@@title@@

Summer 2002

Last | Contents | Next

Issue 43

Parafinance: Enron and drilling for red ink
See Note (1)

John Burnes

Introduction

In The Wealth of Nations, a book supposed to underpin modern free-market philosophies, Adam Smith thought that the separation of management from ownership would inevitably gave rise to negligence and corruption. The owners of Enron were the shareholders, represented by pension funds, banks and trust funds. The chief managers of Enron were Ken Lay, Jeffrey Skilling and Andrew Fastow. Although major share-holders themselves, they managed to dump the stock, while also cashing-in stock options worth millions. There were also self-awarded bonuses of millions. The other shareholders are left with one cent on the dollar. (2) The seventh largest company in the US, supposedly dominating its market and generating handsome returns, in reality had generated a debt mountain. The debt was hidden in 2000-3000 offshore partnerships set up and managed with thousands of as yet unknown partners. Fastow and Skilling made yet more millions from this. The more money Enron lost, the more its executives earned. A more telling illustration of Adam Smith's point would be hard to find.

Given that the Houston office of Andersen, Enron's accountants, spent 2-3 weeks shredding documents before the SEC investigation could get underway, it's possible that the tangle of legal and financial relations between Enron and the offshore partnerships will never become completely transpar-ent; but their essence is now clear enough. During Enron's own internal investigation into the affair, it emerged that White-Wing, one of the offshore partnerships, in 2000 and 1999 respectively, had bought, from Enron, $632 million and $192 million of investments and other assets on which heavy losses had been made. Even though they were controlled by Enron executives, Enron didn't legally own the partnerships; and therefore didn't own the various debts. As a partnership, an unconsolidated subsidiary not owned by Enron, WhiteWing itself had 75 subsidiaries which had financial relationships with each other, and with the other partnerships.

It has become apparent that an almost complete lack of accountability, together with conflicts of interest within the financial services industry, particularly within the accountancy profession itself, allowed this to happen. This essay is an attempt to provide a preliminary analysis of the way in which this lack of unaccountability emerged.

Parafinance

With the decline in accountability, there emerged not financial chaos but a growth of other - parafinancial - structures and practices. Peter Dale Scott defined parapolitics as 'a system or practice of politics in which accountability is consciously diminished'. He later came to see parapolitics as only one manifestation of 'all those political practices and arrangements, deliberate or not, which are usually repressed rather than acknowledged'. A political unconscious, as it were. (3) I propose using Scott's notion in the following but applying it to finances rather than simply politics: parafinance. I use it in a parallel sense to Scott's to mean a financial system or practice in which accountability is consciously diminished; and, by extension, to cover the more complex issue of financial practices which are usually repressed rather than acknowledged - practices in which the practitioners themselves may be unaware of the system in which they act. The Enron/Andersen debacle is a paradigm case of the conscious and/or unconscious diminishing of accountability. (4) It also shows that the media has learned little since the last great financial scandals, the Savings and Loan Crisis, and BCCI. (5)

As the US moved from an industrial economy to a service economy the calls grew for the deregulation of services, particularly financial ones, and a culture of deregulation have become increasingly prominent in the global economy in the last twenty years, particularly since the end of the Cold War. This movement connects with the belief that the private sector is the source of all genuine wealth and the public sector is at best a brake on wealth creation. This view extends not merely to the production and distribution of goods but also of services. Given that government itself, good or bad, is necessarily a public service, its logical terminus would be the view that government itself should be privatised. The emerging vehicle for putting this vision into practice is GATS, the General Agreement on Services. This will cover the provision of financial, educational, health and legal services on a global scale. As many government services as possible will be privatised.

