Search the Internet          Tips  Sites: Finance, Investment

Enron fell on lax control, not business model

Lax accounting, poor management and an overly aggressive trading culture brought down US energy giant Enron, not the group's pioneering business model, senior industry executives said on Tuesday.

"The Enron debacle was a failure of corporate governance and not of the business model. The Enron model is a sound model," Richard Giordano, the US-born chairman of British gas company BG, told an industry conference.

"There was a massive failure by the auditors who did not do their jobs."

Enron's "asset light" model -- trading in energy without owning power stations and gas fields -- has come under scrutiny in the wake of the company's spectacular demise late last year.

The asset light model is used by several other US energy companies moving into European energy markets, where the cost of buying power stations has rocketed since liberalisation started in the late 1990s.

Enron, whose accounts were audited by Arthur Andersen, went bankrupt after a financial crisis spiralled out of control amid allegations of insider trading and financial skulduggery.

US investigators have launched numerous probes into Enron's complex off-balance-sheet transactions, its relationship with Andersen and potential securities fraud.

Gary Cardone, president of Dynegy Europe, whose US parent company had tried to rescue Enron, told the conference big problems at the collapsed giant were the lack of risk controls and an overly aggressive incentive scheme for traders.

"The lack of risk controls was mind boggling. They were clearly trying to work the market," Cardone told delegates.

"(Enron) had an incentive scheme that was so aggressive and focused on the individual and not the team, so it is not surprising this happened. The Enron culture went way too far," he added.

He said Dynegy had hired many staff from Enron, but added they needed to be retrained in risk management techniques.

BG's Giordano said Enron, which also had large trading operations in Europe, had overstretched itself by expanding away from its traditional energy trading business into metals and commodities.

An internal Enron report earlier this month detailed how the off-balance-sheet partnerships run primarily by ousted chief financial officer Andrew Fastow and his trusted lieutenants were used to control earnings and hide debts.

YOU MAY ALSO WANT TO READ:
The Enron Saga
The Rediff Budget Special
Run-Up To The Budget