The general climate of suspicion following the Enron collapse may be more effective in combating corporate fraud than 'a thousand pages of government-enforced regulation', say professors at LSE's Centre for Analysis of Risk and Regulation, in an article published Monday 28 October in the magazine Risk&Regulation.
Professors Tim Besley, Christopher Hood and Michael Power examined the implications of the Enron collapse for risk management and regulation in both the private and the public sector. They argue that the collapse shows that reliance on even the most elaborate risk management systems may be unwise.
'Enron had a 'fully functioning' enterprise risk management system and even a chief risk officer,' commented Power. 'There is some desperation within the regulatory and professional communities in facing up to this fact.'
According to Besley: 'The sheer scale and nature of the Enron collapse, puts the expendability of corporations in a new light. One of the big implications may be a significant loss of faith in private institutions, particularly as models of best practice for the public sector.'
But the climate of suspicion generated by the collapse of Enron and other global firms may have a positive impact on the control of corporate fraud. The intense scrutiny of financial markets and the press have had corporate managers scrambling to check for funny accounting.
'We're often told that trust in institutions is declining in society, and that this is a bad thing' said Hood. 'But in this case a bit less trust would probably have been good. You could say that collapses like Enron are an alternative to regulation, and might even be good for capitalism. They send an effective message to investors and others, not to be so gullible and to look critically at information.'
Michael Power is PD Leake Professor of Accounting and CARR co-director. Tim Besley is a member of CARR, professor of economics and director of Suntory and Toyota International Centres for Economics and Related Disciplines at (STICERD) at LSE. Christopher Hood is a CARR programme director and Gladstone Professor of Government and Fellow of All Souls College, University of Oxford.
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'The Enron Effect' is published in Risk&Regulation, Issue no.4, Autumn 2002. Risk&Regulation (ISSN 1473-6004) is available in print and on-line, Analysis of risk and regulation If you wish to subscribe, please contact Sabrina Antâo, tel: 020 7849 4635.
Risk&Regulation is the biannual magazine of the ESRC Centre for Analysis of Risk and Regulation (CARR). The magazine contains articles by leading scholars in the fields of risk and regulation based at CARR and presents the latest research findings and commentary on risk and regulation related fields including managerial governance, financial control, utilities regulation, health, safety and the environment. Amongst other topics, the new issue contains articles about the reluctance of regulators and industry to put principles into practice in providing freedom of access to environmental information, and the dilemmas facing consumers in the shift from state to private pension provision.
The ESRC Centre for Analysis of Risk and Regulation is based at the London School of Economics and Political Science. CARR's work focuses on the comparative institutional settings of risk management and regulatory practices and is a multidisciplinary research centre with participation from social scientists working in accounting, economics, geography and environment, law, operational research, political science and sociology.
28 October 2002