Glad that I am pretty much done with dissing Enron — out of respect for the late Mr. Lay.
Monday, I suggested that it is troubling that the average investor could not understand Enron’s accounting. Later, I will talk at whether it is possible to have accountings for new economy businesses that the average individual investor can understand. (Enron pretended that it was all new economy. It really was just another energy trader.) But, a little background seems helpful.
After the amazing business scandals, even by Enron standards, of the late 1920s and early 1930s, Congress had to do something about the public securities markets. Public faith was nigh zero. The question on the table was what to do. One answer would have been to have a government agency that really regulated public capital. For example, a government agency could look over the shoulder of corporate managements and second-guess the stock and bond markets. Congress instead decided to put their faith in, among others, the accounting industry. Really! Laff, laff! More below the fold….
This background discussion should be taken with a boulder of salt. I am not a securities lawyer. My study of the history of the US securities laws has been quite limited. Butt covered, lets dive in!
OK, so it is 1933. Congress decides to seek a middle road. They decide to give truly free and fair capital markets a chance. The 1933 and 1934 securities acts, which, with some refinements (such as the 1940 Investment Advisors Act), still are the law today, are enacted: People with a lot of wealth cannot manipulate markets. It is illegal to lie to the markets. Folk cannot trade on inside information. And, the biggie for my purposes, companies must make lots of information, including, very importantly, audited accountings, public (on file with the SEC); so that people can understand the companies whose stocks and bonds they are buying.
Today, those accountings are online, along with a lot of other stuff (also mostly required in the 1930s), in the SEC’s EDGAR (Electronic Data Gathering, Analysis, and Retrieval) database, at www.sec.gov/edgar.shtml