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Lessons of Enron: How could no one have seen it?

Bankruptcy forces a look at accounting, Wall Street practices, and pension plans.

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"We saw growth rates that were completely implausible - growth rates of 50 percent a year for the next 10 years. No one would have believed this stuff," says Mr. Straszheim.

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In Enron's case, the analysts who covered the firm may not have fully understood what was going on. "The company was involved in complicated transactions," says Ed Ketz, an associate professor of accounting at Penn State University in State College, Pa. "Even the experts had trouble." As a result, he thinks the analysts started to trust the company instead of maintaining a skeptical attitude.

Even the rating services that graded Enron's growing debt were fooled. On Oct. 16, after Enron announced $2 billion in write-downs, Standard & Poor's affirmed Enron's rating at triple B plus, an investment grade rating. At the time, Standard & Poor's said it expected Enron's balance sheet to bounce back.

Not exactly. By the end of November, S&P lowered the rating to junk bond status and said there was a "distinct possibility" the firm would file for bankruptcy. A ratings agency analyst who had tracked Enron says, "In the end if the company is working hard to obscure things and the audited books aren't any good and things are getting restated, it's hard to say you're going to be able to accurately portray what the true financial condition is if you're not given accurate information."

The Enron collapse has been notable in at least two aspects. The first is that the firm was politically well-wired, the largest single contributor to the Bush for President campaign and a benefactor of some top Democrats. The second is that there seemed to be different rules for Enron executives, who reaped huge financial rewards from sales of company stock, and lower-level workers, who were prevented from unloading similar shares in their personal pension funds.

Rethinking pension funds

Congress and the press will surely explore Enron's political connections in the months ahead. As yet, there seems no evidence that anyone in government did anything improper as the firm spiraled downward.

The problems with employee pension funds, however, have already resulted in legislative calls for changes in the rules governing such plans. President Bush has said his administration is interested in examining the issue. "We will take the necessary steps to ensure appropriate protection for the retirement nest eggs of millions of Americans," said Treasury Secretary Paul O'Neill.

Sen. Charles Grassley, ranking member of the Committee on Finance, promises to look into whether companies should be able to restrict participants in a plan from selling a matching contribution received as company stock through an employee stock ownership plan.

The Iowa Republican also says he researching whether employees should be able to sell that stock prior to an arbitrary age set by the company - a common feature of such plans or similar 401(k) plans where company stock is contributed.

Employees should be allowed to sell company-contributed stock after 90 days, says Robert Schuwerk, a law professor at the University of Houston. Legislation has been introduced, too, to mandate diversification of stock in retirement plans.

Those funny numbers

Accounting reform is receiving similar intense scrutiny in the wake of Enron's collapse.

One charge is that major accounting firms, including Arthur Andersen, the firm that audited Enron, face a conflict of interest between their auditing arms and their consulting business. Firms are accused of using their auditing practice as a means of opening the door at a firm to sell profitable consulting contracts.

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