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The Enron Scandal: Arthur Anderson

Jason Nelson reports: "Enron speaks to deficiencies in the auditing process that permeate many industrial sectors. For instance, when I was managing a derivative products group at First Union National Bank, each securitized transaction (many exceeded $1 billion in asset value) was audited by a Big 5 firm. In most cases, the auditors depended upon the bank's manager - albeit with some trepidation - to explain the various nuances of a derivative; auditors did not understand how these complex deals were structured. Nevertheless, a comfort letter was eventually issued. I recall several derivative transactions at a competitor firm receiving "clean" audits, only to discover a month or two later that investors were paid improperly.

To my chagrin, I was an employee at Enron Energy Services when the group was founded (see the New York Times, 25/1/2002, for a description of this Enron subsidiary). This company was always a money loser, so I never understood how it kept functioning. I suppose now we all know how the group managed to get on".

My comment: In the Washington hearings on the Enron scandal, I have not noticed any economists or professors of business schools, yet they are in some measure to blame. Some hears ago, trading in derivatives was being promoted as a way an expert economist could make lots of money. It did not make sense to me, but I am not an economist. This was the same time that some Stanford economists were promoting the flat tax and income tax returns on a postcard. Whatever happened to them too? When WAIS held its globalization conference, I invited Stanford Business School faculty to participate. They declined, presumably fearing the hostility of critics of globalization, to which the Enron scandal has indeed dealt a serious blow.

Another fad was the game theory. Citibank used to publish excellent reports on Latin America. I decided once to call on their authors. As I was walking toward their office, I saw through a window a room full of your men seated four to a table playing what appeared to be tiddlywinks. I was puzzled, and I was observed by the master of ceremonies in the room. He invited me in and proudly explained to me that they were learning the game theory. I did not understand it. Doubtless the Enron gang had been trained in game theory.

Afterwards I walked down the hall to talk with the experts who were turning out those excellent reports. I found an old woman and one young girl assistant. Poor old woman. Obviously she had not been trained in game theory. She was not with it. Nor was I.

Ronald Hilton - 1/27/02