The rationale for the merging of the financial services sector in the US was that all financial services were essentially in the same business, looking after the savings of the average US citizen; and therefore there could be no real conflict of interest between them. With the collapse of Enron this homely philosophy has taken a knock. The new economy, an economy which would be 'asset-light' in the words of Enron's Jeffrey Skilling, has begun to look suspiciously like a snow job. Asset-light has become finance-lite. (6)

Enron's reputation as the flagship of the new economy, and the seeming inability of both private and public analysts and regulators to see behind the smokescreen it created, can be understood in the context of the current US economy. An economy which makes less and less but consumes more and more is susceptible to schemes which seem able to make money out of making money. In its fifteen-year journey from being a successful medium-scale distributor and producer of energy commodities to the seventh largest company in the US, Enron's policy was to achieve growth at all cost. Largely undetected, it achieved this by becoming a gigantic hedge-fund, trading options and derivatives to the value of $1.5 billion per day. The individual traders were motivated mainly by the prospect of their quarterly bonuses. (7) The bonuses were based on estimated future returns. This was in line with the now common accounting practice of mark-to-market book-keeping, a practice which Enron pushed to its limit. A company is allowed to mark down profit which it will receive in future years as current profit. If the profits don't materialise, the future audit is supposed to be adjusted accordingly. The dealers had little interest in whether or not the deals would unravel in the future.

Special Purpose Vehicles

Large losses were made and hidden in the various SPVs (special purpose vehicles), offshore partnerships made possible by loopholes in US partnership law. Legally, partnerships are arrangements between private individuals and don't have to publish annual reports. In addition, if a person or persons holds 3% or more of a partnership then the person holding the other 97% is not legally the owner of the partnership. It was this provision which enabled Enron to park the various and rapidly accumulating debts in off-shore partnerships and off its own books. (8) Though they were all registered with the SEC (Securities Exchange Commission), mostly under one of Enron's own addresses, their existence was only hinted at in the company's annual reports. A minor technical adjustment to one of them, WhiteWing, finally brought Enron down. They just missed out on having one sleeping partner conform to the 3% rule. Consequently, Enron now owned the partnership, and with it, the debt which had been placed there. This lead to a restate-ment of its quarterly profits. The existence of the debts and the other partnerships were revealed and the share price collapsed; and with it the company. The company's credit rating had been reduced to junk level so it was unable to borrow its way out of trouble.

The partnerships had not existed solely to hide debts. They had been presented to the board as investment vehicles and tax-avoidance devices. For four of its last five years, Enron paid no federal taxes at all. Through the use of a stock-option device, the IRS paid them. The company received in the 96-2000 tax period a rebate of $391 million, $278 of it in the year 2000 alone.9 Some 800 of the offshore subsidiaries were used to maximise this sum.10 Enron benefited from a negative corporate income tax. Additionally, they didn't pass on to the IRS $357 million paid to them by Portland General Electric as part of the deregulation agreements. They simply pocketed the money. (11)

The status of the partnerships as investment vehicles is more dubious. As well as vehicles to hide as investments what were in reality loans from the banks (see below) they seemed to have served also as instruments of bribery. One internal Enron lawyer whose job included overseeing the legality of the various partnerships was given within weeks a return of $1 million on her investment of $5,000 in one of the partnerships. Other 'investors' were promised rates of return of 1000% or more. (12)

There are wide variations in the estimates of how much Enron actually lost and owes. A relevant legal judgement, and one which may act as a precedent in the case, is that which brought BCCI down and opened up to scrutiny the other frauds in which it had been involved. In order to get round the supervisory law which forbade the operation of banks registered outside the US within the US, BCCI operated illegally, using the US bank, First National, as a front. The US authorities could never actually prove that BCCI owned First National. However, they could prove that BCCI controlled them. BCCI's board would exit by one door in a building as the First National board entered by another to receive its weekly instructions. Control was judged to be proof of ownership. In Enron's case there isn't much doubt as to who controlled the partnerships: Enron, itself, through its CEO, Jeffrey Skilling, and its CFO, Andrew Fastow. If it is found that Enron had de facto ownership of the partnerships through their control of them, it is opened to massive tax liabilities. If it is also determined that a criminal deception was involved in not informing the shareholders of the actual function of the partnerships, then the individuals responsible may face criminal charges. (13)

