Tainted by Enron

Enron’s bankruptcy last December was the largest corporate collapse in history. Thousands of employees of what was once America’s seventh largest company lost not only their annual income, but also a substantial amount of their retirement savings that was invested in Enron stock. Enron’s implosion raises questions about its business practices, about those of its auditor and about Enron’s cozy relationship with dozens of politicians. In addition, the presence of Harvard Corporation member Herbert S. “Pug” Winokur Jr. on Enron’s Board of Directors also raises important and disturbing questions about Winokur’s role at the University.

Enron collapsed when the labyrinthine network of subsidiaries and partnerships that it used to hide its losses and inflate profit reports unraveled. Though these practices are not unheard of in the corporate world, Enron appears to have taken them to a whole new level, and eventually its hidden losses caught up with it.

Accusations that Enron’s top managers have repeatedly misrepresented its finances are supported by the revelation that Enron paid no income taxes for four of the last five years by using a network of foreign subsidiaries as tax havens. Also suspicious is the fact that Enron’s former chief, Kenneth Lay, sent an e-mail to employees touting the company’s stock in October, even while he and other senior executives were selling off their shares.

The fact that Enron was able to hide its losses immediately raises the question of why Andersen, Enron’s auditor, did not blow the whistle. Much of the blame appears to fall on the codependent relationship of Enron and Anderson, but this situation is only indicative of a larger problem. The “Big Five” accounting firms often make more money from consulting fees from their audit clients than from audit fees themselves. They have the incentive to turn a blind eye to potentially illicit practices to make sure those consulting fees keep rolling in.

If investors cannot be confident in the information they receive about companies then they face more risk, interest rates rise and it becomes more difficult for all companies, even honest ones, to raise money. Therefore, the government’s response to the business scandal of Enron’s collapse should be twofold. First, it should enact laws to better regulate the energy market and prevent firms from hiding losses. Second, the government needs to eliminate the conflicts of interest facing accounting firms and ensure that they make adequate audits. To do this, the government should create a new agency with powers similar to the Securities and Exchange Commission to oversee accounting firms.

Not surprisingly, Enron had a disturbingly cozy relationship with a large number of politicians. Seventy-one members of the Senate received political contributions from the company, while Lay was the twelfth-highest contributor to President George W. Bush’s 2000 campaign. While no special favors appear to have been granted to Enron from the Bush Administration as the company was approaching bankruptcy, the decade-long deregulation of the energy market might be seen as the return on Enron’s investment in the campaign chests of various politicians.

Of immediate interest to the Harvard community is the role played by Harvard Corporation member Winokur, who also sits on Enron’s Board of Directors. As an outside director on Enron’s board, Winokur was one of the individuals ultimately responsible for overseeing management issues and the company’s credibility. As chair of Enron’s finance committee, he was directly involved in approving one of the questionable partnerships.

At the very least, Enron’s Board of Directors neglected its responsibility to protect the interests of Enron’s shareholders and Winokur, as a member of that board, must bear at least some of the blame. We feel uneasy and troubled that his duties as a member of the Harvard Corporation—overseeing President Lawrence H. Summers and the administration, as well as protecting the best interests of Harvard and its students—are so similar to the duties in which he failed at Enron.