A Clamour To Learn Lessons Of Enron

The Financial Times
Sheila McNulty

When Bala Dharan, accounting professor at Rice University, Texas, posted a one-day executive education class entitled "The Enron Meltdown", he said people asked how he could hold forth for 2 1/2 hours on the company's bookkeeping.

Not only did Prof Dharan have to skip over much of his presentation to complete the class on time but he did so to a rapt audience that took up all but a few scattered chairs in the back row of a 240-seat auditorium.

Until Enron went bankrupt, professors say, it would have been difficult to rally a room full of executives to an evening accounting course. But the questions arising from the collapse of the US's leading energy trader have brought attention to a field many long considered too boring to notice.

"It is bringing to the fore the importance of the profession," says Bea Sanders, director of academic and career development for the American Institute of Certified Public Accountants.

Suddenly, accounting experts such as Prof Dharan are being called to testify before Congress, investors are paying close attention to accounting notations they might once have ignored and industry changes are making the front pages of news-papers. It was only a matter of time before accounting educators took note.

Prof Dharan was among the first to center an entire class around Enron, demonstrating that the red flags were there for anyone who knew how to scrutinize the Houston-based company's financial statements. Enron also has featured in discussions in regular accounting classes across the country. Now it is forcing changes in some university curriculums.

"It looks (as if) there will be a substantial beefing up of the ethics component," says Jim McKeown, interim chairman of the accounting department of the Smeal College of Business at Penn State University. "Accountants do not create economic problems. They only have to decide when to report them."

The most obvious error committed by Enron's accountant, Andersen, was that it illegally shredded documents relating to the company. What is less clear to accountants is whether Andersen was to blame for the public perception that the company was stronger and more stable than it was.

Prof McKeown says there were notations warning of the risks to the balance sheet in Enron's financial statements: "In the footnotes, it said 'here are some partnerships and here are some of the liabilities of these partnerships'. . . An informed user has to read all the statements . . . There were disclosures there."

That, nevertheless, does not excuse what professors agree seems to be an attempt to hide Enron's flaws behind complicated bookkeeping. So an important part of educating accountants, they say, should be teaching them when to refuse to sign off on something they do not believe in, even if it is not illegal.

But whether professors can persuade students to learn those lessons remains unclear. Over the past five years, the number of accounting graduates in the US has dropped 25 per cent, while the number of people sitting the CPA exam has fallen 9 per cent.

Professors say that is because accounting is becoming more complicated - as can be seen by the variety of transactions on Enron's books - thereby forcing universities to add an extra year of study. Yet, even as accounting has become a five-year program, the wages of accountants have fallen behind those of four-year majors such as marketing and finance.

Accountants are also given less say over companies than they used to have. Jake Thomas, accounting professor at Columbia Business School, says auditors used to help boards form strategy on many issues (a role that has been taken over by management consultants) and advise on mergers and acquisitions (a function now dealt with by investment bankers).

"They have elbowed out the auditors," says Prof Thomas. "It used to be a very respected profession."

Prof Dharan's solution is for universities to combine accounting and finance into a single, more interesting and marketable degree. Until that happens, he is doing his part to make accounting more appealing with classes such as the one on Enron. In it, Prof Dharan mesmerized students with video streams of interviews with Enron executives and a demonstration of how a closer scrutiny of Enron's financial statements could have saved investors billions of equity lost in the company's collapse.

Getting the biggest laugh was a cartoon tagged: "When all else fails, ring in the accountants." In it, the head of the company tells his accountant: "It's up to you, Miller. The only thing that can save us is an accounting breakthrough."

Copyright: The Financial Times Limited 1995-2002

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REPORTERS & EDITORS: For more information, please contact Wyatt DuBois in the Smeal College of Business Media Relations Office at 814-863-3798 or wed112@psu.edu .

Penn State's Smeal College of Business offers highly ranked undergraduate, MBA, executive MBA, Ph.D., and executive education opportunities to more than 5,500 students at all levels. Featuring academic departments of accounting, finance, marketing, insurance and real estate, management, and supply chain and information systems, the college is also home to major research centers such as the Center for Supply Chain Research, the Institute for the Study of Business Markets, the eBusiness Research Center, the Farrell Center for Corporate Innovation and Entrepreneurship, the Center for Global Business Studies, and the Center for the Management of Technological and Organizational Change.

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