAP and those used outside the U.S.While the US accounting standards setter, the Financial Accounting Standards Board-FASB has criticized international accounting standards, it was reported by the Financial Times in 1997 that “FASB is in favour of global harmonization but that does not mean they are in favour of it being done by the IASC [now the IASB].”
The problem then of switching from GAAP to international accounting standards was getting them written into U.S. law.Enron’s questionable accounting problems have now solved that problem.In June 1999 then Treasury Secretary Robert Rubin, speaking at a G7 Finance Ministers meeting, said “Reforming international financial institutions, strengthening the international financial architecture, and maintaining open markets are not simply questions of economics but politics.”
How could something like Enron happen in America?In a Business Week editorial, Bruce Nussbaum wrote, “There are business scandals that are so vast and so penetrating that they profoundly shock our most deeply held beliefs about the honesty and integrity of our corporate culture.Enron is one of them.The financial disaster goes beyond the failure of one big company.This is corruption on a massive scale.”
Let’s review what Enron was able to “get away with”.A $50B bankruptcy, $32B lost in market capitalization and employee retirement accounts drained of more than $1B, hidden partnerships, shredded documents and conflicts of interest on the part of Enron and their auditor, Arthur Anderson.Furthermore, The New York Times reported that Enron received $3.9B in bank loans between 1992 and 2001 that was never reported on its books as debt.By using swap transactions that mimicked loans, Enron publicly claimed them to be hedges for commodities trades so that they were able misrepresent an increase in debt as a reduction in risk
It was Enron’s energy price fixing techniques, perfected in the energy de-regulated state of California that started Enron’s unraveling.First indicator was the court order by the California Attorney General to collect documents.What they found was equivalent to the attacks on the World Trade Center and the Pentagon: earth shattering.According to the Federal Energy Regulatory Commission, Enron created and then “relieved” phantom congestion on the energy transmission grid, getting paid for both transactions.They also engaged in other practices so that it received higher energy prices.For those of us who live on the other side of the country, we were mystified why California was paying just horrendous rates for energy.Now we know.
Former Senator Howard Metzenbaum, now Chairman of the Consumer Federation of America, testified before Congress on March 20, “How could this energy giant have gone from number 7 on the Fortune 500 to bankruptcy court almost over night?The problems that brought Enron down were hidden from investors’ eyes.”
The solution?Congress is now working on a complete overhaul of our auditing, accounting, reporting and securities practices.The outcome basically will be to dissolve any relationship that America has had to the “old world” of the individual nation-state.
I have marveled over the years that I have covered the international level at how musical chairs are played by key globalist players.Surprise, surprise, former Federal Reserve Chairman Paul Volcker now serves as Chairman of Trustees for the newly formed International Accounting Standards Board Foundation which is located in London.Trustees under him include Andrew Crocket, the General Manager of the Bank for International Settlements, Sir Sydney Lipworth, Chairman of the UK Financial Reporting Council and Kenneth H. Spencer, former Chairman of the Australian Accounting Standards Board, to name a few.Volcker’s testimony before the House on June 7 sums it all up, “I appreciate having this opportunity to brief you on the harmonization and convergence of international accounting principles.”
Life will never be the same again.What is so unfortunate is that America is—or has been so great. In a globalized world where all countries are united as a result of a borderless world, it means that big is better and size reigns.Forget global accounting rules as the savior of the corrupt U.S. accounting system for those who wish to bend the rules will always do so whether they are national or global.Any old excuse will do.