Enron's courtroom climax

The practices of accountants and auditors are once again likely to be dragged
through the metaphorical mud as the much-anticipated trial of Enron’s top two
executives is scheduled to start in Houston, Texas next week.

It has taken more than four years, since Enron’s collapse, to bring its top
two executives – former CEO Jeffrey Skilling and former chairman and CEO Kenneth
Lay – before a jury.

During that time, accountants and auditors have had a tough time in and out
of the public eye. Not only has their integrity been attacked by both sides at
high-profile trials across the US, but the additional burden of Sarbanes-Oxley
has made day-to-day endeavours more difficult.

Section 404, which requires companies to document their internal controls
over financial reporting, is said to be the cause of many resignations at CFO
level.

The increase in work has also impacted lower down the food chain and in the
US there is a dearth of accountants with three to five years experience. Those
with that experience are said to be overworked but well-paid, with salaries
rising.

Rising salaries and job vacancies have led to young adults flocking to US
universities to study accountancy, just one reason Barry Melancon, the president
and CEO of the American Institute of Certified Public Accountants, believes the
profession is now probably stronger than ever.

‘If the events of the last four years have done anything, they’ve made the
public understand the importance of the CPA’s role in our capital market system
and the profession’s commitment to the public interest.

‘People still regard the CPA as a trusted adviser, and surveys bear that out.
In a survey of business leaders and decision makers last year, CPAs received
extremely favourable ratings, even higher than physicians,’ he says.

At the big firm level, Richard George, chairman of the Ethics Standards Board
at the International Federation of Accountants, the New York-headquartered
standards-setting organisation, that counts all the UK’s major accountancy
bodies among its members, says it was more than keen to institute more forceful
standards.

‘It was a salutary lesson to accounting firms that a major player like Arthur
Andersen could unravel so fast,’ he says.

The role of Andersen employees will no doubt loom large at the upcoming
trial, even though the firm’s conviction on obstruction of justice charges was
reversed by the US Supreme Court on appeal. The justices said there were errors
in the instructions to the jury.

Of course, that decision was too late to save the firm and the Department of
Justice decided against what would have been a meaningless retrial last
November.

In the Enron debacle so far, around 20 mid-level executives (including a few
from the finance departments) have pleaded or been found guilty of fraud and
have spent some time behind bars.

They include Lea Fastow, wife of the man who will probably be the
prosecution’s star witness, Enron’s former CFO Andrew Fastow. She went to jail
for a year after pleading guilty to a reduced charge of filing a false tax form,
a misdemeanour.

Her husband is scheduled to spend 10 years behind bars as part of a deal for
his co-operation in the prosecution of Skilling and Lay. Skilling faces 31
charges of conspiracy, fraud, lying to auditors and insider trading. Lay faces
seven charges of conspiracy and fraud that, in the main, were allegedly
committed when he took over as CEO after Skilling’s surprise resignation months
before the company collapsed.

Fastow is among the approximately 260 people scheduled to be witnesses at the
trial. Interestingly, not on the list at the moment is Roger Causey, Enron’s
former chief accounting officer and ex-Arthur Andersen auditor, who was
scheduled to go on trial with Skilling and Lay, until he decided late last year
to plead guilty and accept a seven-year prison sentence.

In a nutshell, the prosecution’s case is likely to be that Skilling and Lay
conspired with their underlings to hide from investors and everyone else the
losses the company was making, while at the same time they lined their pockets
selling shares at what proved to be grossly inflated prices.

Before its 2001 fall, Enron ranked seventh on the Fortune 500 and had a
market capitalisation of more than $68bn (£38bn). More than 5,000 jobs were lost
in its bankruptcy, and many of the employees had their retirement savings
decimated.

Investors are suing and claim that accounting irregularities led to $60bn in
losses.

Of course, no-one is sure how Skilling and Lay intend to defend themselves.
Speculation for a long time was they would employ the ‘aw shucks’ defence – that
they were just businessmen who had no idea that the genius accountants were
doing anything illegal.

That defence didn’t work for former WorldCom CEO, Bernie Ebbers, who was
convicted and is now appealing what could be a maximum of 25 years behind bars.
However, it did work for Richard Scrushy, who was cleared on all 36 counts of
masterminding a $2.7bn accounting fraud at US medical services group
HealthSouth, where he was CEO.

In both cases the prosecution’s main witnesses were CFOs and their finance
department colleagues.

In a speech recently in Houston, where Enron was headquartered and where the
trial will be held, Lay hinted that his team of lawyers had abandoned ‘aw
shucks’ in favour of a defence that the company’s actions were in fact
legitimate.

Lay said the Enron prosecution was targeting normal daily business activities
common in publicly traded companies across the country.

‘In virtually every other situation, if there were concerns that any of these
business activities were not being done appropriately, these concerns would be
addressed by a regulatory agency, like the SEC, or as a civil matter in the
courts. But in this case, the Enron Task Force is attempting to criminalise
these very same business activities,’ Lay said.

One person hoping that the defence doesn’t fly is Colleen Cunningham, the
president and CEO of Financial Executives International (FEI), which has around
15,000 members worldwide. She believes an acquittal will result in politicians
wanting to toughen Sarbanes-Oxley.

‘My worst fear is that they don’t go to jail,’ says Cunningham. ‘I shudder to
think how Congress will react.’