Market-rigging

It over-simplifies the situation to see it as one of regulation vs deregulation. Amongst other things, Enron is being investigated by the federal authorities on suspicion of illegally rigging the market during last year's California energy crisis. From a legal perspective, the authorities will have to prove collusion and felonious intent. This isn't really the point. Enron didn't abuse a deregulated market: they played-off the regulated parts against the deregulated ones. Retail energy prices were capped but wholesale prices weren't. Enron and other traders could buy from the partly-deregulated Californian market and sell to other non-regulated US markets at a large profit. The then starved California market had to buy-in electricity at inflated prices to replace the power they had been forced to sell. The shortfall was in excess of $10 billion. This situation could have continued throughout the year. Against its own wishes, the Bush administration was forced to recap prices. The energy crisis disappeared. Enron and the newly deregulated industry blamed the shortages on California and the environmental lobby. The environmentalists were blamed for campaigns which had limited the number of new power stations built in the state over the last ten years. This argument might be more persuasive if there wasn't evidence that some of the power stations had actually switched off during the crisis, thus increasing prices through the limitation of supply. It still isn't clear whether the stations left on line had the same owners, or controllers, as the ones which had switched off.

The main evidence that Enron was involved in price-rigging is circumstantial, but rather strongly so. They had taken out options worth billions that there would be large-scale rises, spikes, in Californian electricity prices. At one stage a $5 unit of electricity spiked to over $80 within days. Without these price-spikes, Enron stood to lose billions.

Enron had essentially a three-point plan concerning the deregulation of markets. They first campaigned successfully for the deregulation of the energy utilities in Texas. This was then used as a base to push for national deregulation. The third stage was to push for global deregulation. The second stage was more or less complete when, to quote Sherron Watkins, an Enron vice-president, from the now famous memo she wrote to Kenneth Lay, Enron's chairman, the corporation would 'implode in a wave of accounting scandals'.

Enron didn't simply cease to become producers and distributors of energy and turn itself into a hedge-fund; it then turned the hedge fund into a gambling syndicate. (14)

Hedge funds

The function of a hedge fund is not primarily to make a profit. It is a financial risk-management procedure, a way of spreading bets so that if a loss is made on one commodity it is likely to balanced by a profit on, say, a complementary one. Enron attempted to turn these stabilising tools into profit generators. This was rather like a ship attempting to convert its stabilisers into wings. Inevitably, the good ship Enron-Icarus crashed.

Broadly, there are only two rational ways to make profits out of a hedge situation. A trader can either know a market inside out, thus taking advantage of small slippages within the market, or s/he can use sophisticated mathematical models to generate small percentage profits on large volumes of trade. (15)

Enron had neither the necessary expertise nor the motive to achieve a financial balance. They employed hundreds of young traders, most of them fresh out of graduate-school with PhDs, whose performance and hence bonuses were judged on quarterly results. These traders were believed to be turning the company into the major player in the energy industry. However, even the company's claim to be the seventh largest in the US was based largely on bogus accounting. Enron employed about 19,000 people. Its auditor, Andersen, employed 85,000, and was only the world's fifth largest accountancy practice. Enron's claim was based on its revenues. These were based on its gross trade whereas Wall Street practice is to count net revenues. Enron simply didn't include costs in its analysis. The revenue to employee ratio alone should have signalled to the analysts that something was wrong. But this, too, was held to signal that the company was an example of the new economy. Skilling had once stated that you have to get rid of people: 'they gum up the works'. That the firm was a little people-light was simply put down to their efficiency. Fewer labour units equalled more profits.

Andersen

Andersen, the company's auditor, who let these figures pass, would hardly have survived a moderately close inspection of its own track record. Until recently, they had the reputation of being the accounting world's conscience. This changed in the last ten years. During that period they have been notable for three things. Firstly, the amount of work they have done for governments, including the US government. (16) Secondly, Andersen were noted for the amount of consultancy work they performed, often for the same firms or organisations, including government, that they audited. Half of their $50 million fee income from Enron came from consultancy fees. Thirdly, Andersen has been noted for the amount of complaints their work generated and the subsequent 'fines' and/or agreed compensation imposed on them.

