The importance of regulation

By Jeff Lipsey

As I sit in the theatre watching Enron: The Smartest People in the Room, I wonder what could have been done to prevent the disaster almost four years ago.

This documentary was a lot more than just an overview of the negligent accounting acts. It was also a lot more than a description of the unethical behavior behind Enron’s top executives. In fact, it was even a lot more than the pitiful display of auditing by Arthur Andersen. The issues brought up by this documentary were not mentioned on the evening news casts (that I can remember), the political elections, or our local classrooms.

Perhaps if California knew what had caused the energy crisis in 2001, Gray Davis may still be employed (and not for Monster.com). If only California had never deregulated the power industry, the entire crisis would have been avoided. Regulation ensures that the companies follow strict guidelines; the absence of guidelines leaves room for corruption, as seen in this example.

Of course deregulation didn’t cause the energy crisis in California; it was the unethical and greedy traders on the floor at Enron. They personally had the power to limit the output of energy and through a mere phone call, they could shut down a power plant (with audio tapes to prove it). These traders would control the price of energy by buying “shares” of it (of course, this was after Enron actually created the energy market) at a low price, and then decreasing the supply. This scenario reminds me of that economics course I took three years back. How something so simple could cause so much damage still confuses me.

In order to make the public happy, Congress had to create a face, or in this case, three. Behind all this were the supposed brains of three people: Kenneth Lay, Jeffrey Skilling and Andrew Fastow (the “Big Three”). Three men can only do so much damage and it is definitely possible that the floor traders at Enron did all this damage without the “Big Three” knowing, but it is not likely. Whenever I hear the argument that they didn’t know what was happening at the office, I get a little uneasy. It’s the responsibility of the executives of a corporation to know the business-not to mention the executives each had private staircases heading up to their offices (you have to walk by the trading floor to get to the private staircases).

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    Sure, Arthur Andersen didn’t blow the whistle and eventually ended up saving himself as well. Back when I was in high school I visited Andersen’s training center in St. Charles, Ill. twice. I was so impressed with the organization and its “virtues” that I wanted to start my career there. So naturally I was ecstatic to hear the news a few weeks ago that the Supreme Court overturned Andersen’s obstruction charge. I was happy, that is, until I learned the overturn didn’t come from Andersen actually being not-guilty. It was because of “flawed jury instructions.”

    This brings me back to my topic. Accounting, as a whole, is highly regulated. The problem is that in the auditing industry, many different accounting transactions exist throughout many different industries. This could be a reason why Andersen didn’t notice Enron’s fraud. I refuse to accept it, however. Anderson didn’t become the most prestigious public accounting firm in the country because it didn’t know what it was doing. Nonetheless, regulations still need to be increased.

    I find it hard to believe that the energy crisis in California would have happened if California was regulated at that time. Perhaps if the Financial Accounting Standards Board would make more precise and complex regulations, Andersen would have been able to detect fraud before it escalated so highly (or at least pretended to). And finally, if we had regulated jury instructions, then criminals such as Arthur Andersen wouldn’t get their sentences overturned because of loopholes in our judicial system.

    Jeff Lipsey is a senior in business. He can be reached at [email protected].