One interesting sidebar on this was an NBC News feature last night on February 6, 2003.   It was pointed out that most of the bad deeds in the Enron scandal were committed by men (e.g., Skilling, Lay, Fastow, and Duncan). Most of the white knights in whistle blowing have been women (the show featured three of those women). The implication was that we should place more trust in the feminine gender. Sounds good to me!

What NBC News overlooked was the the Mata Hari of the Enron Scandal --- Wendy Gramm --- http://www.trinity.edu/rjensen/fraud.htm#bribes 

Reply from Roger Collins [rcollins@cariboo.bc.ca]

Bob, I was turning out what passes for my "home office" earlier today and came across the Winter 1997 issue of Contemporary Accounting Research (Vol 14, #4). One of the articles therein (page 653) is entitled:

"An Examination of Moral Development within Public Accounting by Gender, Staff Level and Firm" by Bernardi, R and Arnold, D F (Sr)

The authors' dataset covers 494 managers and seniors from five "Big Six" firms.

According to the abstract;

"The results indicate a difference in the average level of moral development among firms.....Second, female managers are at a significantly higher average level of moral development than male managers. In fact, average scores for male managers fell between those expected for senior high school and college students.  The data suggest that a greater percentage of high-moral-development males and a low-moral development females are leaving public accounting than their respective opposites.  These results indicate that the profession has retained, through advancement, males who are potentially less sensitive to the ethical implications of various issues."

- all of which leads me to wonder whether your comments (about Enron) re our needing more female executives wasn't right on target - and also, which accounting firms ranked where in "average level of moral development".

Roger
Associate Professor 
UCC School of Business

"Study Reveals Financial Performance Higher for Companies with Women at the Top," AccountingWeb, January 30, 2004 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=98624 

A new study released today by Catalyst demonstrates that companies with a higher representation of women in senior management positions financially outperform companies with proportionally fewer women at the top. These findings support the business case for diversity, which asserts companies that recruit, retain, and advance women will have a competitive advantage in the global marketplace.

In the study The Bottom Line: Connecting Corporate Performance and Gender Diversity, sponsored by BMO Financial Group, Catalyst used two measures to examine financial performance: Return on Equity (ROE) and Total Return to Shareholders (TRS). After examining the 353 companies that remained on the F500 list for four out of five years between 1996 and 2000, Catalyst found:

 

• The group of companies with the highest representation of women on their senior management teams had a 35-percent higher ROE and a 34- percent higher TRS than companies with the lowest women's representation.

   

• Consumer Discretionary, Consumer Staples, and Financial Services companies with the highest representation of women in senior management experienced a considerably higher ROE and TRS than companies with the lowest representation of women.

"Business leaders increasingly request hard data to support the link between gender diversity and corporate performance. This study gives business leaders unquestionable evidence that a link does exist," said Catalyst President Ilene H. Lang. "We controlled for industry and company differences and the conclusion was still the same. Top-performing companies have a higher representation of women on their leadership teams."

"The Catalyst study confirms my own long-held conviction that it makes the best of business sense to have a diverse workforce and an equitable, supportive workplace," said Tony Comper, Chairman and CEO of BMO Financial Group, sole sponsor of the research.

A Note on Methodology

Catalyst divided the 353 companies into four roughly equal quartiles based on the representation of women in senior management. The top quartile is the 88 companies with the highest gender diversity on leadership teams. The bottom quartile is the 89 companies with the lowest gender diversity. Catalyst then compared the two groups based on overall ROE and TRS.

"It is important to realize that our findings demonstrate a link between women's leadership and financial performance, but not causation," said Susan Black, Catalyst Vice President of Canada and Research and Information Services. "There are many variables that can contribute to outstanding financial performance, but clearly, companies that understand the competitive advantage of gender diversity are smart enough to leverage that diversity."

From The Wall Street Journal's Accounting Educators' Reviews on February 14, 2002

TITLE: SEC Still Investigates Whether Microsoft Understated Earnings 
REPORTER: Rebecca Buckman 
DATE: Feb 13, 2002 
PAGE: A3 
LINK: http://online.wsj.com/article/0,,SB1013558932799654480.djm,00.html  T
OPICS: Financial Accounting

SUMMARY: Microsoft is undergoing a continuing SEC investigation into whether the company has understated its revenues. Questions relate to issues in unearned revenue.

