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Experts dissect Enron, criticize reform legislation

By David Scharfenberg Daily Planet staff
Wednesday April 03, 2002

A panel of experts dissected the Enron fiasco, and poked holes in the pension and accounting reform proposals that have emerged in the wake of the energy company’s scandal, at a UC Berkeley seminar Tuesday. 

“I don’t think the legislation that is proposed so far is going to do much,” said John Menke, president of Menke & Associates, a San Francisco firm, which designs and administers employee stock ownership plans. 

Menke was particularly critical of pension reform legislation offered by Rep. George Miller, D-California, who represents portions of Contra Costa and Solano counties.  

Many employers, like Enron, provide contributions to employee retirement plans in the form of company stock. Miller has proposed legislation that would allow employees to dump company stock after a year of participation in a retirement plan and diversify their holdings. 

Miller says, if his legislation passes, employees’ retirement plans would no longer be bound to the fortunes of companies like Enron. 

But Menke objected to Miller’s “Employee Pension Freedom Act” Tuesday, arguing that the employer contribution is a bonus offered by the company, and the company should have control over how it is invested, at least for a reasonable period of time. 

Menke, acknowledging that some reform is inevitable, threw lukewarm support behind alternative legislation offered by Sen. Edward Kennedy, D-Massachusetts, which allows for diversification after three years. 

Clancy Houghton, an adjunct professor at UC Berkeley’s Haas School of Business and former partner with Deloitte, Haskins & Sells, attacked legislative proposals requiring companies to rotate auditing firms periodically. 

“It takes awhile to get to know a client,” Houghton said, arguing that rotations would lead to a decline in the quality of audits. 

But current legislation was not the only topic of conversation. Panelists also suggested several reasons Enron and other companies are doctoring their books, and told investors how they can avoid losing money in similar meltdowns in the future. 

Brett Trueman, UC Berkeley professor of accounting, said managerial compensation packages laden with stock options, and a growing number of “momentum investors” who hop into the market and penalize companies for falling short of earnings projections, encourage executives to hide losses. 

Trueman also suggested that accounting firms who have large consulting contracts with clients, on top of auditing contracts, may be more willing to accept doctored financial statements and please the client. 

Increasingly complex business transactions, and accounting standards that have not kept pace, Trueman said, only add to the problem. 

Trueman suggested that investors look at the fine print of financial statements and calculate items, like long-term leases, that do not appear on typical balance sheets. 

Bala Dharan, a professor of management at Rice University in Houston, Texas, walked through the early signs of Enron’s collapse last year, including the Oct. 16 announcement of $618 million in losses and the Security and Exchange Commission’s Oct. 22 announcement of a probe into Enron. 

“Whenever the SEC announces a probe, settle,” Dharan advised a packed house at UC Berkeley’s Wood Krutch Theatre. 

Dharan seemed to enjoy the attention. 

“Usually, we accountants never get invited to anything,” he joked. “All of a sudden, we’re almost like rock stars.” 


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