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A Times Editorial
© St. Petersburg Times, published February 12, 2002
Blood is in the water in Washington as Congress encircles Enron. The public thrashing of company officers has begun, but Congress also needs to focus on institutional reforms that could keep a similar collapse from happening. Lawmakers' sanctimonious lectures accomplish little other than to divert attention from Washington's role in approving laws and regulatory changes that allowed Enron to operate outside the appropriate checks and balances of corporate activity.
Enron was plagued by insider deals and unethical accounting tricks that kept debt unreported. Beyond that, though, a report released earlier this month by a special investigative committee of Enron's board of directors describes a broader lack of accountability, both within the corporation and among the outside groups that should have provided oversight of Enron's affairs.
There are several steps the government should take to prevent future scandals:
Bar auditor conflicts.
The big auditing firms already have promised major changes in the way they do business. Most will no longer act as internal and external auditors for the same firm. Two of the three major accounting firms that still act as consultants will no longer sell many of those services to the same companies they audit. Putting distance between accountants and the companies they audit should increase public confidence in the auditors' judgments. Those restrictions should be imposed by the government and monitored by the U.S. Securities and Exchange Commission. Former SEC chairman Arthur Levitt attempted to enact such reforms but was rebuffed by the industry's strong lobbying efforts in Washington.
Increase disclosure.
The public needs more information about the financial relationships of executives and board members of publicly traded companies. Do executives have investments in corporate subsidiaries? Do board members have outside jobs with groups financed by the company? Are financial ties allowed to exist between board members, executives and employees? One problem found by the Enron board was that many in a position to blow the whistle were apparently compromised by their own sweetheart deals.
Tighten ethics rules.
Disclosure aside, companies need to build higher walls between their boards and senior management. In Enron's case, the board's own investigative panel faulted directors for not doing their job. While some information was kept from the board, the controls over management "were not adequate, and they were not adequately implemented," the board's investigative panel found. Even the best organizational checks mean nothing if board members lack the skills, time or independence to do their job. As Arthur Andersen, Enron's former auditor, showed, accountants cannot be left as the final backstop.
Set new standards.
The accounting industry's practice of self-policing should be ceded to the SEC. The public interest in the integrity of the markets is clear. Enron also exposed a fundamental weakness in accounting standards; one idea proposed by reformers is a process whereby auditors could alert the investing public to companies that push the accounting envelope. Tougher conduct codes also should apply to stock analysts and investment brokers.
The administration and Congress also are considering a range of ways to protect small investors whose portfolios are dominated by an individual stock. That could have blunted the losses of Enron employees who had company stock in their retirement plan. Another idea is to create a fund to reimburse shareholders who fall victim to corporate duplicity. Also, more regulation certainly is needed of the energy futures trading business.
Sure, kicking around Ken Lay and other former Enron executives may satisfy the blood lust back at home, but where was the concern in Congress for these reforms when Enron was flush a year or two ago? The public doesn't need politicians to add to the heat. Instead, it needs a clear, detailed and workable plan for preventing this from happening again.