QUESTIONS: 

1.) What is conservatism in accounting? Is it an accepted practice?

2.) In general, what is unearned revenue? How is it presented in the financial statements? When is this balance recognized as earned? What accounting adjustment is made at that time?

3.) Why must Microsoft record some unearned revenues from software sales? Could that practice be supported through reserves of some cash accounts?

4.) Given Microsoft's recent experiences in testifying against allegations of violating federal antitrust laws, why might the company want to understate its income?

5.) Why does the former Microsoft employee, Mr. Pancerzewski, say that "he disagrees that there is no harm in a company understating its income"? Do you think there could be problems in understating income even for companies that are not facing charges of earning excess profits through anti-competitive practices?

Reviewed By: Judy Beckman, University of Rhode Island 
Reviewed By: Benson Wier, Virginia Commonwealth University 
Reviewed By: Kimberly Dunn, Florida Atlantic University

The Enron Scandal on Creative Accounting and Audit Independence
 

Selected works of FRANK PARTNOY
Bob Jensen at Trinity University

1.  Who is Frank Partnoy?

The controversial writings of Frank Partnoy have had an enormous impact on my teaching and my research.  Although subsequent writers wrote somewhat more entertaining exposes, he was the one who first opened my eyes to what goes on behind the scenes in capital markets and investment banking.  Through his early writings, I discovered that there is an enormous gap between the efficient financial world that we assume in agency theory worshipped in academe versus the dark side of modern reality where you find the cleverest crooks out to steal money from widows and orphans in sophisticated ways where it is virtually impossible to get caught.  Because I read his 1997  book early on, the ensuing succession of enormous scandals in finance, accounting, and corporate governance weren’t really much of a surprise to me.

From his insider perspective he reveals a world where our most respected firms in banking, market exchanges, and related financial institutions no longer care anything about fiduciary responsibility and professionalism in disgusting contrast to the honorable founders of those same firms motivated to serve rather than steal.

Young men and women from top universities of the world abandoned almost all ethical principles while working in investment banks and other financial institutions in order to become not only rich but filthy rich at the expense of countless pension holders and small investors.  Partnoy opened my eyes to how easy it is to get around auditors and corporate boards by creating structured financial contracts that are incomprehensible and serve virtually no purpose other than to steal billions upon billions of dollars.

Most importantly, Frank Partnoy opened my eyes to the psychology of greed.  Greed is rooted in opportunity and cultural relativism.  He graduated from college with a high sense of right and wrong.  But his standards and values sank to the criminal level of those when he entered the criminal world of investment banking.  The only difference between him and the crooks he worked with is that he could not quell his conscience while stealing from widows and orphans.

Frank Partnoy has a rare combination of scholarship and experience in law, investment banking, and accounting.  He is sometimes criticized for not really understanding the complexities of some of the deals he described, but he rather freely admits that he was new to the game of complex deceptions in international structured financing crime.

2.  What really happened at Enron?

I begin with the following document the best thing I ever read explaining fraud at Enron.
Testimony of Frank Partnoy Professor of Law, University of San Diego School of Law Hearings before the United States Senate Committee on Governmental Affairs, January 24, 2002 --- http://www.senate.gov/~gov_affairs/012402partnoy.htm 

The following selected quotations from his Senate testimony speak for themselves:

• Quote:  In other words, OTC derivatives markets, which for the most part did not exist twenty (or, in some cases, even ten) years ago, now comprise about 90 percent of the aggregate derivatives market, with trillions of dollars at risk every day.  By those measures, OTC derivatives markets are bigger than the markets for U.S. stocks. Enron may have been just an energy company when it was created in 1985, but by the end it had become a full-blown OTC derivatives trading firm.  Its OTC derivatives-related assets and liabilities increased more than five-fold during 2000 alone.
  
