Lessons of Enron Business Page
Part 1
Stabroek News
February 10, 2002

BUSINESS PAGE is dedicated to providing objective information and issues of intrest to the business community and the public at large. The articles in Business page are prepared and contribuated by CHRISTOPHER RAM. Christopher Ram is the Managing Partner of Ram & McRae. Chartered Accountants, Professional Services Firm.

Suddenly Enron has almost become a household name around the world because of a scandal that has severely challenged the integrity of the accounting profession, tarnished its image and rocked the financial world. It is only just overstating the significance of Enron to compare it with the fallout from 9/11. In the space of four months, what was once the seventh largest company in America, spiralled from high-flying darling of the investment community into the largest bankruptcy in the history of the USA. Despite umpteen Congressional Committees, it is clear that no one really understood the company's financial statements or how the company made money. Not the wizards of Wall Street, the financial press or the institutional investors who were dazzled in varying degrees by ignorance, conflict of interest and greed. Enron started out as a lowly gas utility company in the Cowboy State of Texas and progressed into the more lucrative but highly volatile world of energy trading. Not satisfied with incremental growth and victims of their own ambitions and greed, the company's executives decided that since the company made millions buying and selling gas futures (which in simplified terms is betting on projected gas prices), that it was time to move into other areas. They felt that they could increase profitability by trading other commodities such as electricity, water, high-speed internet access and even media advertising time and spent billions on pursuing this strategy. The problem was that the anticipated profits never materialized.

Billions in losses resulted and instead of being reflected in the company's financial statements, they were camouflaged in a series of complex private partnerships that investors had no idea existed. The charade seemed to be successful and the company's stock continued to perform well for a while until the problems started to surface. Then an avalanche of bad news about bad investments precipitated a dizzying freefall into bankruptcy. The Chief Financial Officer of the company who was apparently the architect and beneficiary of many of the questionable transactions was forced out, and two weeks later the company admitted that its profits had been inflated by in excess of $586 million over the last five years.

Huge price
Nothing but strong "buy" recommendations was the message to investors and the stock doubled in value, tripled, split and doubled again. A huge price has been paid by thousands of employees many of whom had put in as much as thirty years with the company and who have lost retirement funds that they believed were secure. However the Enron situation has ironically done a great service to the financial world by bringing to light all that is wrong with the corporate world and the accounting, investment and financial strategies it utilises. With everyone pleading the "Fifth' (the right to remain silent) and the diabolical complexity of the schemes devised by the company with advice from its accountants and attorneys, it is unlikely that the world will ever know exactly the whole Enron story. With every new revelation however, a slightly clearer picture slowly begins to emerge.

Creative accounting
The company apparently used questionable accounting practices to hide its financial problems which included huge debts and failed to disclose the transactions fully in its financial statements for several years. Various purported "investment vehicles" and partnerships were used to conceal the problems and the auditors, one of the top five and largest accounting firms in the world, (along with Ernst & Young with which this writer has a relationship, Deloitte & Touche, KPMG Peat Marwick, PricewaterhouseCoopers, known as the Big Five) Arthur Andersen allegedly failed to uncover many of the accounting deficiencies during its audits of the financial statements and compounded the problem by destroying many documents relating to its audit of the troubled company. Very damagingly for AA, however is the accusation that wearing its consulting hat, it offered advice on structuring these transactions.

Interesting issues
Among the other interesting issues that have arisen are the number of Enron executives that are former Andersen employees and the executives who were principals in some of the questionable partnership vehicles. There are also the professional issues for the accounting profession of consulting services performed for audit clients, the influence of the quantum and the manner of setting fees on audit independence and borderline accounting practices and financial statement disclosures. The prestigious firm has even become the butt of a joke by the US President Bush who was quoted in a newspaper as saying that "The good news is that Saddam Hussein has agreed to weapons inspections. The bad news is he wants Arthur Andersen to do it."

