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.