New scandals, old lessons financial ethics after Enron.

• Author: Millman, Gregory J.
• Position: Ethics

In 1997, former Christian Coalition leader Ralph Reed joined Enron Corp. as a consultant, apparently to help Enron build support for electricity deregulation in Pennsylvania. Perhaps Reed might have been more usefully employed had he compiled a reading list for Enron's board, brass, auditors, analysts and attorneys, such as the passage from Biblical Book of Proverbs that notes: "The false witness will not go unpunished; the man who utters lies will meet his end."

Of course, the Enron story was not simply about people telling lies and getting due comeuppance. In the first place, technically speaking, no one has proven that anyone at Enron lied or even failed to disclose problems. "It was easy to meet your legal responsibility for disclosing what happened, but also easy to know nobody would understand it," remarks Alan Anderson, senior vice president and Member in Public Interest of the American Institute of Certified Public Accountants. Especially when those few who could understand -- analysts and auditors, in particular -- weren't eager to make waves by clueing in the general public.

Secondly, those who appear to have suffered most from Enron's fall were not the masters of manipulated numbers but innocent bystanders guilty of nothing more than investing in Enron stock, especially through the company's 401(k) program. Pedro Reinhard, executive vice president and CFO of Dow Chemical Co., fumes that Enron's former management seems to have gotten off lightly. "At the end of the day, we've seen that the ones that have committed the offenses are still walking around and managing their own fortunes," he says.

The Enron story doesn't quite fit the mold of a good old-fashioned morality tale. It's much worse than that. One of the world's biggest and most admired corporations imploded, scandalously. Collateral damage included not only the destruction of a once-reputable Big Five audit firm but also any lingering post-tech-bubble faith in the integrity of securities analysts, as well as rampant growth of suspicion about much current corporate reporting. Despite evidence of economic recovery, stock prices have stalled -- many say because investors lack confidence in the general integrity of those who prepare, vet and/or analyze financial information.

"Enron is a very vivid illustration of how fundamental ethical standards are to a well-functioning capitalist system," says Prof. Lynn SharpPaine, John G. McLean Professor of Business Administration at Harvard Business School. "Ethics are necessary for trust, and without trust the whole thing falls apart."

Enron also puts some of the most cherished business orthodoxies of the past two decades in a harsh new light. Take, for example, the notion that managers should think like shareholders. "Enron shows the dangers or risks involved in trying to align everybody's financial interest," Paine says. "In this case, we have not only managers with incentives tied heavily to investors' interests, but also legal advisors, financial advisors, accountants. When everybody's financial interest is aligned, it makes it difficult for anybody in the system to say 'these other considerations should take...