To take the complaints first, Andersen's part in the BFA (Baptist Foundation of Arizona) scandal is a fair example of the sort of accounting practice that led to complaints and also of the legal ingenuity they have displayed in avoiding court-agreed and court-imposed obligations. BFA was a retirement fund. Its members were swindled out of some $500 million by the fund's managers. Andersen were the fund's auditors. The fraud was carried out by establishing various hidden offshore partnerships that were used to hide losses and debts incurred by BFA. Exactly the method used by Enron to hide their losses. Andersen can therefore hardly be said to have been unfamiliar with the technique. They recently reneged on an agreement to compensate the investors. At the end of protracted negotiations, and when both the investors and the Attorney-General of Arizona had agreed to drop various lawsuits regarding their auditing of BFA, Andersen agreed to pay $217 million in compensation. Towards the end of March this year, they pulled out of the deal on the (perfectly valid) legal grounds that their insurance company, Professional Services Insurance Company Limited, had advised against payment. However, PSIC, although an independent legal entity, was wholly owned by Andersen and forced to refuse payment because of its own recent technical insolvency. This had been caused by the failure of a major income source to pay a recently due premium of $100 million. The defaulting income source was Andersen itself. They gave the current problems with Enron as the reason for their default. (17)

Normally such a major default on an insurance premium would raise serious doubts as to the solvency of the defaulting party. It would probably have damaged the share-price if they had been a quoted company. However, Andersen, like the other four major accountancy firms that audit the global economy, are an LLP, a limited liability partnership. As such, they have a minimal duty-of-care to shareholders, who, despite being the actual owners of a company, are often considered to be legal third parties in this respect. In other words, there is no necessary transmission through different parties as far as an accountant's legal responsibilities are concerned.

Andersen, PFI and New Labour

The most interesting part of their governmental work has been concerned with the deregulation and privatisation of services. They have been particularly prominent in promoting PFI (Private Finance Initiative) as the solution to the problem of squaring the provision of public services with low levels of taxation. Before 1996, Tony Blair had consistently ridiculed the notion that PFI could be a magic formula that would cut costs and improve services at the same time. The moribund state of the British rail network under privatisation was the main example used by Blair. New Labour's policy changed after a seminar for senior Labour Party figures was held at Templeton College, Oxford. in 1996 This is a business college, largely embursed by the late Clifford Barclay, a senior partner at Stoy Hayward (now BDO Stoy), the London accountants, after World War II. The seminar was given gratis by Andersen and organised through Patricia Hewitt, a former senior Andersen employee and a senior aid to Neil Kinnock when he was leader of the Labour Party. The seminar sold New Labour on the benefits of PFI.

Templeton has always had close links with Andersen. Andersen partners have for many years taken academic sabbaticals there. Equally, academics from the college have frequently become partners at Andersen. Templeton advocated the adoption of American management techniques by British business throughout the Cold War. Clifford Barclay, the original source of the college's funding, had relatively little private money of his own. He'd been born in London's East End and obtained various scholarships to fund his education, rising gradually through the ranks of associates at Stoy. Given this, it is possible that he was merely a conduit for Cold War funds from other sources, either MI6 or, more likely, the CIA.

Berlusconi

Andersen's government contacts don't stop there. With the election of Silvio Berlusconi in 1994, Italy nearly became the first Western country to be run from a PO Box in the British Virgin Islands. Berlusconi's company, Fininvest, asserted by Milanese magistrates to have been the vehicle for various fraudulent deals, including tax evasion and money laundering, had set up various shell-companies registered there. These companies were the instruments for concealing Berlusconi's financial interests in the various deals. Andersen were his accountants. With the help of Berlusconi's London lawyer, David Mills, who had carried out the legal work in setting up the shell companies, Andersen dismantled them within days of the first formal accusations against him.(18) David Mills' London offices were raided by the Serious Fraud Office in 1997 in a search for papers relating to Fininvest. (19) Very little paper work had survived, however. Many papers had been shredded to save space. (20)

Berlusconi's intelligence connections are unclear, as are Andersen's. They have been his long-term accountants since he made his first fortune in a Milanese housing deal politically leveraged by Craxi, the Italian ex-Socialist leader, now in exile in Tunisia after absconding while facing corruption charges. Berlusconi's own political apprenticeship in the late 70s was as a member of P2, the Italian Masonic lodge run by Licio Gelli, whose other members included officers of the Italian intelligence service and the CIA head of station in Rome.

