What is the impact of Enron among your constituents back in Connecticut?
Enron has pierced the consciousness of people I've talked to in Connecticut and
throughout the country. The reason for that is the remarkable story of the way
in which capitalism has been democratized in the last couple of decades --
which is to say that well over half the people in this country own stock of
some kinds. And when they see a big company, seventh largest in America, go
into bankruptcy, and they read the stories of corporate greed and deceit and
the way in which the employees of that company had their dreams for wealth and
retirement security evaporate, it shakes people up. So I think that Enron is a
very important American experience, and one we've got to learn some lessons
from to try to make sure it never happens again.
What lessons do you draw from it? Is this a question of Enron and maybe
Andersen, a couple of companies with people who are either wrong or potentially
criminal, but just a bad bunch in a company or two? Or are we looking at
something larger than that?
I think in Enron we're seeing a group of people who lost their way, who forgot
that there was a difference between right and wrong, and were so driven by the
pressure to continue to show quarterly increases in profit and to get wealthier
themselves -- wealthier and wealthier themselves, not just wealthy -- that they
did things that were just wrong, and probably illegal.
But what I think we see in Enron is a kind of caricature or extreme of a lot of
other tendencies, problems, in the American corporate community that most
others didn't carry as far as the folks at Enron. It's a real warning to
everybody in business in this country today, particularly in larger businesses,
that you've got to have a moral compass here. You've got to decide at some
point that "What I'm about to do is not right, and therefore I'm not going to
do it, even though I might make three times the millions of dollars I'm already
making. It's just not right."
One of the things that struck me, as we began to do some research on this,
is when I first found out that there were more than 450 American corporations
in the last three years of the 1990s that had to restate their earnings. They
had to go back and redo the books that they had done and that had been approved
by their auditors. It struck me as a fairly large statement. I wonder whether
or not that's something you've run across. As you just said, you see Enron as
an extreme example. But [is this] an example of something that is a far more
Yes. Look, our investigation, my committee's investigation, is focused on
Enron, Arthur Andersen and the federal watchdog agencies that, as we put it,
"didn't bark" in protecting us.
But I'm talking to people about this. And I keep running into people inside the
financial community, inside the business community, who say to me that the
kinds of tricks that the folks at Enron were doing with their books were quite
similar, although maybe not in the degree, to what was happening to a lot of
places throughout the American business community -- playing fast and loose in
the little spaces that the accounting rules provide.
It's sometimes going over the line, but figuring that the prospects of getting
caught were not very great, because the watchdogs -- including their own
auditors -- were part of the accounting tricks that they were doing. ...
Are you finding that Arthur Andersen did that, for example, at Enron, that
they were part of the engineering of the very practices that had become so
I don't know that for a fact yet.
Is there any reason to suspect that Arthur Andersen was involved in setting
up the kinds of instruments for Enron that have gotten Enron in so much
Well, in fairness, we're at the fact-gathering stage of our investigation,
though I know this program will probably show when we've gathered the facts and
maybe gone to hearings. But some of these clever accounting devices were
clearly not the brainchild of the executives at Enron. They were willing
partners with their accountants, who were suggesting some of the things that
they did. That's obviously why there's so much focus, not just on Enron, but on
Arthur Andersen; not just on Arthur Andersen as auditor, but also as
What we keep hearing when we talk to folks about what needs to be done is,
"Get the markets honest and get the markets transparent, so people can
understand it." What needs to be done now to get people confident that the
markets are honest and transparent and open?
This is critically important, because Enron has really produced a crisis in
confidence in our capital markets. Now, that's a fancy term that really means
that average middle-class investors who come into the market in the last 20
years don't know who to trust anymore when they decide where to invest their
hard-earned money. And I think we've got to now shake up the system, so that
everybody who was supposed to be a watchdog here -- internally and externally
-- but didn't bark will bark real loud the next time they see some of the stuff
beginning to happen that happened at Enron.
It begins inside. It begins with the board of directors. According to law, the
board of directors has what might be called a fiduciary responsibility. They
didn't exercise any independent control at Enron. In fact, they appeared to be
complicit in some of the decisions that were made that we now find so
What about auditors? The auditors have a professional responsibility not to be
partners with the company in deceit, but to write an auditing report that tells
anybody that wants to know exactly what's happening at the company, so that we
can make a decision whether we want to invest our money in it.
We then go to the federal watchdog agencies, the Security and Exchange
Commission. Companies like Enron file reports at the SEC. Are they looking at
them with any clarity?
Did they have enough people to look at them? Three thousand people, 17,000
[reports] a year?
The direct answer is that the SEC has been underfunded, undersupported, and
is understaffed, so it can't really play the watchdog role that we assume it's
playing. Companies can get away with a lot.
