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Shreds of Evidence
Enron does an Andersen . . . and I'll keep up the criticism.


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Larry Kudlow

Just when you think the worst of the Enron blow-up has come to light, new revelations make an ugly story even uglier. This time it’s a sordid tale of Enron document shredding, as relayed by former executive Maureen Castaneda. She told ABC News that employees were shredding documents as recently as last week. In terms of federal prosecution, this is not a smoking gun — it’s a smoking Daisy Cutter.

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Enron is under investigation by the SEC and the Justice Department for a number of book-cooking actions that include: the false statement of profits, the fraudulent accounting of special-investment partnerships, an apparent case of insider trading, and a number of other corporate-governance related abuses.

Up to now, document shredding had been the sole realm of Arthur Andersen, Enron’s former accountant. In a clear case of obstruction of justice, the top-five auditing firm continued its shredding operations, despite the fact that it too was under government investigatory scrutiny.

That the two firms both engaged in shredding leaves open the strong possibility of collusion and conspiracy in their law-breaking activities. Pathetically, they have been pointing fingers at each other. Enron claims that they couldn’t have cooked the books because Arthur Andersen signed off on the accounting. Arthur Andersen retorts that it was Enron’s business-plan-gone-bad that created the problem.

All this is reminiscent of an old Soviet Union adage: “You pretend to work, and we pretend to pay.”

In any event, the Enron story has cast a pall over both corporate and accounting credibility. The widespread abuses of both firms have surely blocked the stock-market rally and put investor action on hold until, hopefully, the SEC and the Justice Department restore accounting and behavioral law and order.

The Enron story is particularly poignant to me since I served as a paid economic consultant to the firm, which had subscribed to my economic research consulting firm (Kudlow & Co.) for an annual fee of $20,000. Attracted by the personable Kenneth Lay, Enron CEO, I participated in a meeting of Enron’s outside advisory board at their Houston headquarters last May, and also spoke at an Enron conference in Beaver Creek, Colorado, last August. My compensation was $15,000 for each event — standard payments in my business. At the time, the firm was already in turmoil and slipping down the bankruptcy slope. None of this came up at the meetings.

Does any of this compromise my current criticism of Enron? Should I recuse myself from the whole discussion of the Enron/Arthur Andersen debacle? Is there some sort of conflict of interest? Certainly not. I did what I did with that company because that’s the business that I am in. That’s how I make my living.

All that said, recent evidence shows clearly that Enron betrayed my trust. Just as, I might add, Enron and Mr. Lay have betrayed the trust of a large number of political allies from President George W. Bush right on down through numerous senators, congressman, governors, and various local officials. There are a number of Enron relationships that won’t make it to the shredder — nor should they. What we embraced was the free-market, but we were apparently left holding a lawbreaker.

Financial accounting, bookkeeping, and stock-market abuses of the kind at least circumstantially attributed to Enron cannot and must not be overlooked. This is especially true for free-market conservatives like myself who are generally pro-business. But being pro-business does not include condoning illegal actions and other abuses which, if left unattended, would bring down the very free-market capitalist system that we cherish. This system is greater than any of its individual parts — particularly those individuals whose recalcitrant behavior threatens to destroy the very system that has given us so much bounty.

In many respects, it is precisely those of us who have had a business relationship with Mr. Lay and Enron who are most forcefully obligated to speak out against the free-market injustices he and the company have wrought. Rather than confessing to a sin, those who have had above-board dealings with Enron should get vocal and connect to a virtue. If a few more people had sought virtue in the recent past, the abuses to our system by Enron and Arthur Andersen would not have occurred in the first place.



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