   
• Quote: And, let me repeat, the OTC derivatives markets are largely unregulated.  Enron’s trading operations were not regulated, or even recently audited, by U.S. securities regulators, and the OTC derivatives it traded are not deemed securities.  OTC derivatives trading is beyond the purview of organized, regulated exchanges.  Thus, Enron – like many firms that trade OTC derivatives – fell into a regulatory black hole.
  
   
• Quote:  Specifically, Enron used derivatives and special purpose vehicles to manipulate its financial statements in three ways.  First, it hid speculator losses it suffered on technology stocks.  Second, it hid huge debts incurred to finance unprofitable new businesses, including retail energy services for new customers.  Third, it inflated the value of other troubled businesses, including its new ventures in fiber-optic bandwidth.  Although Enron was founded as an energy company, many of these derivatives transactions did not involve energy at all.
  
  
   
• Quote:  Moreover, a thorough inquiry into these dealings also should include the major financial market “gatekeepers” involved with Enron: accounting firms, banks, law firms, and credit rating agencies.  Employees of these firms are likely to have knowledge of these transactions.  Moreover, these firms have a responsibility to come forward with information relevant to these transactions.  They benefit directly and indirectly from the existence of U.S. securities regulation, which in many instances both forces companies to use the services of gatekeepers and protects gatekeepers from liability.
  
  
   
• Quote:  Recent cases against accounting firms – including Arthur Andersen – are eroding that protection, but the other gatekeepers remain well insulated.  Gatekeepers are kept honest – at least in theory – by the threat of legal liability, which is virtually non-existent for some gatekeepers.  The capital markets would be more efficient if companies were not required by law to use particular gatekeepers (which only gives those firms market power), and if gatekeepers were subject to a credible threat of liability for their involvement in fraudulent transactions.  Congress should consider expanding the scope of securities fraud liability by making it clear that these gatekeepers will be liable for assisting companies in transactions designed to distort the economic reality of financial statements.
  
  
   
• Quote:  In a nutshell, it appears that some Enron employees used dummy accounts and rigged valuation methodologies to create false profit and loss entries for the derivatives Enron traded.  These false entries were systematic and occurred over several years, beginning as early as 1997.  They included not only the more esoteric financial instruments Enron began trading recently – such as fiber-optic bandwidth and weather derivatives – but also Enron’s very profitable trading operations in natural gas derivatives.
  
  
   
• Quote:  The difficult question is what to do about the gatekeepers.  They occupy a special place in securities regulation, and receive great benefits as a result.  Employees at gatekeeper firms are among the most highly-paid people in the world.  They have access to superior information and supposedly have greater expertise than average investors at deciphering that information.  Yet, with respect to Enron, the gatekeepers clearly did not do their job.

For more on Frank Partnoy's testimony, click here.

3.  What are some of Frank Partnoy’s best-known books?

Frank Partnoy, FIASCO: Blood in the Water on Wall Street (W. W. Norton & Company, 1997, ISBN 0393046222, 252 pages). 

This is the first of a somewhat repetitive succession of Partnoy’s “FIASCO” books that influenced my life.  The most important revelation from his insider’s perspective is that the most trusted firms on Wall Street and financial centers in other major cities in the U.S., that were once highly professional and trustworthy, excoriated the guts of integrity leaving a façade behind which crooks less violent than the Mafia but far more greedy took control in the roaring 1990s. 

After selling a succession of phony derivatives deals while at Morgan Stanley, Partnoy blew the whistle in this book about a number of his employer’s shady and outright fraudulent deals sold in rigged markets using bait and switch tactics.  Customers, many of them pension fund investors for schools and municipal employees, were duped into complex and enormously risky deals that were billed as safe as the U.S. Treasury.

His books have received mixed reviews, but I question some of the integrity of the reviewers from the investment banking industry who in some instances tried to whitewash some of the deals described by Partnoy.  His books have received a bit less praise than the book Liars Poker by Michael Lewis, but critics of Partnoy fail to give credit that Partnoy’s exposes preceded those of Lewis. 

