Enron exposed the flaws in American capitalism

When Enron, one of the world's leading electricity, natural gas, pulp and paper, and communications companies declared bankruptcy in the United States in 2001, it was a profound wake up call to further check on corporate governance.

What emerged became known as 'the Enron scandal' which revealed the predatory and corrupting side the American corporate system.

The subsequent collapse of the telecoms company Worldcom in 2002, which surpassed Enron to become the biggest bankruptcy in US history showed that the capitalist economic model had glaring flaws that needed to be fixed.

The twin scandals of Enron and Worldcom proved that these organisations were irresponsible at the highest level and their actions or lack of actions affected the lives of millions of Americans.

Kenneth Lay, the chairman and CEO of Enron was a person closely linked to the Republican party. He was one of America's highest-paid CEOs, earning a $42.4 million compensation package in 1999.

As events unfolded in Enron, Lay was indicted for fraud and lying but he died and never faced his trial.

How did things go so wrong in America's top elite companies?

An article on CNET reads, "What's surprising about WorldCom is the very basic nature of what happened," says Karen Nelson, a professor of accounting at Stanford Graduate School of Business. "Enron was all about complex partnerships and accounting for special-purpose entities. But what WorldCom did wrong is something that's taught in the first few weeks of a core financial-reporting class. That's why people are asking, given its basic nature and its magnitude, "How could it have been missed."

On July 1, WorldCom provided the Securies Exchange Commission with a statement detailing what the company knew to date about its accounting problems. The statement explained that in 2001 as well as the first quarter of 2002, WorldCom had taken line costs--mostly fees associated with its use of third-party network services and facilities--and wrongly booked them as capital expenditures.

Enron and Worldcom have gambled on their accounting.

Adam Smith, the proponent of the present model of capitalism and his metaphor of 'invisible hand' stated in "The Wealth of Nations" has to be reexamined.

Smith argues that in capitalism, an individual pursuing his own good tends also to promote the good of his community, through a principle that he called “the invisible hand” of the market.

Specifically, a free competitive market ensures that those goods and services perceived as most beneficial, efficient, or of highest quality will naturally be those that are most profitable. The mechanism for this, Smith saw as being the free price system.

Smith's theory does not achieve the Utopian dream when large business are driven by greed and exploitation of labour that tends to perpetuate without adequate enforcement rules for oversight.

Since deregulation and globalization are the current trends of the new capitalistic wave, corporate stockholders and investors would need to look beyond the glossy figures of corporate accounts while oversight authorities crackdown hard on suspect practices.