James Chanos gave a compelling set of insights on the Enron debacle in 2002 in front of the Congress.

I would like to share a few observations about what happened:

First and foremost, no one should depend on Wall Street to identify and extricate investors from disastrous financial situations. There are too many conflicts of interest, all of them usually disclosed, but pervasive and important nevertheless. In addition, outside auditors are archeologists, not detectives. I can’t think of one major financial fraud in the United States in the last ten years that was uncovered by a major brokerage house analyst or an outside accounting firm. Almost every such fraud ultimately was unmasked by short sellers and/or financial journalists.

In addition, a company’s adherence to GAAP (generally accepted accounting principles), does not mean that the company’s earnings and financial position are not overstated. GAAP allows too much leeway in the use of estimates, forecasts and other inherently unknowable things to portray current results. In the hands of dishonest management (a rapidly growing subset in my opinion), GAAP can mislead far more than they inform! Further, I believe that certain aspects of GAAP, particularly accounting for stock options in the United States, are basically a fraud themselves. Such obvious accounting scams should be ended immediately without any interference by third parties.

James Chanos has established himself as a level headed and trustworthy investor, despite many Wall Street analysts’ negative view on short selling.