For years, when people asked me what aspects of business I wrote about, I used to answer with one word: Enron. And they got it. I didn’t have to explain about corporate governance, or audit, or accounting. That one word was enough.
It summed up precipitate corporate collapse, here one day and gone the next. It was one of the first times that reputation and its trashing had brought down such a well-known and respected global business in the form of Arthur Andersen. The actions of audit staff who had worked on Enron in shredding working papers in Houston, Texas meant that people as far away as Aberdeen or Sydney lost their jobs. Never mind that the US Department of Justice exonerated the firm as a whole later; the damage had been done.
So part of the answer is that people want to believe in corporate magic. People want to believe that someone has come up with a new way of making extraordinary amounts of money for themselves and the shareholders. And so they take it up and talk it up enthusiastically. And then, inevitably, the ideas collapse and people, eventually, in the US, go to jail.
People want to believe that bright young kids have new ideas that the wiser old folk probably don’t understand
Cataclysmic collapse
Such was the cataclysmic collapse that years of regulatory reform and innovation followed. And the assumption was that such a thing could never happen again. All that would be left would be artefacts of the morning after: ticket stubs for the film Enron: The Smartest Guys in the Room, and Enron the West-End and Broadway play. I even have a couple of Enron corporate plastic coffee mugs, sold off in ‘Enron: the auction of everything left in the office’.
But 20-odd years later, here we are again. This time it is the collapse of FTX, the cryptocurrency exchange. Some US$32bn of value has vanished, leaving only the bright-eyed young lad who told the world that he had the magic touch standing among the wreckage.
Accountants’ wisdom has been downgraded over the past couple of decades.
There was, CEO Sam Bankman-Fried said, a risk-managed algorithm that made them different. And everyone had pitched in – almost a million of them – including some of the most respected investment banks, pension funds and venture capitalists.
It now transpires that there was no internal audit function. There was no active accounting department, and only a small audit firm to provide assurance to the outside world.
And what do we have three years after FTX was founded? Well. As one of the most senior partners at one of the most respected of US law firms said the other day: ‘We have witnessed probably one of the most abrupt and difficult collapses in the history of corporate America and the history of the corporate entities around the world’.
Generation FTX
How has this happened once more? On the surface it is generational. The laid-back chap in charge of FTX was 30 years old. People want to believe that bright young kids have new ideas that the wiser old folk who have gone before probably don’t understand. The shaggy-haired kid was also a noisy cheerleader for a movement called ‘effective altruism’: the idea that this new way of doing business could made a stack of money that could be then given away to make the world a better place.
The progressive public rubbishing of accountants and auditors over the past 20 years has taken its toll
Where were the accountants?
But much of this ought to have been stopped in its tracks by accountants. They should be standing up and saying the business model and the systems to back it up make no sense. And often they are. But their wisdom has been downgraded over the past couple of decades. If someone on the outside had said that FTX ought to have an internal audit function, they would have been laughed at.
Since the days of Enron, the attacks on auditors and accountants have been pretty relentless, some of them justified. But the progressive public rubbishing of accountants and auditors over the past 20 years has taken its toll. So even if people do say the old things, like ‘look at the figures and you will see they don’t work’, people don’t take too much notice. And over the years the role of the accountant as someone who speaks truth to corporate power has been diminished.
The result is yet another daft corporate caper that will go down in business history and will, for a while, generate calls for reform. But unless those reforms see a strengthening of the power and influence of those who understand the figures and what they mean, we will be back here again. And it may not be after as long a time as the two decades since Enron.
