Enron and World Finance: A Case Study in Ethics PDF
Preview Enron and World Finance: A Case Study in Ethics
Enron and World Finance A Case Study in Ethics Edited by Paul H. Dembinski, Carole Lager, Andrew Cornford and Jean-Michel Bonvin Enron and World Finance Also by Observatoire de la Finance From Bretton Woods to Basel Finance & the Common Good/Bien Commun,no.21,Spring 2005 Ethics of Taxation and Banking Secrecy Finance & the Common Good/Bien Commun,no.12,Autumn 2002 Will the Euro Shape Europe? Finance & the Common Good/Bien Commun,no.9,Winter 2001–2 Dommen,E.(ed.) Debt Beyond Contract Finance & the Common Good/Bien Commun,Supplement no.2,2001 Bonvin,J.-M.Debt and the Jubilee:Pacing the Economy Finance & the Common Good/Bien Commun,Supplement no.1,1999 Dembinski,P.H.(leading contributor) Economic and Financial Globalization:What the Numbers Say United Nations,Geneva,2003 Enron and World Finance A Case Study in Ethics Edited by Paul H.Dembinski Carole Lager Andrew Cornford and Jean-Michel Bonvin in association with Palgrave Macmillan Selection,editorial matter and Chapters 1,2 and 16 © Observatoire de la Finance Remaining chapters © contributors 2006 Softcover reprint of the hardcover 1st edition 2006 978-1-4039-4763-5 All rights reserved.No reproduction,copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced,copied or transmitted save with written permission or in accordance with the provisions of the Copyright,Designs and Patents Act 1988,or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency,90 Tottenham Court Road,London W1T 4LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2006 by PALGRAVE MACMILLAN Houndmills,Basingstoke,Hampshire RG21 6XS and 175 Fifth Avenue,New York,N.Y.10010 Companies and representatives throughout the world. PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St.Martin’s Press,LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States,United Kingdom and other countries.Palgrave is a registered trademark in the European Union and other countries. ISBN 978-1-349-52447-1 ISBN 978-0-230-51886-5 (eBook) DOI 10.1057/9780230518865 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Enron and world finance :a case study in ethics / edited by Paul H. Dembinski…[etal.]. p.cm. Includes bibliographical references and index. 1.Enron Corp.—Corrupt practices—Case studies.2.Energy industries— Corrupt practices—United States.3.Corporations—Corrupt practices—United States—Case studies.4.Business ethics—United States—Case studies. 5.Corporate governance—United States—Case studies.6.Corporate culture— United States—Case studies.I.Dembinski,Pawel H.,1955– HD9502.U54E57367 2005 333.79(cid:2)0973—dc22 2005051354 10 9 8 7 6 5 4 3 2 1 15 14 13 12 11 10 09 08 07 06 Contents List of Tables and Boxes ix Acknowledgements x Notes on the Contributors xi List of Abbreviations xv 1 Overview of the Book 1 Andrew Cornford Enron: origins, character and failure 2 Transactions and institutional structure 2 Accounting and auditing 3 Strengthening corporate governance 5 Corporate culture and incentive systems 9 Ethical foundations 11 Part 1 Enron:Origins,Character and Failure 2 Enron and Internationally Agreed Principles for Corporate Governance and the Financial Sector 19 Andrew Cornford Introduction 19 A sketch of Enron 20 Accounting and transactional techniques used by Enron 21 Enron’s financial reports 24 Some other examples of Enron’s activities 26 Different parties and non-observance of good corporate governance 26 Corporate governance and the OECD Principles 33 The policy response to recent corporate scandals 35 Corporate governance and key financial standards 39 Annex 1 Illustrations of Enron’s accounting and transactional techniques 40 Annex 2 A look at some of Enron’s financial reports 45 v vi Contents 3 A Revisionist View of Enron and the Sudden Death of ‘May’ 54 Frank Partnoy Introduction 54 A revisionist view of Enron 57 The regulatory response to Enron’s use of derivatives 66 Conclusion 77 4 Who Is Who in the World of Financial ‘Swaps’and Special Purpose Entities 90 François-Marie Monnet Part 2 Ethics in Thought and Action 5 An Ethical Diagnosis of the Enron Affair 103 Etienne Perrot Principles of action and the foundation of ethics: some diagnostic tools 103 The ethical basis for an analysis of the Enron affair 105 Conclusion 116 6 Anonymity:Is a Norm as Good as a Name? 117 Edward Dommen A society of the anonymous 118 What does anonymity convey? 