Like Clifford Barclay, Leonard Spacek, Andersen's senior partner throughout much of the Cold War, was a scholarship boy made good. He sat on the Pentagon's Industry Advisory Council. He'd rescued the firm from near bankruptcy in 1947. He became the accounting industry's conscience, upholding rigorous standards and insisting that the 'objective standard [underlying all accounting principles] is fairness'. (21)

More contemporary standards prevail these days. In line with other professions, the bottom line for the accountancy industry is self-regulation. Hence, accountancy firms face little in the way of accountability themselves. In theory they are open to three regulatory regimes, the SEC, the American Institute of Certified Public Accountants (AICPA) the profession's own regulatory body, responsible for upholding standards, and the various state regulators. In practice these various bodies rarely bite. The SEC cannot take away the licence to practice, it can only bar a firm or an individual from a particular audit. Only an individual state can revoke the license. But if a potential prosecution by the SEC is not enforced and the firm can escape censure by paying damages without accepting any wrongdoing on its part - the usual result - the state authority has to build its case from scratch. (22) It rarely has either the resources or information to do this. This applies also to groups of individuals tempted to sue for negligence or conspiracy. The AICPA rarely disciplines its members. (23) It is a trade association rather than a disciplinary body, interested in protecting the interests of its members rather than the public. It has fought any attempt by the SEC to further regulate the profession.

The profession gains further protection from the fact that even the largest global accountancy firms are partnerships. This protection has been further enhanced over recent years by the introduction of LLP's, Limited Liability Partnerships. All the big five accountancy firms are now LLP's. They enjoy the legal privacy peculiar to business partnerships. In the US an accountancy firm is only obliged to publish information about its total revenues. Other information concerning accountancy has to be compiled from the annual reports of public authorities or publicly quoted companies. Thus we know that Andersen's income for last year was some $9 billion. We are left with guesstimates regarding the firm's profits, the income of partners, and even the amount of tax paid, if any. Thus a firm with 85,000 employees worldwide, and auditing a large part of the global economy, was able to exist with almost no publicly available information about its own finances.

The downside to partnership status was that partners were able to be sued. Normally each member of a partnership is open to each and several liability to the full extent of their assets. Each partner is liable for the actions of the others. The availability of limited liability prevents this. A partner is now liable only for his or her own actions, and then only to the amount they have invested in the firm. In practice this has given them the protected legal status of stockholders in a company.

Historically, the emergence of both the limited liability company and the partnership have different roots but both came out of 19th-Century notions of the public interest. Until the middle of the 19th Century investors had no protection regarding the potential debt even a small investment could open them to. They were liable not just for the amount they had invested in a particular company but that company's total debt. All of an individual's assets were at risk. This was changed in English law (and later in other jurisdictions) because it was impossible to fund large-scale capital projects such as the national supply of water or the building of railway systems without limiting an individual investor's liability. At the same time it was recognised until the 1950s that it was not in the public interest to allow partnerships to grow beyond a dozen members, that partnerships with dozens or hundreds of partners would be in reality business corporations rather than associations of individuals. Similar considerations of the public interest led to the formation of the utility companies in the US. Commodities such as energy and water were considered to be natural monopolies, best produced and supplied by a unitary body, either local and national. In return for their monopoly status, they were regulated in the public interest to ensure that they performed their functions adequately. The prices of these basic commodities were also regulated.

It wasn't just the US utilities which were deregulated in the past decade. The US financial services industry was regulated by the Glass-Steagall Act introduced after the Wall Street Crash in 1929. The rationale in favour of the Glass-Steagall Act was well expressed in the 1970 brief filed by the First National City Bank in a case Investment Company Institute v. Camp (401 US 617, 1971):

The Glass-Steagall Act was enacted to remedy the speculative abuses that infected commercial banking prior to the collapse of the stock market and the financial panic of 1929-1933. Many banks, especially national banks, not only invested heavily in speculative securities but entered the business of investment banking in the traditional sense of the term by buying original issues for public resale. Apart from the special problems confined to affiliation, three well-defined evils were found to flow from the combination of investment and commercial banking. (24)

Provisions of the Glass-Steagall Act were directed at these abuses:

Banks were investing their own assets in securities with consequent risk to commercial and savings deposits. The concern of Congress to block this 'evil' is clearly stated in the report of the Senate Banking and Currency Committee, an immediate forerunner of the Glass-Steagall Act.