Political influence
Politicians however are not untainted by the scandal since many Senators and Congressmen from both the Democratic and Republican parties benefited from the largesse of the company in the form of political contributions and fund-raising activities of its chief executive. The US President himself over the years received in excess of $823,000 in funds for his campaign and inauguration. Among its directors is Chairman of the UK Media Watchdog and it is known to have contributed to that country's governing Labour Party. There have been accusations of Enron using its connections to influence energy policy and also that as its demise became apparent approaches were allegedly made to the Treasury Department of the United States government to "encourage" banks to extend credit to the company. There is no evidence of a favourable response.

Failed safeguards
Critics point to the failure of the safeguard that accounting firms supposedly have in place to prevent events like those that occurred at Enron because of the pressure on the firms' partners to keep clients happy and their pockets full. While Arthur Andersen appears to have had more than its fair share of embarrassments the other members of the revered Big 5 have also had their own. Accounting firms themselves have publicly stated that there is need for toughening of the rules because the ambiguity inherent in current accounting conventions allows manipulation of profit and sales numbers. The US has resisted international attempts to co-ordinate accounting rules arguing that theirs are the best in the world. Enron will probably cause them to revisit this boast.

Among the rules that will most certainly be subject to scrutiny are those governing how an entity values its assets. The criticism is that the Financial Accounting Standards Board which is private and controlled by accountants, gives great latitude to companies like Enron in deciding when to include as current, profits expected to be realized in the future. The ability to create "special purpose" entities (such as the partnerships which hid its losses to shift items from the balance sheet to make it appear that the company owed less than it actually did) will also be the subject of much debate.

Questionable system
The whole system of providing accounting information is now being questioned with both Justice Department and Congressional hearings being convened in the United States, and other countries seriously considering the deficiencies in their own financial reporting systems. Each day a new discovery surfaces that brings into question the soundness of the financial infrastructure and exposes issues of conflict of interest among directors, executives and even the prestigious accounting firm Arthur Andersen.

Auditor independence
The development at Enron must be a complete vindication of Arthur Levitt, former chairman of the Securities and Exchange Commission, who was in the forefront of the fight to ensure auditor independence. By a remarkable twist of irony and at the instance of the Big 5 led by AA and Deloitte & Touche, he lost his job to Harvey Pitt, who had among his clients some of those very Big 5 firms. Everyone is asking how a prestigious accounting firm could repeatedly give its blessing on the corporation's financial manoeuvering that resulted in nebulous partnerships that gave rise to phony profits and hid its mountain of debt.

There is now a universal call for a complete overhaul of the accounting standards and financial disclosure practices of public companies since it is felt that they do not allow for fair and accurate reporting of information on entities' financial dealings. The proliferation of off-balance sheet transactions is a source of great concern since these have proven to be vehicles for creating fictitious profits, hiding liabilities and in the case of Enron self-dealing and enrichment by executives. The stock market in the US has faltered badly because of a crisis of investor confidence and the much-publicised breakdown of accounting safeguards has done nothing to bolster that confidence.

Next week We will look at the domestic situation and enquire whether we are tolerating or encouraging our own Enrons albeit on a much smaller scale.


In Part 1 of this article published two weeks ago, we looked at the demise of Enron, one of the largest companies in the United States, and the actions by its executives, auditors and professional advisers that are reported to have precipitated the collapse. No day seems to go by without further revelations involving one or the other of the Big 5 Firms, each of which casts a pall of uncertainty and suspicion over the entire accounting profession. Pricewater-houseCoopers has been added to the Enron probe for its role in providing consulting advice to Enron on one of the now notorious off-balance sheet partnerships in which Enron had a stake while it was simultaneously providing tax advice to two of those very partnerships. And everyone is now asking how it is at all possible for Deloitte & Touche to have given Arthur Andersen a clean report following their recent peer review of (Andersen). Then during the week, Ernst & Young was subpoenaed to attend an SEC hearing into the failure of one of its banking clients with the name PNC Financial Services Group.

It would be naive to believe that the profession and businesses in Guyana are insulated from the shenanigans playing out so far mostly in the United States. Four of the Big 5 operate in Guyana through correspondent-type relationships while the fifth has full member firm status. The parent company of GT&T, whose accounting practices have been questioned on a number of occasions, is audited by Arthur Andersen.

All of our major companies, financial institutions and insurance companies are audited by a firm connected with the Big 5 which set the standards of quality of audits and integrity for all their associates. The attempt by Andersen in the UK to distance itself from the misfortune of its US arm is particularly disingenuous since Andersen, like the other top firms, prides itself on its worldwide, seamless service.

