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Economics Infectious Greed or the Working of Capitalism? By Martin Eisenberg During the year 2002, corporate business and accounting practices came under close public, media and governmental scrutiny

The public debate was centered on allegations that corporate accounting firms used a financial process called “deferral modeling” to disguise the financial impact of changes in the company's tangible reserves. The accounting firms argued that their practices were fair and legal. Some allegations about deferral modeling came from Enron, Halliburton and World Com, while the rest came from others that were later found in the company's files, including from accounting firms at the University of Virginia and Bain Capital, and from Wall Street analysts at the firms of PricewaterhouseCoopers and Arthur Andersen. Most of the accounting scandals have been resolved, but the discussion of how the accounting firms handled the changes in the company's tangible reserves continued for several years. What did the accounting scandals reveal? The accounting scandals revealed that certain companies used accounting tricks at the expense of the stockholders, in order to show profitable growth without actually adding to the gross profits of the companies. The most important controversy centered on Enron, one of the most complex energy trading companies in America, whose traders were accused of fraud in manipulating the company's revenues in order to falsely show profits for all the companies in the group. Enron's accounting practices were so controversial because in order for them to be used, the revenue projections had to be based on actual transactions and data. For this to work, Enron had to assume that other companies' projections were right, and other companies, in turn, had to assume that Enron's revenue forecasts were correct. And since the projections themselves were in the form of an analysis, which Enron submitted to the S.E.C. rather than to independent experts, the company had to be willing to accept a certain level of risk in those projections. Enron, meanwhile, seemed to believe that it could use its technical accounting skills to manipulate the economic data to disguise its accounting problems. For its part, the accounting firms who worked with Enron, PwC, Ernst & Young and others were forced to agree on common principles when they created internal reports on the company. Enron's problem, said the accounting firms, was that it had not yet developed an effective internal system of tracking sales that could accurately identify whether the data it reported was in line with reality. For years, Enron seemed to rely on some combination of naïveté, good luck and good ideas. Eventually, however, it became apparent that Enron's accounting models were not only flawed, but often grossly distorted when compared to reality.

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