Thanks to Michael for giving me the chance to guest blog. It was fun 2 years ago. Hope you out there find my stuff somewhat interesting.
I am a tax guy. Unfortunately, from my blogging point of view, in the US, the only interesting discussion going on about taxes these days is about the estate and gift tax, and I have little to add to that debate. (Yes, we should not be Mexico…)
But, in the other area in which I know something, law and accounting, lots is happening. The ongoing option backdating scandals make it clear that much still is wrong with the accountability of corporate managements. So, for now, accounting seems more worth writing about.
Which gets me to Enron. Many have noted the importance of the recent convictions of Lay and Skilling: The convictions restored some faith in justice. More importantly, for my purposes, they saved public capitalism. If Lay and Skilling had been able to get away with what they did, it would have seriously undermined the public’s faith in the capital markets.
But another aspect of the convictions has not received public scrutiny and merits discussion: how the convictions were achieved.
(My analysis is based on public reports and various blogs by reporters who were present at the trial.) The prosecution quite smartly did not attempt to try Lay and Skilling on their misleading accounting. After all, the jury would not have understood. Instead, the prosecution’s case was that Lay and Skilling are real smart guys who must have known of Enron’s problems, yet they said all was well. The company went belly up. Thus, Lay and Skilling must have lied. Do not pass go. Go to jail
OK, good for the prosecution. Right way to win! But, what does that say about modern investing? If the best lawyers and experts could not explain Enron’s accounting to a jury, the average individual Enron shareholder could have had no idea what she was investing in. This strikes me as a bad thing. Which is where we will pick up tomorrow.