The arrogance of trading and complicity of accounting create a dilemma for American business. Companies can impose and enforce controls likely to shrink the potential for quick profits. Or they can let governments do the job. Of the two choices, self-enforcement is the less costly.
Enron Corp., bankrupt and disgraced, has discredited the practice of trading. Arthur Andersen, the Enron auditor newly convicted of obstructing justice, has stained the practice of accounting. The companies might not survive. The functions they represent must.
Functions needed
Business, the energy business no less than any other, needs trading. It needs a mechanism for managing risks and cash flows and for transmitting market signals. Business obviously needs accounting as well. It needs a mechanism for, among other things, maintaining financial discipline and upholding fiduciary responsibility.
Trading and accounting, however, should be two functions among many in business. In recent years, trading has become an end unto itself. And it appears to have co-opted accounting. It thus has escaped the control essential to business self-governance.
Some of the reason for accounting's submission is that modern trading occurs with such speed and complexity that accounting simply can't keep up. Some of the reason also must be that regulatory oversight lags behind events for the same reason. And maybe accounting has become so integrated with operations at some companies that the function has lost the independence it needs in order to exercise effective business control.
Then there's greed. Trading thrives on it. Aggressive traders, corporate and individual, can make a lot of money very quickly by making nothing but deals. In the dizzying quantities characteristic of successful trading operations, money has a way of blurring the lines that define propriety and legality. Traders are human, accountants no less so. All humans submit to greed, some more readily and thoroughly than others.
Hence Enron. Hence Arthur Andersen.
And hence Barings Bank of London; Orange County, Calif.; Metallgesellschaft of Germany; and others brought low in the past decade by trading gone amok. A current example is Allfirst Financial, the US subsidiary of an Irish bank where a 37-year-old currency trader recently was indicted for fraud on suspicion that he camouflaged $691 million in trading losses.
Can the need be any clearer for tighter business control over trading of all kinds? Where are the accountants? Where are their managers?
"We were all driven to make profits, profits, and more profits," writes Nick Leeson, the Singapore currency specialist who broke Barings Bank in 1995 with more than $1 billion in trading losses, in his autobiography Rogue Trader. The culture he describes matches Enron's. The only difference is that Leeson traded money, and Enron traded energy. To traders, that's no difference at all.
Last February, when suspicion about activity similar to Leeson's by John Rusnak of Allfirst Financial came to light, Leeson told BBC Television: "The checks that should be in place to stop this sort of thing happening are extremely basic, and people haven't been doing them."
They apparently didn't do them at Enron, either.
A culture that rewards only profits, profits, and more profits. Bright, young hustlers craving rewards, rewards, and more rewards. The absence of basic checks. Companies destroyed. There's a pattern here. It's not a healthy one.
Business should make more than clever trades. It should produce raw materials and manufacture the goods that people want and need. Nonproductive but essential parts of business-such as accounting and trading-should serve the productive parts. The quick-money orientation of modern business has reversed this relationship. That needs to change.
Trading punished
Investors seem to know this. Since Enron's collapse, the stock market has punished energy companies with major trading operations. To some extent, it's guilt by association. But no one wants to ride another Enron into ruin. And no one can yet be sure that trading profits are all they're reported to be.
So commodity traders who once soared on gilded wings over lesser forms of business life now bow to stock traders exercising prudence unseen since before the dot-com craze. Confidence doesn't radiate from this irony. Business has much to fix. Repair needs to come from the top, even above the accountants.
