Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 220-225)

SIR JOHN BOURN KCB, DR COLIN REEVES CBE, MR RICHARD FLECK AND MR JON GRANT

TUESDAY 25 JUNE 2002

Chairman

  220. But you do not have sympathy with Bentham's comments?
  (Sir John Bourn) No, I do not, but I can understand why they were made.

  221. Sir John, finally, if I could just ask maybe all of you, we mentioned Enron at the beginning and you mentioned the Enron culture, in one of your answers, and also the role of non-execs. The issue of corporate governance is extremely important. But maybe if I could ask, if we could translate Enron over here, as a company, and look at it, and it was a company which experienced phenomenal growth in the nineties, annual turnover grew from $7.9 billion, in 1993, to $100 billion seven years later, in 2000; that was accompanied by steady, positive earnings and a share price that ultimately stood at seventy times earnings. Now, on the board and on the audit committee, the chairman was a professor of accountancy at the local university, there was a local judge on the board, and a ex-British Cabinet Minister on that audit board, so I would assume you would take great comfort from that. But when the house of cards was blown down, it was revealed that the profits were overstated by $586 billion, the debt was understated by $2.6 billion, there were $63 billion of liabilities, and the share price, which traded in August 2000 at $90, in January 2002 was $1. Now, if I ask you to put yourselves in a position as non-execs and look at the issue of corporate governance, would any of you have been sniffing the air for some foul smell before 15 January2002, when the house of cards blew down?
  (Sir John Bourn) You put it to us like that, and the answer is, yes, we would.

  222. And where would you have sniffed?
  (Sir John Bourn) Two areas that I would have sniffed. I just would not have believed that a company could actually have been that successful; so that would have made me suspicious. I certainly would have been very suspicious about these bodies, which were in some way connected but in other ways were not connected; because my general experience of organisational life is that if you have complexity you have confusion, and if you have confusion you have chaos, and if you have chaos you have crime. And I would have thought that that is very dicey and odd, and I would like to think that, if I had been a non-executive director of Enron, I would have asked for all this to be explained to me, so that I would have understood it, and if I had not understood it I would have wanted to say this and get out quickly, but to say it, as to why I was going.
  (Mr Fleck) Shall I comment, just briefly, from a different perspective. I think, if you are a non-executive director of a high-flying company, it is incumbent upon you to understand why it is high-flying; and if there were at the time also those who were calling into question the substance of that, as there were two years beforehand, I would have been looking to be provided with analysts' reports and comments.

  223. It was Fortune magazine that was highlighting that two years beforehand.
  (Mr Fleck) And Barrons, about two years beforehand, wrote a very perceptive analysis of Enron and commented on its lack of substance. And I think, if you are a non-executive director of a high-flying company, bluntly, Sir, it is incumbent on you to be sensitive to the validity of that success and to look at what third parties are looking at, as well; and the Barrons article is interesting, in the amount of information that they deduced from the available published information, and their intelligent analysis of it, which was very prescient.
  (Mr Grant) I think, if I could add just a few words, Richard Fleck has got the key; understanding the business is, I think, what non-executive directors need to do. It seems to me, from what I have read about Enron, that it was an extremely complex business. I do not know that I fully understand the way they earned their revenues, I do not really understand the way they structured themselves, and I do not know the way they made their profits; but I needed to have done, if I was a non-executive director, or indeed if I was an auditor. And so it is really getting to the heart of the business fundamentals that was key.

  224. What we have discovered, as we have been on our inquiries, is that a lot of businesses in the UK as well are very, very complex, too, and that is the issue that concerns us?
  (Dr Reeves) It was not just the complexity either, Chairman. I think Enron actually started off in manufacturing and distribution and changed into marketing energy products, and I just wonder, when it went into marketing, if it did not fully understand it as well; just to put a balance to the whole picture. And the second point I would make is that, you talked about the auditor relationship with the audit client today, there seems to be, in terms of the American situation, almost a deeper malaise round the financial markets; it is also important to look at the banking industry, insurance, pensions and financial analysts as well, as well as just the relationship between the auditor and the client.

  225. Yes; we have got advice on that. Sir John, we have wildly overrun our time, but it has been a fascinating morning for us, and it has been very, very helpful to us in our inquiry; and we would like to thank you and your colleagues for your presentation this morning, it was very worthwhile. Thank you.
  (Sir John Bourn) Thank you very much, Chairman, and if there is any further assistance that I and my colleagues can give you and your colleagues, please let us know and we shall be glad to do so.

  Chairman: Thank you; thank you, Sir John.





 
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