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Thursday, 13 February, 2003, 23:28 GMT
Enron's trail of deception
After a year-long investigation, the US government has provided the most detailed explanation yet of the complex way in which Enron avoided paying any tax despite earning billions of dollars in declared profits.
Senate finance committee chairman Charles Grassley warned corporate lobbyists not to treat the findings as a "roadmap" for future evasion, and vowed to "shut down" the tax schemes outlined in the report.
But the detailed findings show how difficult this will be.
The Internal Revenue Service (IRS), the US tax authority, was simply overwhelmed by the complexity of the numerous schemes, and has still not been able to determine the tax liability of Enron for the last 5 years, or whether the schemes were actually illegal.
Rewarding the top
The clearest evidence of dubious practices in the report concerns the way the top executives were rewarded, even as the company was hurtling towards disaster.
The bulk of the increases were paid in stock options, which increased from $60m to $1bn in this period - explaining why Enron was so desperate to keep boosting its share price.
The salary of chairman Ken Lay rose from $15m to $168m in that period, and chief executive Jeffrey Skilling received a raise from $12m to $139m.
The report points out that the Board's compensation committee never questioned a single award.
Mr Lay received a number of other perks, including company loans amounting to $77m, life insurance, deferred payments, and annuities.
One executive also received a share of ownership of a corporate jet as a reward.
And the company seemed to have very few records of some of the transactions.
But only some of this can be dealt with by legislation - for example, by the ban on loans by companies to their executives in the Sarbanes-Oxley Act.
For the rest, it is the change in corporate practices and the growing anger of shareholders that will be required to alter the compensation culture.
'Money above common sense'
The culture of Enron, however, was one in which financial instruments were designed purely to change profits into losses, and taxes into tax shelters.
Senator Grassley says that the motive was "money above honesty.. money above professional and business ethics.. money above common sense."
The report points out that in the four years between l996 and 1999, Enron told shareholders it had made $2.3bn profit, while reporting $3bn in losses to the tax authorities.
This was accomplished through 12 complicated tax schemes, with exotic names such as Renegade, Condor, and Apache, which were designed to shift income into tax-sheltered categories through sham transactions with banks and others.
Joint Committee on Taxation Chief of Staff Lindy Paull said, "Enron deliberately and aggressively engaged in transactions that had little or no business purpose in order to obtain favourable tax and accounting treatment."
And most disturbing to the investigators was the collaboration of professional advisers - with lawyers, accountants and bankers prepared to pretend that schemes had one purpose for the tax authorities and another for the shareholders - maybe in order to collect the $87m in fees they earned from creating the tax shelters.
The tax department was even designated a profit centre, with the job of contributing the bottom line of higher reported earnings.
The report would like to increase the penalty to those individuals who collude with such arrangements, including the loss of professional privileges, if they know information is "incorrect, incomplete or inconsistent".
And it would like to make it the responsibility of the corporation to make a "detailed disclosure of any tax-motivated transactions in a timely basis" since it is "exceedingly difficult for the IRS to "identify and property evaluate these transactions."
But it points out that there always going to be differences between accounting standards and tax submissions.
Another proposal, much favoured by independent witnesses to the committee, would be to make public some parts of the corporate tax return, so that experts could compare the two submissions.
But the report's author, Lindy Paull, made it clear there was no "silver bullet" that would stop all such abuse - despite the eagerness of Senators to look for one.
Large corporations that were determined to use complexity to confuse shareholders and taxpayers would not necessarily be deterred by changes in the tax code, but would look for new loopholes.
So in the end, it may not be the law after all that will change company behaviour.
Rather, it could be the change in the corporate climate - which the publicity about Enron helped engender - that will do most to change corporate practice.
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