BIS Speaks Out on Enron Affair

The Bank for International Settlements, the Swiss-based central bankers' central bank, yesterday blamed the collapse of energy trader Enron on a catastrophic failure of corporate governance.

In a sweeping condemnation of those involved in the scandal the BIS said: "The company's board of directors, the external auditor, stock analysts, credit rating agencies, creditors and investors jointly failed to critically assess how Enron's management achieved ostensibly superior earnings growth.

"In particular few asked hard questions about the nature of numerous off-balance sheet transactions, transactions which helped to hide mounting losses."

In a sharply worded analysis of the fall-out from the Enron affair, the BIS noted that financial markets reacted far more dramatically to the news that the auditors had shredded documents than to Enron's initial bankruptcy filing in December last year.

It said the bull market of the late 1990s had created a corporate culture in which "firms had an incentive to present financial reports that would inflate earnings expectations".

It added: "Auditing firms and stock analysts increasingly found their interests aligned with the companies aggressively managing their earnings."

The BIS said the Enron affair had damaged reputations and led to measures seeking to prevent a repetition but warned: "It remains to be seen whether the efforts thus far will be sufficient to fully reassure investors or to withstand the distortions that the next bull market will no doubt bring."

However, the bank remains concerned that share prices are still overvalued. In its latest report the BIS warned: "Although financial markets responded more smoothly than many expected to a series of tests vulnerabilities remain."