The SEC’s and Wall Street Analysts' Failure to See Through Enron’s Financial Reports
At the end of the Enron accounting scandal investigations, the SEC and the Wall Street analysts were partly blamed by the congressional hearing committee for their failure to exercise their duties with utmost diligence. Accordingly, had these two sectors compared Enron’s financial reports with other companies or with the industry standards, they could have noted the large disparities.
In January of 1992, which was the beginning of the gas price manipulations, the chief accountant of the SEC granted Enron permission to use mark- to-market accounting for their gas services. The underlying argument for this method was Enron’s inability to furnish a more accurate presentation of their true liquidity by booking their liquid assets using historical costs. Hence, the use of the market's price forecasts for their natural gas would create a fairer presentation of their financial position
In 1994, the SEC exempted power marketers like Enron from the Public Utility Holding Company Act (PUCHA). The decision was made based on the premise that said companies, which included Enron, did not operate power plants but merely traded electricity contracts. This particular exemption made it possible for Enron to manipulate their natural gas and stock prices by creating a fake energy crisis.
PUCHA’s essence was for the prohibition of utility holding companies from investing the citizen’s “rate payments" in non-electricity industries or in out-of-region power plants --- the reason for this was that such investments would not directly contribute to the improvement of the services being provided to the customers.
Add to that the Enron exemption privileges from the securities laws prescribed under the Investment Company Act of 1940 granted by the SEC during the chairmanship of Arthur Levitt in 1997.
Investigating bodies concluded that these privileges allowed Enron to make use of fake companies or SPEs, where Enron buried their million-dollar debts and losses.
Had the SEC reviewed Enron’s financial statements and its contracts with the more than 3,000 SPEs before awarding said exemptions, the fraudulent transactions and accounting manipulations could have been discovered much earlier.
Enron’s Board of Directors was likewise accused of endorsing all these transactions through their Board approvals, without any records of raising any questions. Accordingly, they were asked by CEO Kenneth Lay to sign a waiver of their rights to question the investments placed by CFO Fastow in the fake LJM investment partnership.
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