Frank Partnoy, FIASCO: Guns, Booze and Bloodlust: the Truth About High Finance (Profile Books, 1998, 305 Pages)

Like his earlier books, some investment bankers and literary dilettantes who reviewed this book were critical of Partnoy and claimed that he misrepresented some legitimate structured financings.  However, my reading of the reviewers is that they were trying to lend credence to highly questionable offshore deals documented by Partnoy.  Be that as it may, it would have helped if Partnoy had been a bit more explicit in some of his illustrations.

Frank Partnoy, FIASCO: The Inside Story of a Wall Street Trader (Penguin, 1999, ISBN 0140278796, 283 pages). 

This is a blistering indictment of the unregulated OTC market for derivative financial instruments and the devious million and billion dollar deals conceived by drunken sexual deviates in investment banking.  Among other things, Partnoy describes Morgan Stanley’s annual drunken skeet-shooting competition. 

This is also one of the best accounts of the “fiasco” caused by Merrill Lynch in which Orange Counting lost over a billion dollars and was forced into bankruptcy.

Frank Partnoy, Infectious Greed: How Deceit and Risk Corrupted the Financial Markets (Henry Holt & Company, Incorporated, 2003, ISBN: 0805072675, 320 pages)

Partnoy shows how corporations gradually increased financial risk and lost control over overly complex structured financing deals that obscured the losses and disguised frauds  pushed corporate officers and their boards into successive and ingenious deceptions." Major corporations such as Enron, Global Crossing, and WorldCom entered into enormous illegal corporate finance and accounting.  Partnoy documents the spread of this epidemic stage and provides some suggestions for restraining the disease.

4.  What are examples of related books that are somewhat more entertaining than Partnoy’s early books?

  Michael Lewis, Liar's Poker: Playing the Money Markets (Coronet, 1999, ISBN 0340767006)

Lewis writes in Partnoy’s earlier whistleblower style with somewhat more intense and comic portrayals of the major players in describing the double dealing and break down of integrity on the trading floor of Salomon Brothers.

John Rolfe and Peter Troob, Monkey Business: Swinging Through the Wall Street Jungle (Warner Books, Incorporated, 2002, ISBN: 0446676950, 288 Pages)

This is a hilarious tongue-in-cheek account by Wharton and Harvard MBAs who thought they were starting out as stock brokers for $200,000 a year until they realized that they were on the phones in a bucket shop selling sleazy IPOs to unsuspecting institutional investors who in turn passed them along to widows and orphans.  They write. "It took us another six months after that to realize that we were, in fact, selling crappy public offerings to investors."

There are other books along a similar vein that may be more revealing and entertaining than the early books of Frank Partnoy, but he was one of the first, if not the first, in the roaring 1990s to reveal the high crime taking place behind the concrete and glass of Wall Street.  He was the first to anticipate many of the scandals that soon followed.  And his testimony before the U.S. Senate is the best concise account of the crime that transpired at Enron.  He lays the blame clearly at the feet of government officials (read that Wendy Graam) who sold the farm when they deregulated the energy markets and opened the doors to unregulated OTC derivatives trading in energy.  That is when Enron really began bilking the public.

ARTICLE ONE
"How Enron Ran Out of Gas," by Paul Kedrosky (Professor of Business at the University of British Colombia, The Wall Street Journal, October 29, 2001, Page A22 --- Click Here 
http://interactive.wsj.com/archive/retrieve.cgi?id=SB1004306265411230320.djm&template=pasted-2001-10-29.tmpl 

Is troubled Enron Corp. the Long Term Capital Management of the energy markets, or merely yet another mismanaged company whose executives read too many of their own press releases? Or is poor Enron just misunderstood? Those are the questions after another week of Chinese water torture financial releases from the beleaguered Houston-based energy concern.

A year ago Enron was the hottest of the hot. While tech stocks were tanking, Enron's shares gained 89% during 2000. Even die-hard Enron skeptics -- of which there are many -- had to concede that last year was a barnburner for the company. Earnings were up 25%, and revenues more than doubled.

Not bad, considering where the company came from. A decade ago 80% of Enron's revenues came from the staid (and regulated) gas-pipeline business. No longer. Enron has been selling those assets steadily, partly fueling revenues, but also expanding into new areas. By 2000, around 95% of its revenues and more than 80% of its profits came from trading energy, and buying and selling stakes in energy producers.