Few people have any confidence in the standards of morality in the public or private sector in Guyana and everyone knows about the absence of regulatory mechanisms to curb improper and illegal practices in those sectors.

Corruption is so widespread that it is taken for granted in a society that demonstrates extreme forbearance for illicit behavior. Indeed, we place our professionals on a pedestal even as rumours abound of their failure to demonstrate the kind of ethical conduct to be expected from our leaders. As a percentage of their membership, more accountants have been granted national awards than any other group of professionals, a clear if mistaken acceptance of the high ethical standards which accountants assert as the hallmark of their profession.

Fortunately, for this purpose, we have few public companies but is it not time that we ask ourselves whether the audit reports presented to shareholders at the ritual which passes for the annual general meetings do give a true picture of the company's operations and financial condition. Is it not just possible that by our tolerance, we are encouraging our own mini- Enrons?

Is it not time that we review the disclosure requirements of the Companies Act and compliance therewith, the quality of governance in our public companies and the free rein given to accountants to regulate themselves? The problems of Enron started when it announced some restatement of prior years earnings, a situation which has surfaced on numerous occasions in Guyana whenever there was a change of auditors. If accountants are following the same rules, why should a change of auditors result in different profit figures?

Unfortunate professional oversight?

No society can survive without a credible system of accounting and reporting and pre-Enron, the accounting profession had boldly protested its integrity and stoutly defended its rights to regulate itself. But that right must not only be earned, but its foundation rests entirely on the maintenance of public trust. Auditors are expected to be able to provide objective, professional opinions and therefore the public must be assured that their actions and conduct are of the highest order.

They are expected to be above reproach in all their professional dealings but regrettably some leading practitioners fall short of the ideals and values which ought to be their hallmark. One firm carries a particularly misleading advertisement in the Telephone Directory while another which has recently changed its relationship with one of the Big 5, not only still sports the billboard of its previous incarnation but has failed to make the professional announcement which normally accompanies such a change. While these may be no more than oversight, they contribute to public misgivings that the profession can be left to define integrity and ethical conduct which are clearly public interest issues. They also raise questions within the profession as to whether accounting and auditing are now seen as business with profit as the major objective.

At the other end of the spectrum, the poor standard of work of some of the firms which are recognised by the Companies Act and which are granted practicing certificates by the Institute of Chartered Accountants of Guyana (ICAG) is well known in professional circles but nothing is being done to correct this situation. So bad did this situation become that one of the country's leading commercial banks found it necessary to establish its own rating system of the firms.

Pressures on auditors

As this article will show conditions and practices in Guyana encourage Enron type behaviour. The position of the auditor is a difficult one. The law requires that even the smallest cakeshop, once it falls under the Companies Act must have its books audited by a member of the ICAG, even if the rudimentary systems make those books unauditable. While the new Companies Act provides mechanisms to protect the auditor's independence, very little has changed in practice and the auditor is expected to be the poodle of the directors whom he dare not offend for fear of losing the client and fees. One not so leading public company fired its auditors because they insisted that the disclosure requirement of the law be met and deliberately misled its shareholders as to the reason for the change. The Private Sector Commission in its eagerness to change auditors has ignored all the provisions of the law and at this stage is still without a functioning auditor for the year 2001.

Both these cases arose because of audit-related disclosure issues and encapsulate the attitude of local Directors to accurate reporting. Worse, it says something about the profession that there seem to be other auditing firms that are only too willing to collude in such improper behaviour. Sometimes though no pressure is required. There was the case of the internal auditor of a local public company whose serious approach to his job was more than the CEO could take. To get rid of the poor chap, the CEO requested the external audit firm to employ him. Instead of resisting, the firm readily agreed.


Non-executive directors are usually drawn from a pool of exclusive individuals with considerable influence and prestige in society and no one questions their actions and competence. They design schemes which guarantee them pensions and in many cases a position on the board long past their useful lives. So pervasive is this attitude to non-interference in board appointments that even where the law requires it, the regulators have shown striking reluctance to intervene. One hopes that in the post-Enron/ Globe Trust era directors would be more careful in discharging their statutory and fiduciary responsibilities to shareholders and third parties and that regulators will take action in appropriate cases.