What about the Wall Street analysts who we see on television and whose reports
we see in newspapers or average investors can get on the Internet? We did a
hearing on the Wall Street analysts, and I was startled to learn that, as we
chartered the last couple of years, only 1 percent of the recommendations of
Wall Street analysts was to sell a given stock. Almost two-thirds were to buy;
the rest were neutral. So I think a lot of the Wall Street analysts have become
salespeople for the companies, instead of real independent analysts.
And of course, there's the hint of conflicts of interests there, because the
investment companies the analysts work for are also doing other business for
the companies that the analysts are analyzing. It's just rife with conflicts.
Of course, then the law has to be toughened up. I mean, ultimately, some of the
most significant reactions to the Enron collapse and scandal are going to be
the embarrassment, shame and ultimately law enforcement against people at Enron
and Arthur Andersen, which will shake up people in similar positions in
corporations and accounting firms throughout the country for a period of time.
But human nature being what it is, people may feel pressures again pretty soon,
and begin to cut corners that ought not to be cut. And that's why we have to
take some of the lessons learned and put them into law which lasts.
One is to have accounting firms be prohibited from both auditing and consulting
the same firm. We've got to create a new entity independent of the accounting
profession to oversee that profession. We've got to make it clear that the
millions of people who have 401(k)s will never be trapped again like the Enron
employees were, watching their company's stock go down and they don't have the
ability to sell.
Let's take the 401(k)s. You were talking about little people getting hurt.
Here you got the people that are locked in; meanwhile, Ken Lay, Jeff Skilling,
Fastow, all of them are making millions, selling these options that they got
Where are you today on the expensing of options on the balance sheet? Should
we do that? Should that be enforced now, or do you still feel the same way you
did in 1994?
I feel the same way I did in 1994, because I don't think the Enron problem is
an options problem. In other words, forgive me, the best comparison I can think
of is the one that the NRA uses about guns -- which is that guns don't kill
people, criminals do. Options were not the problem with Enron; it was the way
in which the executives of Enron sold their options, while the real problem
[was that] they knew the company was in trouble, the employees and the rest of
us did not know.
And I don't know if you want to get into this detail. But, very simply, the
concern that I had back in 1993 and 1994, and that I still have, is how do you
accurately value an option on the day it's granted? It has no real value. The
value is when somebody exercises the option and actually buys the stock,
because then there's a market value.
The accounting board, I think, came up with a pretty good compromise here,
which was, instead of requiring so-called expensing from income, it said the
company has to disclose by some formula -- which is a real sort of guesswork,
but better than nothing -- what impact the expensing of options at the time
they were granted would have on the earnings of the company.
It's right there in any report. It's probably a lot clearer than a lot of the
other stuff that are in those reports that the companies put out.
Companies don't have any trouble figuring out how much options cost them
when they list them on their tax returns to reduce their taxes.
That's a separate question, which is an important question. Usually that's
done, and it's done more effectively at the time they're exercised, because at
the time of exercise, there's a tax impact on the employee and on the company,
and they adjust it in that way.
Let me take the Enron case. The options that were given -- not only to the
people at the top who committed acts of greed and deceit, but to others in the
company -- now are worth essentially zero. So if you try to give them a value
for accounting or tax purposes at the day they were granted, it would be an
So why can't you do it on the day they were exercised?
Oh, I would be for doing it on the day they were exercised, because then I
think it has a real value. And I think that's the important thing to say.
But they're not expensed in any way now, are they? Isn't that right? I mean,
you have a guy like Warren Buffet saying, "If options aren't compensation, what
are they? If compensation isn't an expense, what is it? If an expense shouldn't
be on the balance sheet, where should it be?" How do you answer a guy who's as
deeply into investing as Warren Buffet is?
Yes, I mean with all respect -- and, of course, there's a lot of other experts
who say quite the opposite -- the essential problem here is for accounting
purposes and also for tax purposes. Can you value something before it has been
bought and sold? In other words, those who want to expense options on the day
they're granted take you through a very complicated formula that is used for
options that are actually traded on options markets. That's not the case with
That's used in the footnote now.
That is used in a footnote, but it is an imperfect measurement.
Let me just go back to the question of openness and honesty. This gets
raised as a matter of, how do you openly and honestly present a company's
financial situation? If you shift debt to off-book partnerships, you're not
accurately reflecting the company's situation.
If you don't show the accurate expenses and if you do what Sunbeam was
accused of doing, which is selling things to people, counting them as sold when
they had the right to return them, in fact, they aren't sold. If you did what
Enron did, which is to contract ahead and count income from energy contracts
that it had sold 10 and 20 years ahead, it hadn't been income.
