AIG vs. Enron

When reading this week’s case, I could not help but notice the similarity between the downfall of AIG and the collapse of Enron from last week. Enron had, in my opinion, a poor business model to begin with as was depicted by its expansion after expansion without depth, whereas AIG was a substantial business. With this in mind, something must have been alike between the companies in order for them to crash in similar manners. I found many parallels in the reasons for their demise: secretive accounting being the most striking similarity. Both companies were revealed to have used borderline illegal accounting measures once under investigation: strategic accounting “window-dressed” financial statements; off-balance sheet entries should have been public information; lenient auditors were hired and “missed” the loopholes used. These measures in turn increased the businesses’ credit ratings. But without a stable foundation, even a company that can appear strong and that can make its stakeholders believe that it is strong, growth will not save a company.

Although ultimately accounting practices were a significant factor in the collapse of both companies’, I do not think that this type of accounting is not the fault of the businesses’ accountants. This is the decision of management. Corporate executives for both AIG and Enron made a conscious ethical decision to remove certain projects from balance sheets, to categorize cancelled projects as assets, to alter truthful financial statements. This is the “social responsibility” that I believe a person working for a company does have.

Are examples such as the downfall of AIG and Enron, sending a message to other companies, the government, and to society itself? The articles both screamed to me that you can’t get away with “sneaky” accounting. Other companies could too be doing the same thing and just haven’t been investigated yet. Companies should ensure reliable accounting in order to keep their business sound; people should do the same. There are many that attempt, for example, tax evasion or insurance fraud that get away with it for a while, but I always hear of these stories ending badly: in jail time, debt, etc. Additionally, in the same way as governments should ensure that companies are not becoming “oligarchies”, as described in Johnson and Kwak’s Bankers, they should also monitor extremely large, quickly emerging, companies to ensure that they are genuine.

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11 Responses to AIG vs. Enron

  1. mcardinute says:

    It is pretty sick to read AIG and Enron’s ethics code after the collapse of both companies. I agree with your argument to a certain extent that we can’t solely blame the employees for these sneaky business tactics, but both AIG and Enron’s share the concept of Integrity in it’s code of conduct. This does not merely apply to the corporate governance; but the employees have to abide by these rules as well. If each employee followed the code of conduct: integrity then each employee that was told to fix the financial statements in favor of the company should pack their belongings up and walk out immediately. Right?

  2. aml028 says:

    I would hope companies will learn from the collapse of companies like Enron and AIG. If companies like Enron and AIG get caught with fraud financial reports than any company could get caught. Enron had very complicated financial statements and it took people years to figure out their finacial statements. I feel like a smaller and less complicated company would be much easier to figure out. If companies don’t learn from the past then it just shows how desperate people are to make an extra dollar.

  3. Jordi says:

    “I do not think that this type of accounting is not the fault of the businesses’ accountants.”
    Did you mean a double negative here? So, it is business accountants? Or is it management?

    • Re-reading my post, I do not know what I was thinking in writing that sentence! I believe that it is primarily management’s fault for asking accountants to organize the company’s financial statements in the secretive manner that they did. Accountants, unless extremely moral, would follow orders to keep their job. So I think what I was meaning to say was that it is management’s responsibility to ensure ethics among their accountants. The accountants themselves, if they feel as though what they are being asked to do is unethical, should speak up. I do understand why they would not in fear of losing their jobs, however. Had the accountants been taking money for themselves from the company – that is their responsibility. But they were only following unethical orders from their superiors. The managers were definetely to blame for this aspect the case of Enron and AIG.

  4. Jordi says:

    Different comment: You say in the first paragraph that since they both collapsed, there must be a similarity. Not necessarily! Similar effects can have different causes. That is why you need to specify the how. You go on to address the how with the role of secretive accounting. Maybe the title can be more interesting, then.

  5. awhigbee says:

    I think the most relevant question about “sneaky accounting” is how much can you get away with? It is definitely a bad thing that these firms both can convey this question, and probably AIG more than Enron. Even in the “Bankers” readings, the real question is what do we do next if someone else needs to be bailed out? Can we as a country afford to continue bailing out banks that took risks they should have known were poor choices?

    • Hi Alex, I think you are right in that we absolutely can not afford to continue bailing out banks that made poor risk decisions. America is in enought debt already! I also think that “sneaky accounting” may go unnoticed for a certain point of time as you were reffering to with your question about how much a company can get away with. But won’t that always end badly? You can get away with more and more until you eventually get caught, as was the case with Enron and AIG. I think it is human nature to continue to push the envelope and I don’t see that changing.

  6. katiebaum13 says:

    After reading the AIG case I agreed and still do with you about the idea that “sneaky” accounting did play a major role in the fall of AIG. But after yesterday’s class and doing Mackenzie’s exercise with ranking the major causes for the fall of AIG, it made me think more about it and realize that although the accounting issue did play a role in AIG’s collapse, it was more of the internal factors that lead to it. I believe that one the main causes was poor financial controls and risk management practices. Another reason I feel was a played a major role in the downfall of the company was the changes to and lack of enforcement regulations. These regulations enabled AIG to do what they did when it came to their accounting and the books, so I feel that the lack of regulations might have played a bigger role.

  7. mnickels says:

    I agree with Katie in that some of the main causes of AIG’s collapse were poor financial controls and lack of regulations. I think it is the company’s job to follow the rules and make sure their employees are doing their jobs correctly and enforcement agencies can’t be counted on at all times to regulate every little thing. We must rely on them to catch companies in their bad practices but I think it says a lot about a company sometimes in how they abuse their power, size, or standing in the industry. If we can’t trust high-profile, industry leading companies, then who can we trust in the business world these days? Will people finally learn from the mistakes of companies in the past or will they keep trying to defy regulations and laws until they themselves get taken down?

  8. Pingback: Arguments I’m Tired of Hearing; Episode #389567 « Marty Andrade

  9. Jordi says:

    He, there is a pingback for this one! THat means another blog linked to this post!

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