Enron Enabled by Clinton SEC
Dan Frisa
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Thursday, January 24, 2002
Last week on the front page of the N.Y. Times, the Clinton-appointed former chairman of the S.E.C. put forth what many observers might view as a rather self-serving, me-thinks-he-doth-protest-too-much, defense of his tenure with regard to the roots of the Enron debacle.
Arthur Levitt, the former S.E.C. chairman, recalled his efforts in the 1990s to change the standards of the accounting industry, which were met – he says – by stiff opposition from more than a dozen United States Senators who threatened S.E.C. appropriations should he proceed with such reforms.
His theory, ostensibly, was, that more rigorous rules by which the accounting industry should be conducted, would have thereby prevented abuses such as those seemingly perpetrated by Arthur Anderson in the Enron case.
There are two functions provided to corporations by the bigger accounting firms, namely: consulting and accounting.
What many believe is an inherent conflict of interest, is that to ensure continued lucrative revenues from the "consulting” side of the business, accounting firms could be tempted to comprise their otherwise strict adherence to generally accepted accounting principles on the "accounting” side to curry continued favor with their clients.
The fact that reforms of these accounting practices did not occur, Levitt maintains, resulted in the rampant abuses by Arthur Anderson in the Enron case.
Sounds plausible as far as that goes, right?
Sure it does, as a general matter, and if that is all there was to the case it would certainly be worthwhile to explore. In fact why not release the names of those senators who engaged in such questionable behavior?
However, there is a far more important and pertinent factor, which much more directly led to the Enron excesses.
In 1996, the Congress – while I was a member – enacted amendments to the Investment Company Act of 1940, to impose greater investor protections on the mutual companies governed by the statute.
Enron vigorously sought provisions to enable its growing investment activities to be exempted from certain prohibitions in the law with regard to foreign investments and the shifting of debt from its books to the off-shore subsidiaries as well as from provisions preventing corporate officers from investing in partnerships related to the company.
At that time, I served as a member on the subcommittee of the House Commerce Committee with jurisdiction over this matter and, as a co-sponsor of the act, played an integral part in the drafting and enacting of this legislation.
I recall at the time that these requests from Enron seemed odd, and in direct conflict with our intent to provide greater investor protection by way of enhanced transparency – resulting in more informed investors – while enabling certain other valid flexibilities to the mutual fund industry, which performed extraordinarily well as a result. Returns in excess of 20 percent were almost commonplace – exceeding even the Standard and Poors 500 performance for nearly all of the time since.
We did not entertain the Enron proposals and did not include them in the reforms passed with our amendments to the Investment Company Act of 1940.
Undeterred, it now turns out, Enron then went directly to the S.E.C. to lobby for regulatory relief from that which they had been rebuffed by the Congress.
Incredibly, in 1997 the S.E.C. granted by agency order that which the Congress had denied in the 1996 legislation: the very ability to lawfully engage in the conduct that appears to have directly resulted in the recent collapse and largest bankruptcy of any company in U.S. history.
When questioned by the N.Y. Times for their article published yesterday, Arthur Levitt said "he had no recollection” of the exemption but admitted that it might have wound "up being determinative.”
I’ll say!
I guess it’s somewhat understandable that those who were in a position at that time to have prevented the Enron debacle, might point fingers today in an effort to absolve themselves from any blame for the mess.
But smoke and mirrors cannot – and must not – obscure the sad history that led to this dreadful abuse by Enron, aided and abetted by both an unfortunate change in the rules by the S.E.C., as well as an accounting firm more concerned with its own revenue than upholding its fiduciary responsibility to the investing public. |
