Professors see effects of Enron
As Kenneth Lay, former Enron executive, tries to exercise his Fifth Amendment rights before the U.S. Senate, those involved in business and economics are still trying to figure out what the Enron scandal means to them.
Utah State University business professor Robert Malko has been involved in the power industry since 1974 and said he believes the Enron situation will cause changes in the industry.
Malko has been inv olved in many books on the subject including co-editing Customer Choice: Finding Value in Retail Electricity Markets in which Lay wrote chapter 20.
Malko sees a possible change in the way audits are conducted in the future to better protect investors.
He said firms giving financial consulting, information work, restructuring advice or other “non-auditing activities” will be less-likely to be involved in the actual audit process or their non-audit work will have to be narrowed. Doing this would eliminate the conflict of interest that can arise for firms because much more money can be made when doing non-auditing work. It is also possible a regular change every four to five years of the firm doing the audit could be mandated
Utah State accounting Professor Clifford Skousen said he agrees what has happened with Enron may lead to stricter rules with regard to firms providing both consulting and auditing services but simplifying such complex information may be next to impossible.
Skousen also said it is important to remember accounting mistakes were not the reason Enron went bankrupt.
“What the company tried to do is develop new markets that got investors really excited who then made big investments that did not pan out. Few people realize that the share price had fallen long before accounting even became an issue,” Skousen said.
So far, Arthur Anderson, Enron’s accounting firm, has publicly stated people in their firm made serious errors in judgment when destroying documents. Skousen also said it is important to remember that while people working for Arthur Anderson did make mistakes in destroying documents, auditors do not keep the books, they examine financial records, and Enron’s last audit was in December 2000 before signs of trouble.
Jay Price, accounting professor worked for Arthur Andersen before retiring and coming to USU. Price said although it was bad business decisions by Enron which caused its downfall, accounting principles such as Special Purpose Entities will most likely be looked at.
Another potential change could occur in the restructuring of the energy/power industry itself, Malko said.
In chapter 20 of Customer Choice titled “Give all Customers the Right to Choose, Immediately” Lay outlines the need for more customer choice, or deregulation, which would allow power companies to do more non-traditional utility activity such as being involved in pharmaceuticals or transportation and have different rates in different states.
Lay said he believes going the deregulation route would give customers more meaningful choices while others think it would raise utility prices.
Currently, the Public Utility Holding Company Act of 1935 limits how much non-traditional utility activity companies can do in an attempt to protect both the investor and the consumer. Over the past 10 years, however, Enron and other power giants have felt the industry is too sophisticated for the Act, Malko said.
“It’s about consumers. Consumers and the benefits that come with the freedom to make energy choices for themselves must remain the focus,” Lay wrote in the book.
Lay also said, “At Enron we have a saying: Facts are friendly. We will continue to assess our opportunities month by month, market by market; our obligation to our shareholders demands it.”
Problems came up, however, and Malko said it is likely the trend toward deregulation will now slow down because investors will be more cautious and consumers will want better safe guards.
A main concern is protecting those in the company who invest money in 401K’s for new ideas and then all of a sudden the company goes bankrupt. More insurance for these people who are millionaires one day and not the next is probably needed, Price said.
“I think people will have to ask has that trend gone too far? Has it gone too rapidly? Do we need more safeguards for customers and investors? We’re better off having change but having change in a progressive and prudent manner, not excessive and rapid, especially with electricity which provides such a critical service,” Malko said.
Some states, such as California, have gone to deregulation and suffered problems with utilities also slowing the trend toward deregulation. Malko said Utah has not turned to deregulation but has felt part of the trend.
“Pacificorp is a subsidiary of a global/international holding company, so we have part of that trend here. This is a global issue,” Malko said.
A balance which gives choice while protecting those involved is what is needed, Malko said. If regulation is excessive growth and incentives are limited and if regulation is too loose, problems with prices, protection and reliability can occur. Malko said this is especially important because of the necessity of electricity and all those involved including the companies, stock holders, customers as well as the societal and environmental issues.
“This is a balancing act that needs to be kept in mind,” Malko said.
Skousen said, “It’s a complex situation and still in early stages. We’ll just have to see what the outcome is.