Editorial: Take a hard look at fall of Enron

Friday, Jan. 18, 2002 | 10:04 a.m.

The disclosures just keep coming regarding Enron's spectacular fall, a collapse that has left the nation's seventh-largest company lying in ruins. This week it was revealed that Kenneth Lay, Enron's chairman, had been warned in August about the dangers posed by the company's accounting practices, which had kept hundreds of millions of dollars in debt off the company's books. When that practice ultimately was made public, and Enron had to report a $638 million third-quarter loss last year, investor confidence suffered a meltdown. Stock in Enron that once traded at $90 a share in the fall of 2000 plummeted following the company's admission. Trades today on the over-the-counter market for Enron, which is in bankruptcy, are well under $1 a share.

The Justice Department is investigating whether any laws were broken, and Congress itself is launching probes. Enron had close ties to the White House, but so far there has been no evidence that the Bush administration tried to help rescue Enron. The fallout from Enron's failure will spread to the accounting profession, as government investigators look into the cozy relationship that sometimes exists between auditors and the companies that they're supposed to be giving unvarnished advice to. In this case, accounting giant Arthur Andersen was aware of what was going on, yet didn't tell Enron to hit the brakes.

One of the most infuriating episodes was the way that Enron executives misled their employees at a time when they knew the company was going down the drain. For instance, in an Aug. 14 memo sent to all Enron employees, Lay encouraged the employees to hang in there. "I want to assure you that I have never felt better about the prospects for the company," Lay wrote. "Our performance has never been stronger; our business model has never been more robust; our growth has never been more certain ..."

In a follow-up memo to Enron workers, Lay mentioned that he would work hard to restore investor confidence. "This should result in a significantly higher price," Lay wrote on Aug. 27. As Rep. Henry Waxman, D-Calif., noted in a recent letter to Lay asking about the e-mails to the employees, by the time the second encouraging e-mail was written -- when the stock price was $37 a share -- Lay at that point already had sold $40 million of his Enron stock during 2001.

Adding insult to injury, on Oct. 17 Enron implemented a so-called "lock-down" that prevented employees participating in Enron's 401(k) plan from selling their company stock. The lock-down came while Enron switched administrators for its 401(k) program. This is a situation where the company should have postponed the transition in order to allow employees the option of ridding themselves of the depressed stock. Enron executives had enough inside information in advance to know that they should cash out, but their employees had to watch much of their retirement compensation disappear before their eyes.

At the very least, this sad episode should serve as a wake-up call for every employee in the country who is contributing to a 401(k) retirement fund, especially one that involves company stock. Employees should find out what kind of restrictions apply to their individual plans. And while companies often encourage their employees to buy company stock, the Enron episode reveals that employees should diversify themselves. Loyalty cuts both ways, and the Enron debacle certainly will make employees leery of loading up on their employer's stock as a gesture of "corporate patriotism." In addition, the federal government should take a close look at creating more protections for employees with 401(k) retirement plans so that they're not put in a position of being forced to hold on to stock under unreasonable conditions.