119 Anonymity and compartmentalisation 122 Norms and names 122 Is communitarianism the answer to anonymity? 126 Decent dress: how much to reveal? 127 Conclusion 128 7 Spaces for Business Ethics 131 Domingo Sugranyes Bickel New forms, old problems 131 An unfinished revolution 132 Codes of conduct and social responsibility 134 Corporate culture as the key 135 The combination of people and capital 136 The bottom of the pyramid 137 Part 3 Corporate Governance and Auditing 8 The Demise of Andersen:A Consequence of Corporate Governance Failure in the Context of Major Changes in the Accounting Profession and the Audit Market 143 Catherine Sauviat Contents vii The Andersen collapse as a case of corporate governance failure 144 Concentration, diversification and loss of independence 148 Auditing as the ‘poor relation’ of professional services: the problem and its effects at Andersen 151 Conclusion 154 9 Enron et al.and Implications for the Auditing Profession 159 Anthony Travis Introduction 159 Historical role of the auditing profession 160 The expanding role of external auditors to identify fraud 162 Unanswered questions 163 Today, a regulated profession 163 10 Enron Revisited:What Is a Board Member to Do? 168 Beth Krasna High risk accounting 168 Inappropriate conflicts of interest 171 Extensive undisclosed off-the-books activity 173 Excessive compensation 174 Lack of independence 176 Fiduciary failure – a Board is not a team 177 11 How to Restore Trust in Financial Markets? 180 Hans J. Blommestein Introduction 180 Public information, valuations and financial market efficiency 181 The central role of the gatekeepers of public trust in the new financial landscape 182 Why have the gatekeepers of public trust failed? 182 A fundamental response is needed to restore public trust 187 Part 4 Corporate Culture and Ethics 12 Enron:The Collapse of Corporate Culture 193 John Dobson Introduction 193 Enron’s corporate culture 194 America’s corrupt corporate culture: an educational failure 198 Rising from the ashes of Enron: building a sound foundation for corporate culture 200 Some concluding thoughts 203 viii Contents 13 Ethics,Courage and Discipline:The Lessons of Enron 206 Robert G. Kennedy The external response: law and regulation 207 The internal response: professionalism 208 The character of business professionals 213 Business schools and corporate cultures 215 14 Developing Leadership and Responsibility:No Alternative for Business Schools 217 Henri-Claude de Bettignies The ‘leadership’ dimension 218 The ‘responsibility’ dimension 219 Leadership and responsibility: two facets of the same challenge 222 15 Ethics for a Post-Enron America 226 John R. Boatright What went wrong? 227 What is to be done? 229 Part 5 Conclusion 16 Enron:Visiting the Immersed Part of the Iceberg 237 Paul H. Dembinski and Jean-Michel Bonvin Enron, a multi-causal reading 237 ‘Financiarisation’: trust in finance 240 Loss of bearings – the conflict of interest example 243 Beyond ‘financiarisation’: common good at risk 245 Index 253 List of Tables and Boxes Tables 2.1 Effects of application of six accounting techniques on Enron’s financial statements for 2000 25 2.2 Adjusted components of Enron’s key credit ratios 25 Boxes 1.1 Selected legal proceedings connected to the Enron case 7 2.1 International Financial Reporting Standards (IFRS) 20 2.2 International Standards on Auditing 20 2.3 Prepays precedents and applicable law 23 3.1 Derivatives markets 55 3.2 The concept of a ‘prudency’ reserve 65 3.3 Forward curves 65 ix
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