Directors' remuneration

This area has a wonderful parallel with the Enron case where at best Andersen relied on legal counsel for comfort in respect of the off-balance sheet transactions. In Guyana, despite compelling counter- arguments and the provisions of the Companies Act, many companies do not disclose the emoluments paid to their directors.

That the shareholders have no clue of the emoluments paid to their executive directors makes a mockery of the very basic principles of corporate governance. Very conveniently, the Institute of Chartered Accountants of Guyana is relying on an advice that disclosure is required only of payments made in the capacity of directors and not of managers. Is it not a complete farce that the fees of a few thousand dollars paid to the directors whether executive or non-executive has to be disclosed while the hundreds of thousands received as an executive director remain a closely guarded secret? Whose company is it anyway and do they not have a right to know?

(To be continued next week)


Today we conclude our series on the implications of the Enron debacle for us here in Guyana. We do recommend that you read Dr Clive Thomas' column on the subject in which he has made path breaking recommendations for major overhaul in the currently self regulated accounting profession. This column supports those recommendations while simultaneously calling for better governance in businesses.

It is interesting to note that some of the reforms now being discussed in the developed countries include issues of related parties transactions, conflicts of interest between the fiduciary duties of directors and their personal interest, the role of directors generally and non executive directors in particular, audit committees, clearer rules of accounting and disclosure and establishing the conditions for a truly independent audit profession. In today's article we look at some of these corporate governance issues and comment on the practices in some of our top companies.

Minority shareholders

Minority shareholders can play a major role in corporate governance that is if they are allowed to. In Guyana, unfortunately, minority shareholders have practically no say in their company and are regarded at best either as a nuisance or groups to be appeased. Significantly this applies even when the minority shareholder is the government as in the case of GT&T, Guyana Stockfeeds Ltd or any other of the privatised entities.

In Guyana, we have the additional concern that in two of our major companies Banks DIH and DDL the directorate and management are almost inseparable, and shareholders, whether large or small, have hardly ever made any decision which did not originate from this exclusive group.

Because of the practice of interlocking directorships, the institutional investors drawn mainly from the pension funds and insurance companies become caught up in the corporate milieu and ignore the additional independent function which they are expected to perform. Given existing corporate culture, it is unthinkable that our institutional investors will initiate any moves to fire their CEO's as happens so frequently in the developed economies.

The concept of democracy should not allow the controlling managers or shareholders to ignore the rights of others 51% or less cannot be the same as 100 per cent! For some inexplicable reason, we excluded from our Companies Act (CA) one other provision of the Canadian Business Corporations Act on which our CA is modelled that requiring unanimous shareholders' approval in defined circumstances. While there are provisions in our laws to protect minority shareholders, those apply only in extreme cases and we need reforms which include guaranteed representation at the directorate level for minority shareholders. This can be done by way of changes in the CA, the company's by laws or through shareholders' agreements.


The annual reports of some of our major public companies including Banks DIH and DDL contain no information on the governance arrangements within those companies. From their annual reports it is impossible to determine whether they have in place such basic safeguards as Audit, Nomination or Compensation Committees controlled by independent, capable non executive directors. And if they do what is the mandate and are these persons entitled to seek independent professional advice? Are the non executive directors involved in the establishment of procedures for procurement and marketing, choice of investments and selection of suppliers or are these issues which are reserved only for the executive directors?

Another practice which contributes to concentration of power and poor governance is the fusion of the roles of the Chairman and CEO a practice which has been largely dispensed with in the public sector and which is looked at with disfavour particularly in Europe though it is still fairly common in the USA. Kenneth Lay was both Chairman and CEO of Enron and had as his number two his chief finance person, features not dissimilar to what takes place in our top companies.

One of the first steps we have to take is the separation of the roles of Chairman and Chief Executive Officer. This is an untenable and indefensible position for it assumes that one can be accountable to oneself. Who sets his emoluments and who monitors his performance? The answer in practice is only he. The other executive directors are subordinate to him while he plays a principal role in handpicking the non executive directors.