Unsound loans were made in order to shore up the price of securities or the financial position of companies in which a bank had invested its own assets.

A commercial bank's financial interest in the ownership, price, or distribution of securities inevitably tempted bank officials to press their banking customers into investing in securities which the bank itself was under pressure to sell because of its own pecuniary stake in the transaction.

It was the Glass-Steagall Act against which the banks and the major accountancy houses campaigned throughout the 1990s. It was still on the statute book in the late 1990s when Citibank and Travellers Insurance merged. This made CitiBank, now CitiGroup, the largest bank in the US. However, the merger contravened the Act and was illegal. CitiGroup pleaded with the Federal authorities for time to sort the situation out. They were given two years. They used this time to launch a massive lobbying campaign in Washington which resulted in the effective repeal of the Act and was probably the most significant deregulatory measure of the nineties. The lobbying industry centred on the financial services sector was now so powerful that it managed to have the main regulatory laws concerning its own industry abolished. (25)

By erecting a wall between commercial banking and investment banking in effect, the law had kept banks from doing business on Wall Street, and vice versa. This prevented banks from share-ramping by proxy, as it were. A bank that has invested heavily in a stock can hardly be expected to be objective when deciding issues such as further loans, loans which may affect the stock-price. After the repeal, there were supposed to be various firewalls to protect against such activities. One of the lessons emerging from Enron is that the firewalls were ineffective, if not simply cosmetic. This confusion between a loan from a bank and an investment was another of the tangles which led to Enron's collapse: an investment can be smuggled into the profit side of a company's account; a loan has to be repaid. One is a potential source of profit, the other is a debt. In practice, many of the returns-on-investment paid to the banks (and individual bankers, who appear to have been some of the 'partners') were exorbitant interest payments. Enron needed the money: the banks were willing to 'invest'.

Revisionist historians of finance have recently emphasised an alternative view of the role of the banking collapse in the Depression. They argue that it was a result of the Depression, rather than a major cause of it, and that it was exacerbated by structural weaknesses peculiar to the US banking system itself, such as the lack of nationwide branches. That there has been a major change in the ratio of 'cash' to securities holdings in the world-banking system over the last two decades may have led the banks to a rosier view of the general benefits to be gained from demolishing the legal barriers in place since the Depression. Only four years after the repeal and replacement, Enron and Andersen have collapsed, and Merril Lynch's fortunes are subject to speculation.

The repeal of the Act to aid the rationalisation of the financial services industry had three major negative consequences. It allowed the institutionalisation of conflicts of interest. Banking and insurance are not the same business: what may have benefited an insurance company and its customers would not necessarily have benefited a bank. It watered-down the previous requirements that banks lend to poor areas. Additionally, it provided a $50 billion loophole which allowed insurance companies and mutual societies to avoid paying out money to their members by the simple device of converting to a listed com-pany. The windfall tax due on these savings by the companies, profits on their own members, was avoided by the equally simple expedient of moving to another state and setting up a hybrid structure, a mutual holding company. (26) The large mergers, accompanied by large fees, kick-started the growth-by-merger frenzy which has recently hit the wall, driving companies like World.com to the edge of bankruptcy.

