Enron Trial an Opportunity for Fresh Thinking Commentator Ev Ehrlich, who was Undersecretary of Commerce in the Clinton administration, says the Enron trial presents an opportunity to reexamine corporate accounting practices.
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Enron Trial an Opportunity for Fresh Thinking

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Enron Trial an Opportunity for Fresh Thinking

Enron Trial an Opportunity for Fresh Thinking

Enron Trial an Opportunity for Fresh Thinking

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Commentator Ev Ehrlich, who was Undersecretary of Commerce in the Clinton administration, says the Enron trial presents an opportunity to reexamine corporate accounting practices.

STEVE INSKEEP, host:

Some other news now: the former chief financial officer of Enron, Andrew Fastow, could testify today. He's a witness in the trial of former CEO Jeffrey Skilling and Kenneth Lay.

Commentator Ev Ehrlich says the case illustrates some problems that go far beyond Enron.

EV EHRLICH reporting:

Here's what we'll learn from the trial of former Enron tycoons and alleged scam artists Ken Lay and Jeff Skilling: not so much whether these two guys are guilty, but a jury will ever be able to wrap its mind around the accounting at the center of the accusations.

People think accounting is about adding two and two, but it's not. When the Blobbo Corporation tells us they earn say a dollar per share last year, we want to think of that as a fact, like the temperature outside is 50 degrees or Albert Pujols hit 330 last year.

But it's not a fact, it's a judgment. Any accounting estimate is built on judgment about questions that have no one right answer. Here, if develop new software or a new microorganism, should I deduct those research costs now or wait until the product starts making money. It depends on the judgment you make. And to help auditors make these judgment, we give them a rulebook. It's issued by a quasi-public entity called the Financial Accounting Standards Board and, collectively, the rules are called Generally Accepted Accounting Principles.

So when auditors try to decide, let me use an example you'll hear about in the Enron trial, whether a company's subsidiary should be consolidated into the company's accounting, they don't always try to find the best depiction of reality. Instead, they find a rule in the rulebook and apply it.

The problem in Enron and many other companies on the list of bad corporate apples, is that they looked for a rule that would let them do what they wanted to do anyway and then cover their rear ends if they ever ended up in court. Then they could tell the judge, hey, I was just following the rules!

And that's the real story of the Enron trial: whether accounting rules provide crooked managers with an alibi, even as they commit the crime. That's not to say the Enron guys are criminals; that's for the jury to decide. But too many corporate managers have been preparing for a trial while they were preparing their books.

The Enron trial has the potential to be a landmark: the end of an accounting system that uses rigid rules and the beginning of one that allows auditors to use sound judgment. That will require changing our ideas about everything, from how earnings are reported, to how cases get resolved in court. But as Enron shows, what good is a system that lets you lie and follow the rules at the same time?

INSKEEP: Commentator Ev Ehrlich was under the secretary of commerce in the Clinton Administration. He's now president of the EFC company, an economics-consulting firm.

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INSKEEP: This is MORNING EDITION from NPR News. I'm Steve Inskeep.

MONTAGNE: And I'm Renee Montagne.

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