Conditions still ripe for ... another Enron?

By Carrie Johnson and Ben White
The Washington Post
February 12, 2006

Four years after the collapse of Enron spurred the most sweeping revisions in business regulation since the Great Depression, experts warn that the ingredients for a similar financial disaster remain. Despite new laws and regulations, companies still face enormous pressure to meet short-term financial goals, creating a powerful motive for accounting fraud. Outsized executive compensation grows by the year, offering another rich incentive to cook the books. And there is no certainty that Congress will continue to fund regulatory budgets at current levels.

But some things have changed since December 2001, when Enron's sudden descent into bankruptcy protection rocked investor confidence and left the markets reeling. Accountants face independent oversight for the first time in 70 years. Most corporate board members take their jobs far more seriously. Wall Street is somewhat less willing to accommodate clients' interests.

Nearly a dozen experts contacted by The Washington Post, including regulators, accountants, chief executives and board members, agreed to fill out a corporate governance report card on the eve of the Enron trial. The Houston energy trader's implosion exposed wide gaps in the safety net designed to protect shareholders. Former executives Kenneth Lay and Jeffrey Skilling are standing trial in Houston on fraud and conspiracy charges.

Accountants exploited loopholes to curry favor with companies that paid their fees. Executives collected more than $400 million in salary and bonuses but denied knowing about fraud on their watch. Investment bankers engaged in sham deals to help clients meet quarterly profit targets. Boards of directors waived conflicts-of-interest policies and turned a blind eye to overly aggressive business practices. And overwhelmed regulators failed to devote enough resources to combat fraud.

Congress passed the Sarbanes-Oxley Act in July 2002, imposing new duties on corporate executives, auditors and directors. The Securities and Exchange Commission (SEC) and the Justice Department spent tens of millions of dollars to root out malfeasance. Along the way, prosecutors won criminal convictions and decades-long prison terms for former leaders of Adelphia, Tyco and WorldCom.

But the government efforts may have backfired, inspiring a dangerous overconfidence among investors.

"I just don't think we are as far along as we need to be," said former SEC Chairman Harvey Pitt, who led the agency when it brought the biggest-ever fraud case against telecommunications company WorldCom in 2002. "Many shareholders may have been led to believe that [reforms] have cured all the problems and we're home free. Unfortunately, that's a prescription for disaster"...

Labels: Department of Justice, Enron, Tyco