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ENRON EXPERTS

Business Practices

Study: Corporate Crime Doesn’t Pay

“Enron would do anything to close the deal — coerce clients and employees, reward risky and inappropriate behavior,” says Mel Fugate, assistant professor of management and organization in SMU’s Cox School of Business. “These norms were supported and intensified by the compensation practices.”

Even before Enron’s collapse, the decade of the 1990s saw a rapid increase in earnings restatement. With limited manpower, the SEC was unable to investigate every case for corporate malfeasance. One important study, however, found that when companies must restate their earnings, the market penalizes them.

“Once a company is discovered to commit a GAAP (Generally Accepted Accounting Principles) violation, a board reacts decisively to dismiss management,” says Hemang Desai, associate professor of accounting in SMU’s Cox School of Business and co-author of the study “Market Penalties on Firms and Their Management for Aggressive Accounting” with Chris Hogan of SMU and Mike Wilkins of Texas A&M University. “Further, the labor market imposes severe penalties on these managers.”

Studying corporate America from 1997-98, they tracked senior managers under whose management companies were forced to issue earnings restatements or corrections. Of those companies, 60 percent dismissed at least one of their top managers. Even more significant, of those dismissed managers, 90 percent failed to find a comparable job four years later. Contact either Fugate or Desai for other angles:

  • Executive pay
  • Cultural norms that bred Enron
  • GAAP reforms
  • SEC investigations
  • Organizational change

Enron’s Tax Shelters Ruled Legal

“Most people don’t know that other big companies have adopted the same tax shelters used by Enron that the courts have ruled okay,” says Christopher Hanna, SMU law professor. “Andrew Fastow’s Star Wars transactions raised a lot of eyebrows, but nobody to this day has found them to be illegal.”

Hanna investigated Enron’s taxes back to 1985, making him one of the few people in the world who understands the labyrinth of tax shelters used by the nation’s seventh largest corporation to escape paying federal taxes. A recognized tax specialist, Hanna was the only outside consultant to the U.S. Joint Congressional Committee on Taxation. Hanna can explore other angles to the Enron trial:

  • Chief Accounting Officer Richard Causey’s paper trail
  • IRS reforms
  • GAAP reforms
  • The Congressional investigation of Enron taxes