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| Features |
| Any lessons from Enron? |
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by
Frank Phiri, 08 June 2006
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07:30:13
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The bankruptcy and subsequent downfall of US energy giant Enron reverberated as it shocked the corporate world in 2001. Dubbed by financial commentators as one of the world’s biggest business scandals ever, Enron has become a common reference on corporate failure and how to overcome it. The recent passing of a “guilty” verdict on Enron’s two top executives by a US Federal Court, has brought an end to the Enron saga. In this piece, Frank Phiri asks if the lesson has sunk in Malawi’s corporate circles.
On May 25 this year, the last piece in the jigsaw puzzle that was the downfall of Enron fell into its place after a nerve-racking five years for investigators and prosecutors.
On this day, a Federal Court in Houston convicted Enron’s founder Ken Lay and former Chief Executive Officer Jeffrey Skilling for their role in bringing the energy giant down to its knees.
The court and jury found both Lay and Skilling guilty of fraud and conspiracy, confirming everyone’s fears that the two men did indeed engage in white collar crime by dipping their hands in the cookie jar.
The pair—due for sentencing later in September—faces lifelong sentences.
With the collapse of Enron fell the US’s seventh largest company—an energy trading colossus that grew from a mere pipeline entity in 1985 when the ambitious Lay founded it.
As Enron went down under the weight of wire and securities fraud, insider trading, conspiracy and blatant lies—so did thousands of jobs, billions of shareholders’ wealth and investor confidence.
Other ripple effects included the downfall of Enron’s auditors, Arthur Andersen.
In 2002, the US accounting firm—then one of the world’s top five accountants—was found guilty of obstructing justice for illegally and systematically shredding Enron’s financial books and deleting computer files relating to its client.
Today, as the indiscretions by the Enron executives come back to haunt them, the significance of the Enron saga cannot be overemphasised.
The result is that worldwide, governments and private sector corporations now pay closer attention to corporate governance and related issues.
The question, however, is whether this has had the desired effect of fixing a poor corporate governance record here in Malawi.
Reactions to this question are mixed, as Business Review supplement to The Nation found out this week.
On one side of the argument, stakeholders said the Enron saga has helped to foster discipline among auditors, accountants and top executives as these gatekeepers are now required to be more accountable in the eyes of cynical shareholders, regulators, clients and peers.
But on the flip-side, some critics ponder that the Enron and Andersen scandals could not be put to good use as lessons in corporate governance until Malawi enacted specific laws providing the basis for stricter regulation of businesses and prosecution of the rogues.
In an apparent reaction to the Enron case, the Society of Accountants in Malawi (Socam) came up with a Code of Best Practice for Corporate Governance in 2001 which was launched in 2002.
The code is a set of procedures which entities in the public and private sector are required to adhere to. Its weakness, though, is that adherence is on a voluntary basis.
It calls on organisations to be more transparent and accountable, which in the long-term, is hoped to bring efficiency and contribute to economic growth.
For companies that are public by virtue of being listed on the Malawi Stock Exchange (MSE), corporate governance is a must.
These companies are now required to come up with a declaration clause on corporate governance, which is usually to be found inserted in their published annual financial statements.
In turn, the local bourse—despite absence of enabling legislation—has a role to ensure that all listed companies are playing according to the set rules and procedures.
“Malpractice is inherent in any setup and there will always be a risk. But as a stock exchange with only 10 listed companies, we’re satisfied with how every player has kept above board,” said Symon Msefula, MSE Chief Executive Officer.
Socam Executive Director Hennox Mazengera says the Enron saga and the subsequent development of the Malawi Code have alerted government, private sector and their employees to strive for compliance to governance requirements.
“Even regulators have learnt a lesson. At institutional level, we have seen accountants and auditors becoming more eager to work in line with ethical and professional standards to prevent liability,” he said.
But seasoned fraud examiner Anthony Mukumbwa, who sat in the steering committee that developed the code, is sceptical that it is achieving its goals.
Mukumbwa, who is also Managing Director of Corporate Governance Centre (CGC)—a training centre for internal auditors—says for as long as the compliance to the code remains voluntary some organisations can choose to disobey.
“It is only working for multinational corporations like Stanbic, because corporate governance is a must for them at international level. Most of the local firms are not adhering,” he said.
Mukumbwa, himself a Certified Internal Auditor (CIA), said what the country needs are strong laws to check corporate crimes.
He pointed out that some laws such as the Companies Act (1984) are too old and vague to cope with the increasing prevalence of white-collar crimes—now more sophisticated thanks to modern technology.
Mukumbwa is vindicated. A recent survey by audit and business advisory firm KPMG ranked Malawi as the second most fraudulent country in Africa after Swaziland.
It cited poor internal controls, management’s overriding of internal controls and absence of corporate ethics as some of the contributing factors.
As can be deduced from the findings of the KPMG survey, the responsibility and liability of auditors and accountants is often a fundamental issue and comes to the fore, as was witnessed with Andersen in the US.
Lamion Gama, the Managing Partner for KPMG Malawi, believes that auditors and accountants in the country have come of age and are well equipped to prevent an Enron and Andersen catastrophe.
Gama said local audit firms now employ capable hands and are subject to annual quality performance reviews by international regulators and their affiliates such as Socam.
Shadreck Namalomba, President of the Institute of Internal Auditors Malawi Chapter, agrees:
“The codes of conduct for auditors and accountants are being rigorously monitored. Locally, auditors and accountants have become a biting dog with severe disciplinary measures and penalties levied on those behaving unprofessionally.”
But Namalomba holds management of most local companies in contempt for not reforming, even after Enron.
While the Enron episodes are now a closed chapter, they remain a real time bomb for Malawi, unless Parliament gets serious and enacts firm economic laws.
Equally wanting is the judiciary, which must move with the tide and adopt the right levels of sophistication to ably prosecute corporate criminals.
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