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Enron fraud small change next to U.S. accounting gimmicks


Former Congressman, CPA, puts scandal in perspective

by Joseph J. DioGuardi
SPECIAL TO WORLD TRIBUNE.COM
Sunday, May 4, 2003

On May 1, federal prosecutors filed a superceding indictment against former Enron Chief Financial Officer Andrew Fastow, his wife, and other key executives in connection with the multibillon-dollar collapse of the Enron Corporation.

You do not have to be a Certified Public Accountant to see the merit of the charges against Fastow, but even many CPAs would be surprised to hear that the federal government is guilty of using fraudulent accounting gimmicks similar to those that brought down Enron. But since the accounting principles and financial governance mandated by U.S. securities laws enforced by the Securities and Exchange Commission do not apply to the books and budgets of our federal government, what is considered fraud for officers of publicly traded corporations is merely shrugged off as sloppy accounting or “off budget” in Washington.

Our federal government's ability to manipulate its accounts and budgets is similar in many ways to what Fastow did at Enron to cook the books and manufacture earnings.

The new indictments added to the seventy-eight counts of financial fraud and conspiracy outlined in the original indictment on October 31, 2002, The prior financial fraud centered on a series of off-balance-sheet partnerships referred to as "Special Purpose Entities," or SPEs—structures set up to make Enron appear financially more attractive to Wall Street investment analysts and credit rating agencies. To no one's surprise, the losses uncovered fell squarely on the backs of the shareholders.

In fact, Fastow may have cloned Enron's SPEs from the federal government's “Government Sponsored Enterprises,” or GSEs, which are also used to put major losses and debt off the federal government's books and budget in order to hide politically sensitive deficit spending. Although 1987 seems long ago, most of us vividly recall the Savings and Loan budget debacle, which then Comptroller General Charles Bowsher said was “a huge scandal that was allowed to grow because of the way this town [Washington] does business.”

Basically the government's accounting scam went something like this. Congress created a new GSE called the Resolution Trust Corporation (RTC). It initially borrowed $50 billion from the viable parts of the S&L industry. These funds were then used to cover depositors' losses from the bankrupt S&Ls. Since these government-backed RTC bonds were sold to the private sector, they were “off budget.” While the Treasury Department paid the interest on the bonds “on budget,” the payments from the RTC to cover the S&L losses through the Federal Savings and Loan Insurance Corporation were deemed to be government revenue, which reduced the deficit. This helped Congress to artificially meet politically sensitive deficit reduction targets while at the same time increasing the national debt by the cost of the bailout, which ultimately amounted to hundreds of billions of dollars. Similarly, the U.S. government has provided trillions of dollars of off-budget loan guarantees for everything from student loans to home mortgages. These only show up on the government's books when there is a default, which happens regularly, and the government then passes the tab on to us, the taxpayers.

Lately, the federal government has done an admirable job in cracking down on virtually all accounting fraud except its own. Conveniently, the federal government is exempt from the “generally accepted accounting principles” and practices mandated for all entities that issue stock and/or debt instruments to the public. Yet, ironically, the U.S. government is the largest public issuer of notes and bonds in the world.

After Enron's collapse came other huge accounting frauds at WorldCom, Qwest, and Adelphia. This prompted some journalists to look at the way our federal government accounts for its activities, and articles began to appear with titles such as “U.S. Government Is Unrivaled Champion at Cooking Books,” “Numbers and Double Standards,” “Congress Cooks Own Books and Calls Kettle Black,” and “Billions Lost by Feds.” I think it is ironic that members of Congress made such a public fuss over the way fraudulent accounting affected the shareholders of Enron, while they have spent little time, if any, thinking about the improvements that are sorely needed in the accounting principles and practices used by the federal government. And I have not even mentioned the mother of all off-balance-sheet liabilities: trillions for Social Security!

An article that appeared in The New York Times on October 14, 2002, entitled “Auditors Say U.S. Agencies Lose Track of Billions,” claims that the government's financial records are so badly flawed that virtually no federal agency (with the possible exception of the National Science Foundation) can be credibly audited. In 2000, auditors found $1.1 trillion in unsubstantiated balance adjustments in the Defense Department alone—which was a huge improvement over 1999, when the figure was $2.3 trillion! In a letter to Congress on October 7, 2000, Mitchell E. Daniels, Jr., Director of the Office of Management and Budget (OMB), said that the federal government's accounts would “never be tolerated in the private sector.”

As a CPA, former Congressman, shareholder, and taxpayer, I can only hope that the Enron debacle prompted by CFO Fastow's accounting shell game results in real systemic change, not only to protect the shareholders of all publicly traded corporations, but also to protect taxpayers and their children, whose futures depend on the “full faith and credit” of a financially viable and properly accountable federal government.

The writer is a CPA who practiced for twenty-two years at Arthur Andersen & Co. before serving in the U.S. House of Representatives from 1985 to 1989. He is chairman of Truth in Government (www.truthingovernment.org] is the author of Unaccountable Congress: It Doesn't Add Up. For additional information contact: jjd@truthingovernment.org

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