The financial system has now produced a situation where the value of crucial elements of the system are intrinsically undecidable. If it is impossible to decide whether or not a given financial transaction had any economic substance, it is equally impossible to decide the true profit-and-loss status of that transaction. The substance will be a function of largely arbitrary legal decisions and processes, mainly concerning the legality or not of certain actions by management. The legal process will be largely concerned with the assignment of responsibility and blame. Ignorance of the law is famously no excuse but a successful prosecution still has to establish that a defendant understood, or should have understood, the nature of the action itself. The only criminal charges that have so far arisen from the Enron/Andersen debacle, the obstruction of justice through the shredding of documents, are all after the fact, so as to speak. Enron didn't hide the offshore partnerships, they just didn't advertise them. The SEC has been derided for finding out about the partnerships only from an article in the Wall Street Journal. They then seemed to know the identities of most of them within hours. This is not surprising. All the partnerships were duly registered with the SEC themselves in Enron's annual notifications, 'the 10ks'. A 10k normally con-tains much more information than the company annual report. Enron's annual reports merely referred in the vaguest terms to some future capital liabilities owing to various unnamed entities - the partnerships. However, 10ks are public documents and freely available on the SEC's website. Most of the partnerships had an Enron building as their registered US contact address. No one had bothered to ask what they were for. The board apparently didn't know that the partnerships were being shored up by the banks who were themselves both advisors to and investors in Enron. Enron shares were used as collateral for the loans which sustained the partnerships.

Cheerleaders

The big five auditing firms are themselves hinting at the difficulty of accurate accounting. Andersen's outgoing CEO stated to much derision that an audit can only provide an 'opinion' on the state of a corporation's books; and, further, that they can only base this opinion on what the corporation choses to show them. Equally, Enron claims that they are not themselves accountants, that only the professional auditors can give a true picture of a company's books. This is not wholly a matter of legal passing-the-buck. An audit of a large company is today so complex, and involves so many interconnected decisions, that it is often a process of interpretation rather than a description of fact. However, given that Andersen conducted Enron's internal audit as well as its external one, and that they also received nearly $5 million in fees for auditing the LJM partnerships, it is difficult to believe that they didn't have a fairly accurate picture of Enron's financial state. It has yet to be determined how much Andersen were themselves involved as management consultants in setting up the company's financial structures.

Enron's practices were obviously fraudulent in the sense that they were deceptive, and designed to be so. When fraud has become obvious and blatant, but difficult to the point of impossibility to prove, the law needs to be changed. In both the US and the UK, the current laws regarding accountancy, partnerships and offshore financial instruments are an invitation to fraud. Obvious conflicts of interest should be de-legitimised. A system where it is possible for banks, accountants, and other financial institutions to be team-members, coach and referee at the same time is inherently flawed. The flaws are exacerbated by the share-value being the primary - in practice, the only - concern of the board. The current system is without checks and balances. Global banks and accountants have simply become cheerleaders for the share-value of a company.

Notes

1 A Texas term meaning throwing good money after bad.

2 Lay's approach was particularly ingenious. He said that he'd cashed in his stock to repay personal loans of millions from Enron so as to help the company's cash-flow problems. The stock rapidly became worthless. In effect, he hadn't repaid the loan. An additional bonus.

3 Deep Politics and the Death of JFK, (Berkeley and Los Angeles: University of California Press, Fall 1993), pp. ix, 413

4 The Savings and Loan Crisis was itself caused by deregulation. Small financial institutions designed originally to provide mortgages for the ordinary citizen were allowed to speculate in the securities market. This they did to the point where the eventual losses came to $500 billion. The Federal authorities came up with a rescue package. The original deregulation had been one of Ronald Reagan's pet projects. He appointed George Bush, then the Vice-President, to head the steering committee to see through the deregulation.

5 Opening a conference in 1992 sponsored by The Annenberg Washington Program and devoted to the topic of why the news media had been so slow to pick up on the BCCI and Savings and Loan scandals, David McKean observed:

'As the United States enters the post-Cold War era, more often than not the most important stories are financial ones. Whether it is the growing deficit that threatens our economy, or internat-ional white-collar financial crime that threatens our institutions, complex business and financial stories have ever more pro-found national and international implications. Reporting these complex stories is one of the great challenges facing the media today.' David McKean, Why the News Media Took so Long to Focus on the Savings and Loan and BCCI Crises (Washington, D.C. : The Annenberg Washington Program in Commun-ications Policy Studies of Northwestern University, 1993).

