Accounting in Crisis

A few years ago, it would hardly have seemed possible: The nation's attention, from the halls of Congress to main street, has been riveted on an accounting scandal, a subject so abstruse it rarely makes the front page. But as the tawdry chapters in the Enron (ENE ) fiasco unfold like some penny dreadful, with explosive revelations of hidden partnerships, shredded documents, and shocking conflicts of interest, it's clear that the fall of Houston-based Enron is in a class by itself.

Everything about this debacle is huge: a $50 billion bankruptcy, $32 billion lost in market cap, and employee retirement accounts drained of more than $1 billion. The lapses and conflicts on the part of Enron's auditor Arthur Andersen are equally glaring. Andersen had been Enron's outside auditor since the 1980s, but in the mid-1990s, the firm was given another assignment: to conduct Enron's internal audits as well. In effect, the firm was working on the accounting systems and controls with one hand and attesting to the numbers they produced with the other. And the ties went even deeper: Enron's own in-house financial team was dominated by former Andersen partners. Then, as the firm began its last, rapid plunge toward bankruptcy, the Andersen auditors began frantically tossing records of their work into the shredder.