And by the same token, people say options are an expense, and if you don't
put them on the balance sheet--
No, wrong. Wrong. Each of the other things you talked about had a value. And
each of the other things you talked about were not mentioned in the financial
statement of the companies in a way that could be understood. There is a major
difference here. Don't fall for this line, because this is not what Enron was
about. The major difference is if I give you an option today, it has no value.
It only has value when you decide to exercise it. And it may not have any
value; it may be worth a lot more or it may be worth a lot less.
Finally, the Financial Accounting Standards Board did something that was not
done in any of the other cases of deceit that you've talked about that Enron
was involved in. It required Enron and every other company to list in its
financial statement what impact the expensing of options at the time they were
granted would have on earnings, according to an extremely imperfect method.
So you think the action in 1994 that the Senate took in your resolution and
then the ultimate compromise was a good action?
Yes, I think it was a good action, because the contrary action would have been
to try to put a hard value on something that one can't value.
There were a lot of people arguing, particularly from Silicon Valley, that
if you expensed options, it would hurt their ability to recruit, it would raise
their expenses and hurt their income. Do you think it would have hurt the
economy, or do you think it would help the economy?
Yes, absolutely. Here's why I think it would have hurt the economy. Look, look,
the granting of options is one of the ways in which capitalism has been
democratized in America over the last 20 years. There are companies -- Wendy's
is the one that comes to mind -- that give stock options to everybody that
works for the company, including the people who are at the counter when you go
Silicon Valley companies, which drove the technology industry, which increased
the productivity of our economy during the 1990s and in large part created the
boom that we had, came to me at that time and said, "We need to use these stock
options to lure the brilliant minds from the big companies that are paying them
the kinds of salaries we can't pay them, because we're going to give them a
stake in the company."
So yes, I think that if we had forced the expensing of stock options at the
granting, not only would we have forced something that is impossible to do
rationally -- because the option has no value, really, at that moment -- but we
would have hurt the economic growth of the company and the enormous benefit
that came to many employees from stock options.
Let me just say a final word about this. Stock options, I think, are a device.
They can be used well or not well. In too many companies, a disproportionate
percentage of the options were given to the very top people in the company. In
fact, I put legislation in to try to create a system that would have required
half of the options given by any company to be given to so-called non-highly
In the case of Enron, a system that, as I've just said, an idea of stock
options for employees which have helped millions of people in America make it
into the middle class and beyond, were probably part of the reason that the
executives at Enron did the bad things that they did. And what do I mean? Well,
not only were they driven to raise their quarterly profits, but there's an
argument to be made -- and I haven't gotten inside their heads -- that they
exercised their options in a way that was deceitful to others in the company
and greedy to themselves.
And they were pumping the stock price.
And they were pumping the stock price for various reasons; either that they
already had stock; either that they were trying to fatten their salaries, but
also because they were increasing the value of their options.
So what I'm saying here is that the problem was not the options. ... Have they
been abused by some? Have they created another reason for some people who lost
their moral compass to be greedy? Yes, but you can say that all along the way
about a lot of different things that happened in Enron and that happen in life.
So it just seems to me that the problem with Enron was not the accounting
system for valuing options.
In fact, for anyone who cared to see at a level of clarity much beyond any of
the other things you've talked about -- offshore accounts, pumping up markets
for derivatives, et cetera, et cetera, that the Enron people are involved in --
this thing was right there to see if anybody was worried about it.
So far [the investigation] has focused on Andersen, accounting, a little bit
on lawyers. Are investment bankers going to be called into question in terms of
their involvement in these partnerships, their investment in these
I don't know. I can tell you so far that we've called in the Wall Street
analysts, some of whom work for investment banks. And we expressed concerns
about whether there was a conflict of interest when an analyst working for an
investment bank that does business with a company analyzes that company.
One of the suggestions that's come before the committee is that the markets may
want to adopt rules to prohibit that kind of conflict of interest. That, or to
require disclosure, so that when somebody reads the report of a Wall Street
analyst on company ABC, that the average investor ought to know that ABC is
doing business with the analyst's company. So there's a problem there.
Do you think that's going to take laws or do you think Chairman Pitt is
going to move far enough with his SEC--
So far, I haven't seen Chairman Pitt be willing to move far enough. It may take
laws. This is a balance. We're never going to be able to, by law, cure
everything that happened in the Enron case, because unfortunately, people will
do bad things. That's why we not only have criminal laws when they do the worst
things; that's why we try to teach people the difference between right and
wrong. But this is an important area. And I think we're going to explore the
limits of what the law can do to adopt better values and to make sure that we
don't do this again.
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