6 Skilling has a dry sense of humour as well as some insight. In a web-chat with Enron employees during the recent California energy crisis, he remarked that the difference between California and the Titanic was that when the Titanic went down at least it had the lights on. His insight is shown by the fact that he mentioned he might come to regret the remark. Possibly at his future trial.

7 An insight into Enron's business culture may be gained from this anecdote which surfaced concerning the company. In its London office the bonuses were delivered via a toy train-set connecting the various desks. One trader was so enraged when his bonus turned out to be less than half-a-million dollars that he smashed his PC against the wall. Unfortunately, he damaged the train-set in the process. He was disciplined for the latter lapse. Jack Beatty, Atlantic Monthly, 12 March 2002

8 Parafinancial activity often takes place offshore. A favourite in the US is the Cayman Islands, where some $800 billion is held on deposit. This is equal to approximately 30% of the deposits held in the US. Enron had their tax shelters there. In the UK, the Channel Islands are the favoured location for offshore deposits. At any given time Jersey, an island with a population of 80,000 has some �100 billion on deposit, equivalent to 10% of the UK's GNP.

9 Campaign for Tax Justice report 202-626-3780, 17 January 2002

10 Institute of Taxation and Economic Policy's October 2000 report on Corporate Income Taxes in the 1990s discusses the use of stock options and other loopholes to reduce corporate income taxes.

11 Darren Puscas, Polaris Institute, 4 February 2002 www.polarisinstitute.org

12 This practice is not unique to Enron. Thomas McCauliff, the Chairman of the Democratic Party, received within months a return of nearly $5 million on his investment of less than $50,000 in Global Crossing before the company collapsed.

13 However, the shareholders may not press this. An additional tax burden would simply increase Enron's total debt, reducing the amount of money available to be distributed.

14 This was consonant with the rapidly emerging culture at Enron. A favourite activity of Enron traders was the operation of an internal gambling syndicate based on NBA results. The group didn't just lay bets on the results of the games, it evolved an ever more complicated system of betting against the possible bets of other members: betting about betting.

15 The first of these methods was successfully employed by the metals trader, Marc Rich, and his associate, 'Pinky' Green. Rich's downfall came about through bogus trading with a company he owned in order to evade taxes. The other method was successfully employed by the large hedge-fund LTCM (Long-Term Capital Management) until the Russians defaulted on their quarterly repayments because of a short-term liquidity crisis. This political possibility had not been factored in to the mathematical model, and the fund began to haemorrhage, necessitating a rescue package by the US authorities. The moral is that long-term risk-management strategies can be quickly undermined by short-term crises.

16 All US government work has been taken away from them in the light of recent events.

17 They would not have been allowed to purchase an insurance company while the Glass-Steagall Act was in force. This is discussed below.

18 www.FT.com17 April 2001

19 Mail On Sunday 24 August, 1997

20 Married to a New Labour junior health minister, Tessa Jowell, Mills also helped police enquiries in London and in Italy into another Italian business deal. Again, this was for a company, Padmore, with which he was associated and was also registered in the British Virgin Islands. A nine-ton cargo of blood plasma on its way by sea from Italy to a third world country was seized in an Italian port. It was past its sell-by-date and contaminated with HIV. It is unclear who the Italian principals were behind the scheme. Padmore was quickly put into liquidation. Mills was unaware of the contamination. He perhaps suffered some personal embarrassment. His sister-in-law, Barbara Mills, is a former head of the Serious Fraud Office and a former Director of Public Prosecutions. He also plays golf with Alastair Campbell. The Express 29 July 1999

21 Ohio State University, Alumni website.

22 Washington Post, 6 December 2001

23 Ibid. Of the 280 sanctioned by the SEC in the last ten years, the AICPA disciplined only a fifth. A third of practising accountants in the US are not even members of the association

24 First National City Bank, 1970, pp. 40-2.

25 The financial services sector contributed some $30 million in political contributions to key congressmen. Chairing the relevant committee in Congress, Phil Gramm was among the leading beneficiaries. His wife, Wendy Gramm, had retired as head of the regulatory body governing futures trading in commodities and became head of Enron's audit committee. She had a relatively small salary but rather large stock options.. BBC News, Friday, November 5, 1999