Interim Reporting Essay

WHAT CAUSED ENRON?:   A Capsule Social and Economic History of the 1990's
by John C. Coffee, Jr.*
      The sudden explosion of corporate accounting scandals and related financial irregularities that burst over the financial markets between late 2001 and the first half of 2002 - - e.g. Enron, WorldCom, Tyco, Adelphia and others - - raises an obvious question: why now?   What explains the sudden concentration of financial scandals at this moment in time?   Much commentary has rounded up the usual suspects and blamed the scandals on a decline in business morality, “infectious greed,”1 and similar subjective trends that cannot be reliably measured.   Unfortunately, this approach simply reasons backward: because there has been an increase in scandals, there must have been a decline in business morality.   An equally common theme has been to announce that the board of directors failed in all these cases.2   This may well have been true, but it does not supply an explanation of why a sudden surge of failures occurred.   Nor does it tell us what caused these boards to fail.   Was the board delinquent in ignoring obvious warning signals?   Or was it blinded by the gatekeepers and others on whom it necessarily relies?   Still a third reaction has been the more cynical response that a wave of recriminations, soul-searching and scapegoating necessarily follows in the aftermath of any market bubble’s collapse, and clearly a large frothy bubble did burst in 2000.3   As a historical matter, this may be true, but it again does not mean that normative criticisms are not justified.
      In contrast to all these responses, this brief comment will take a very different approach towards the issue of causation.   Without defending any of these boards or applauding the current state of business morality, it will nonetheless suggest that the last year’s explosion of financial irregularity was the natural and logical consequence of trends and forces that have been developing for some time....