Related party transactions

The existence and disclosure of transactions with related parties (professional term for those who can exercise significant influence or control or over whom you have control or significant influence and dealings with) has been a major issue in the Enron affair. The Enron directors and those close to them received substantial benefits that were not disclosed to the shareholders of the company. This situation is perhaps even worse here as the Guyanese reporting culture is still in the most rudimentary stages, there is no oversight body and the auditor is either unwilling or unable to challenge the directors. As a result different companies have vastly different standards of reporting even where the auditor is the same.

The financial statements of DDL provide no information on related parties transactions. Shareholders are left to wonder from whom DDL purchased its majority shareholding in Solutions 2000 Inc, and the thinking behind the transaction other than the company's diversification policy.

Banks DIH and Citizens Bank Limited have both fairly recently started to disclose related parties transactions but in the case of Banks DIH these are so cryptic that they hardly help the shareholders to understand those transactions which is the focus of the relevant accounting standard. Again, both these companies have in common the external auditor, chairman and several directors but disappointingly different reporting and disclosure policies a hard proposition to justify. An equally troubling issue is the frequently repeated concern that directors of some of our public companies engage in both investment and trading transactions with their companies clearly a conflict of interest and a breach of their fiduciary duties.


Incredibly, despite reporting profits of hundreds of millions of real dollars, Enron paid no taxes, no doubt under schemes devised by their tax accountants and attorneys. After all, taxation is at the heart of the accounting profession and the profession must therefore hold itself partly responsible for the level of tax evasion in this country. Too many accountants are willing to add their signature to accounts and tax returns which they either know or ought to know are incorrect. They owe it to the society which accords them respect and exclusivity to demonstrate a higher standard of professionalism. The tax authorities need to use the weight of the law to stop this lawlessness.

Poor job

Just as it would be wrong to believe that every American company is an Enron in waiting, so too it would be to suggest that every one of the Guyanese businesses or auditing firms is at best, careless in the discharge of their duties and at worst, dishonest. It is hard to escape the conclusion however that accountants and auditors have been far more interested in protecting the directors' interest rather than that of shareholders. It is disingenuous for auditors to try and wriggle free of the blame by saying that management hid information from them. Surely Andersen is not offering to pay US$800M for a well done audit! The truth is that auditors have fallen prey to the instinct of greed and they have become the agents of the management and accomplices in dubious tax schemes if not outright tax evasion. While I do not believe that only the accountants are at fault in the Enron matter, as a member of the accounting profession, I cannot help but be embarrassed at the tacit acceptance by members of the profession of the trampling on shareholders' rights by directors and the profession's general betrayal of the trust which society has placed in them.


Enron holds lessons for both the business community and the accounting profession in Guyana. We continue to have Enron type behaviour because of some irresponsible and dishonest directors and senior management. Combine this with sloppy accounting practices and timid auditors who are afraid that questioning transactions involving directors or senior management can lose them lucrative engagements, and the credulity of our already fragile financial system is under siege.

Proper application of accounting rules is fundamental to a sound financial system and if we are to emerge from the dark ages in this regard we must be prepared to recognise this. No investor will put money at risk when there is no assurance that financial information presented can be relied upon. We keep talking about the need to attract investors but no attempt is being made to address the deficiencies in a system fraught with conflicts of interest, poor governance and inadequate financial disclosure.

As the Economist of Feb.9 15, 2002 said in a leader article: "It is time for another effort to realign the system to function more in shareholders' interest. Companies need stronger non executive directors, paid enough to devote proper attention to the job; genuinely independent audit and remuneration committees; more powerful internal auditors; and a separation of the jobs of chairman and chief executive. If corporate [America] cannot deliver better governance, as well as better audit, it will have only itself to blame when the public backlash proves both fierce and unpleasant."

The 1991 Companies Act was designed to bring some democracy and transparency to the corporate sector. Unfortunately, like in the USA, its architects under estimated the determination of some in the private sector to maintain the schemes and practices which were far from transparent and some of which are downright illegal. We must not believe that our politicians do not know these things and that they are ready to counterattack in allegations of corruption.

Next week: A review of the annual reports of Demerara Bank Limited and Citizens Bank Limited.