Since declaring bankruptcy in December, Enron Corporation has been embroiled in an accounting scandal that has received national attention due to its wide implications.
Michael Salinger, Chairman of the Department of Finance and Economics in SMG, discussed how the outcome of this case could affect the business world, the government and the public.
How does something like this happen to a company that is seemingly doing so well?
What’s really shocking about Enron is that in contrast to some other situations, people don’t really understand what’s going on, or what happened, or how Enron was making money to begin with.
What they do know is that there was a level of accounting deception that was generally unheard of in this country before. They had a number of losses in a number of ventures that they were hiding in a number of fraudulent ways.
What do you think will be the result when the trials are all over?
It’s likely that Enron itself will disappear, and a number of people will go to jail.
More generally, I think people will be forced to take a hard look at the accounting practices that allowed this to happen. There will be a change in accounting rules.
What will be the effect on the government?
The Democrats will try to pin this on the Republicans and claim that its evidence of corruption and the hazards of deregulation. There’s certainly a risk that people will use this to re-regulate a market [energy generation] that doesn’t need it.
What should the investing public think? Should they be wary of investing their money?
The sensible public will realize that they shouldn’t put too much in one place, ever. What happened isn’t typical of the system and shouldn’t prevent them from investing in the future.
The mistake some naive investors have made is to want to get on the bandwagon when a stock increases. This episode is just another cautionary tale.
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