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Non-Tech : The ENRON Scandal -- Ignore unavailable to you. Want to Upgrade?

To: Raymond Duray who wrote (3684)	4/1/2002 10:16:03 PM
From: Mephisto	Read Replies (1) \| Respond to of 5185

Two Takes on Enron Editorial The Washington Post washingtonpost.com Monday, April 1, 2002; Page A14 LAST TUESDAY Alan Greenspan, the Fed chairman, traced the decline in the quality of financial reporting symbolized by Enron to a variety of subtle causes. Since the 1980s, tax and regulatory incentives have discouraged firms from paying out cash dividends, driving investors to value shares by focusing instead on inherently subjective earnings numbers. This focus in turn has created an incentive for managers to manipulate earnings in order to support their stock prices. More recently the Internet revolution generated talk of shifting business paradigms, so that no firm's future seemed predictable. Confused investors reacted wildly to small changes in earnings, further increasing managers' temptation to massage the numbers. The question is what follows from these observations. In Mr. Greenspan's view, these disturbing shifts are to a large extent self-correcting: The Internet bubble has burst, and since Enron's collapse firms have come to find that suspect financial reporting will draw swift punishment from the markets. Mr. Greenspan therefore cautions against excessive regulatory reaction to Enron, though he does endorse measures to make chief executives personally responsible for the quality of corporate reports and is wonderfully robust in calling for the cost of employee share options to be reflected in firms' earnings statements. The Fed chairman's caution is fair: The reaction to a scandal is often overreaction. Yet his hands-off attitude begs some serious questions. How can the market discipline firms for earnings manipulation when the whole point of such manipulation is that it happens secretly -- precisely to mislead the market? Isn't it likely that investors will unjustly dump entire categories of firms that raise alarm bells -- for example, all that have made acquisitions, because acquisitions are a notorious source of creative accounting -- rather than distinguishing between good firms and bad ones? And isn't this inimical to stock-market capitalism, in which investors need reliable information about companies in order to allocate scarce savings to the best ones? Curiously, just as Mr. Greenspan has sounded a cautionary note on reform, the leading exponent of caution is sounding more determined. On March 21 Harvey Pitt, chairman of the Securities and Exchange Commission, presented testimony in the Senate that represents a big improvement on his position at the start of the year. Mr. Pitt's premise, unlike Mr. Greenspan's, is that investors aren't getting good enough information about the companies they own and that reform is needed. Mr. Pitt is newly forthright about the Financial Accounting Standards Board, which writes accounting rules that too often reflect lobbying by accountants and corporate managers. "The SEC has historically abdicated far too much of its obligation," he said. "We plan to take a more active role to ensure that standards are implemented that benefit markets and investors." In particular, Mr. Pitt promised to strengthen the board's financial independence from auditing firms, and to push it toward " principle-based standards" -- in contrast, presumably, to lobbying-based ones. The SEC chairman also has moved in other ways. He now says that auditing firms must ban the practice of compensating audit partners according to the amount of consulting services sold to their clients -- a recommendation that falls short of banning the consulting outright but that is nonetheless useful. He is also explicit that his proposed new auditor-oversight body should be financially independent and secure so that it is not subject to blackmail from the auditors it is meant to discipline. Finally, Mr. Pitt has embraced the idea of making chief executives more responsible for accurate financial disclosure and wants to force company officers to report stock sales more promptly. This last idea would prevent chief executives from urging investors to buy their firms' stock while they dump it in secret. Mr. Pitt's activist outlook seems more appropriate to the Enron challenge than Mr. Greenspan's cautious one. But questions remain about Mr. Pitt's position. The SEC chairman continues to emphasize a reform agenda that he embraced before the Enron scandal, which would require firms to disclose more qualitative data to investors. This may be useful, but it must not distract from the more fundamental challenge of improving the disclosures' accuracy. The Enron scandal has drawn attention to the lax climate that pervades financial reporting: Accounting rules are marred by egregious loopholes, the oversight of auditors is weak and auditors have a strong financial incentive to tolerate dishonest numbers. The market cannot fix these problems, whatever Mr. Greenspan says. And disclosing more data is unhelpful until disclosures are honest, whatever Mr. Pitt's attachment to his pre-Enron agenda. © 2002 The Washington Post Company