A Senate investigation found “systemic and catastrophic failure” by the Securities and Exchange Commission in its regulation of Enron Corp. (ENRNQ), Monday’s Wall Street Journal reported.
In a far-reaching staff report and sharply worded letter Sunday to the SEC chairman, Harvey Pitt, the Senate Governmental Affairs Committee detailed how Enron’s years of deceptions escaped any detection by securities regulators, rating agencies and investment-bank analysts.
“Investors were left defenseless,” said the letter, which was signed by the committee chairman, Joseph Lieberman (D., Conn.), and its ranking Republican, Fred Thompson. The study found, for example, that the SEC failed to review any of Enron’s post-1997 annual reports, missing its best chance of finding red flags in Enron’s misleading descriptions of partnerships controlled by its chief financial officer and used to hide its debt.
“If the SEC had pressed Enron about those and other troubling disclosures when they first appeared in Enron’s 1999 annual report, some of the enormous losses suffered by workers and investors might have been prevented,” the senators wrote.
The report offers the most comprehensive evaluation to date of the failure to detect the Houston energy trader’s schemes both by public- and private-sector watchdogs. It covers the shortcomings of credit-reporting agencies and Wall Street analysts that have been widely reported in recent weeks. But it is the SEC that comes in for the most blistering criticism, and the report takes a grim view of today’s system of market regulation.
With Enron, and the many corporate collapses that have followed, “we have witnessed a fundamental breakdown in this system,” the 127-page report said. The SEC cannot simply rely on company auditors and boards of directors to assume most of the responsibility for ensuring honest public disclosure, it said.
“Although our investigation found no willful malfeasance by the Commission with respect to Enron, Committee staff has concluded that the Commission’s largely hands-off approach to the company combined with the failure of the auditors and board of directors to do their jobs allowed inaccurate and incomplete information to flood the market.” Throughout the 1990s, “the SEC had reason to question whether auditors and corporate boards were playing their appointed roles yet the Commission did little to adjust its own role to fill the gap.”
In a prepared statement Sunday, Mr. Pitt said he had not yet had a chance to read the full report. He said the commission would carefully consider its conclusions and is taking steps to improve corporate disclosures. “I appreciate that the committee staff recognizes our need for more resources both people and technology,” Mr. Pitt said. “Working together with the Congress and other governmental representatives, we are well under way toward taking and completing the tasks necessary to restore investor confidence.”
The report chronicles how the commission as far back as 1992 granted Enron permission to use easily manipulated “mark-to-market” accounting to record the values of its energy contracts, even in instances where no public markets existed from which to obtain data about such contracts’ fair market values. But the SEC never followed up to ensure that Enron was applying the method appropriately. According to former employees interviewed by the Senate investigators, Enron routinely abused the accounting technique, which allows companies to record estimates of future profit as current earnings.
The report criticizes the SEC for failing to act, even to this day, on an April 2000 application by Enron requesting exemption from regulations covering public utilities. In the absence of SEC action on the request, Enron, which has been operating under bankruptcy-court protection since December, has been permitted to claim the exemption anyway. The report concludes that Enron has been able to take advantage of the SEC’s delay in acting on the application and lack of coordination between the SEC and the Federal Energy Regulatory Commission to get regulatory benefits to which it may not have been entitled.