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Springfield Business Journal Articles
Sarah Delano Pavlik and Tom Pavlik write a monthly column on legal and business issues for the Springfield Business Journal.


Their columns will be added here each month after publication.
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The Enron collapse and other recent events vividly illustrate some basic principals that can be easy to forget, especially when times are good. Some of these lessons are:

Diversify. Any company can suffer a downturn or go bankrupt. Large companies are not immune from financial disaster. KMart, Global Crossing and Enron are only some of the recent examples. Do not trust your financial security to one company or one industry. Keep in mind that diversification cannot be achieved simply by investing in mutual funds. You must know the components of each mutual fund. Otherwise you could inadvertently invest in several mutual funds that are essentially the same.

You are responsible for your future. Do not blindly trust your advisors. Enron illustrates the fallibility of the "experts." Although Enron's finances were complicated and hidden to a certain extent, some advisors saw through the smoke and mirrors more than a year ago.

Question your advisors -- financial planners, accountants, lawyers. Yes, you pay these people so that you will not have to labor through the tedious details of the tax laws, securities prospectuses, federal regulations, etc. Nevertheless, you should understand the components of your tax return, the structure of any financial transaction in which you participate, and the compensation of your advisors.

Ask direct questions and expect direct answers. If your insurance agent recommends an annuity, it could be because an annuity is the correct product for you or it could be because annuities pay large commissions to the agents. Ask your agent what his or her commission is. If he or she will not tell you, then you have reason to be concerned. The hard sell, the "perfect product" and the "only solution" are all red flags.

Another warning sign is a confidentiality agreement. These have become common in tax and financial transactions, particularly with the large accounting firms. The firm proposes a transaction but makes you execute an agreement stating that you will not reveal the details of the transaction to anyone. The agreement gives the impression that the transaction is unique. Many times it is not. In addition, it keeps you from receiving a second opinion on the transaction.

As Enron only too clearly showed, a clean audit report is not foolproof. Again, the motivation of the auditors must be questioned. Arthur Anderson advised on the creation of the Enron partnerships and then audited the transactions. They were also receiving huge consulting fees from Enron. According to a Wall Street Journal report, Arthur Anderson regularly proposed revisions to Enron's financial statements. When Enron objected, Arthur Anderson determined that the proposed changes were not material, and, therefore, could be disregarded even though one such proposal would have reduced Enron's income by half for the year in question.

Every profession has dishonest members. Attorneys and accountants have been convicted of looting estates. A client recently hired our firm to pursue a claim against her previous attorney who stole the proceeds of her real estate sale. Do not sign documents without reading them and never sign blank tax forms or other legal documents.

A broker in Cleveland stole $125 million dollars from his clients over a fifteen year period by misdirecting the clients' brokerage statements to himself and mailing false statements to his clients. Apparently the investment companies who employed him were so pleased with the fees that he generated that they were not inclined to supervise his methods too closely. The broker was even part of the compliance team at his office, essentially supervising himself. He was allowed to keep a personal computer in his office, even though personal computers were prohibited.

Do not let your advisors intimidate you. If they do not address your questions with candor and respect, hire different advisors. You are paying for the advice. You should be comfortable with what you receive.

Likewise, expect candor and respect in the workplace. If something seems awry, discuss your concerns with your supervisor or with the legal department. If you are concerned with potential liability for yourself, consult your own attorney. Document your concerns and the steps you take to address them. Do not risk becoming the scapegoat.

Ultimately, Enron teaches us what we already knew. Don't be blinded by greed or laziness. Use your common sense and pay attention your financial affairs. Otherwise, you may have no one to blame but yourself.
Posted in: March, 2002
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