At the very least, How Companies Lie: Why Enron is Just the Tip of the Iceberg should win an award for being first to market following the collapse of Enron, WorldCom and so many other companies. Authors A. Larry Elliott and Richard J. Schroth have written a pithy book that does not tell us much about the collapse of Enron that we didn’t already know. Yet the book does us a service by standing firm in its conviction that this seemingly endless rash of corporate greed and stupidity at the highest levels is inexcusable and requires major structural changes in the business of business.

Elliott and Schroth are consultants who are intimately familiar with the world of Fortune 500 companies. They believe that a new management science, one not taught at business schools, arose over the past decade as a result of the booming economy: “managed mendacity.” The authors explain their term: “Lies and deception help the inner circle achieve personal goals of greed and cover up their incompetence as executives.” And they argue that managed mendacity can be found in virtually every industry and every business. “The same processes are in play whether books are being cooked, tobacco executives are testifying that nicotine is not addictive, airlines are telling you that flights are really on time and that security is being improved, or Ford is telling you that those Explorers are safe…”

Elliott and Schroth are firm in their conviction that the executives running companies that have failed should not have been in charge. The authors tell us that these men (and it is interesting that virtually all are men) were simply playing a game: “Gamesmanship has replaced business management competence as executives and their boards have focused on managing the stock first, the business second and strategic value last.” We have come full circle back to Michael Maccoby’s Gamesman of a generation ago, only the 1990s version seems to have no grounding in morals or ethics.

The authors rightly take boards of directors to the woodshed, calling them an “underperforming asset” and pointing out that “very few people can tell you exactly how a board adds value to the corporation.” It is the board that should provide oversight and review of all corporate practices and hold executives accountable. The always-prescient Peter Drucker wrote back in 1954: “A dishonest chief executive can fool an outside board, though not for long if its members demand the information they should be getting and ask the questions they should be asking.” Elliott and Schroth argue that “boards should be one of the prime intellectual capital assets of the corporation, and their insight into the best practices in business should set a high standard for conduct at the executive level.”

The authors argue for much greater powers for the SEC to dig into a corporation’s books and its accounting practices. They seem to place a great deal of stock in the ability of the SEC to gather real-time information about corporations: “Technology has the power to provide real-time detection of potentially fraudulent transactions.” Recent news about the SEC suggests that the Commission as currently structured under Harvey Pitt has neither the capability nor the commitment to take on such a task, however.

The most blistering chapter is entitled “Words Without Foundation,” in which the authors ask: “Do we have any reason to believe that corporations conduct their business with candor and honesty, and provide accurate reporting to their shareholders?” Their answer, sadly, is no. The burden, they argue, will have to be on investors to display a healthy, even aggressive, sense of skepticism toward all financial reports released by publicly-traded companies.

The first question investors should ask is “Have these numbers been verified, or did you just make this up for me?” The assumption must be that even the most reputable companies have somehow “dressed up” their numbers, with help from their accountants, to make themselves look better. An amusing but telling suggestion the authors make is that companies affix stickers on their financial reports with language similar to that found on right-hand mirrors on cars in the U.S: “Warning: This corporation may appear to be more capable than it is.”

The authors focus on five areas where they believe any hope for reform must lie:

  • Accurate and verified communications
  • Full disclosure of conflicts of interest
  • Real-time accounting and real-time reporting
  • Straightforward accounting rules
  • Real accountability by executives.

They point out where weaknesses lie and offer suggestions for how to improve performance in each area. While we may argue with their prescriptions, Elliott and Schroth succeed in jump-starting the debate over how to avoid Enrons, WorldComs and other collapses in the future.

We need more than talk, however. We need a new generation of business leaders who as executives, directors, analysts and auditors, understand that their responsibilities go far beyond themselves and their bank accounts. The question is not how companies lie; it is why their executives lie. Integrity, responsibility, trustworthiness and a strong sense of ethics cannot be legislated. Without these characteristics in the boardrooms, executive suites, law firms, banks, brokerages and accounting firms, the authors will be proven right – that Enron is only the tip of the iceberg.