The stock market applauded the move: At its peak, Enron was trading at around 55 times earnings. That's more like Cisco's once tropospheric valuation than the meager 2.5 times earnings the market affords Enron competitor Duke Energy.

But Enron management wanted more. It was, after all, a "new economy" Web-based energy trader where aggressive performers were lucratively rewarded. According to Enron Chairman and CEO Ken Lay, the company deserved to be valued accordingly. At a conference early this year he told investors the company's stock should be trading much higher -- say $126, more than double its price then.

Then the new economy motor stalled. The company's president left under strange circumstances. And rumors swirled about Enron's machinations in California's energy markets. Investors pored over Enron's weakening financial statements. But Enron analysts must have the energy and persistence of Talmudic scholars to penetrate the company's cryptic financials. In effect, Enron's troubles were hiding in plain sight.

It should have been a warning. Because of the poor financial disclosure there was no way to assess the damage the economy was doing to the company, or how it was trying to make its numbers. Most analysts blithely concede that they really didn't know how Enron made money -- in good markets or bad.

Not that Enron didn't make money, it did -- albeit with a worrisomely low return on equity given the capital required -- but sometimes revenues came from asset sales and complex off-balance sheet transactions, sometimes from energy-trading revenues. And it was very difficult to understand why or how -- or how likely it was Enron could do it again next quarter.

Enron's financial inscrutability hid stranger stuff. Deep inside the company filings was mention of LJM Cayman, L.P., a private investment partnership. According to Enron's March 2000 10-K, a "senior officer of Enron is the managing member" of LJM. Well, that was a puzzler. LJM was helping Enron "manage price and value risk with regard to certain merchant and similar assets by entering into derivatives, including swaps, puts, and collars." It was, in a phrase, Enron's house hedge fund.

There is nothing wrong with hedging positions in the volatile energy market -- it is crucial for a market-maker. But having an Enron executive managing and benefiting from the hedging is something else altogether, especially when the Enron executive was the company's CFO, Andrew Fastow. While he severed his connection with LJM (and related partnerships) in July of this year -- and left Enron in a whirl of confusion last week -- the damage had been done.

As stories in this paper have since made clear, Mr. Fastow's LJM partnership allegedly made millions from the conflict-ridden, board-approved LJM-Enron relationship. And recently Enron ended the merry affair, taking a billion-dollar writedown against equity two weeks ago over some of LJM's wrong-footed hedging. Analysts, investors, and the Securities & Exchange Commission were left with many questions, and very few answers.

To be fair, I suppose, Enron did disclose the LJM arrangement more than a year ago, saying it had erected a Chinese wall between Fastow/LJM and the company. And in a bull market, no one paid much attention to what a bad idea that horribly conflicted relationship was -- or questioned the strength of the wall. Now it matters, as do other Enron-hedged financings, a number of which look to have insufficient assets to cover debt repayments due in 2003.

We didn't do anything wrong is Mr. Lay's refrain in the company's current round of entertainingly antagonistic conference calls. That remains to be seen, but at the very least the company has shown terrible judgment, and heroic arrogance in its dismissal of shareholders interests and financial transparency.

Where has Enron's board of directors been through all of this? What kind of oversight has this motley collection of academics, government sorts, and retired executives exercised for Enron shareholders? Very little, it seems. It is time Enron's board did a proper investigation, and then cleaned house -- perhaps neatly finishing with themselves.

Then I discovered the "tip of the iceberg" article below:

ARTICLE TWO
"Enron Troubles Only the Tip of the Iceberg?," by Peter Eavis, TheStreet.com --- http://www.thestreet.com/markets/detox/10003083.html 

Dealings with a related party have tarnished Enron's (ENE:NYSE - news - commentary - research - analysis) reputation and crushed its stock, but it looks like that case is far from unique.

The battered energy trader has done business with at least 15 other related entities, according to documents supplied by lawyers for people suing Enron. Moreover, Enron's new CFO, who has been