Bipartisan congressional investigators have blamed the Securities and Exchange Commission, stock analysts and credit rating agencies for “a systemic and arguably catastrophic failure” that contributed to the collapse of the Enron Corp.
The top Democratic and Republican members of the Senate Governmental Affairs Committee, chairman Joseph Lieberman (D-Conn.) and Sen. Fred Thompson (R-Tenn.), sent a letter and 127-page report to SEC chairman Harvey Pitt yesterday, castigating the SEC for missing a series of signals that should have warned of the imminent implosion of the now bankrupt energy-trading company.
As comprehensive as the report may have been, the warnings had a hollow ring, several reform advocates agreed.
“The last place Congress seems to want to look for villains is in the mirror,” said Barbara Roper, director of investor protection for the Consumer Federation of America. “The reality is that there may be other failures of policy on the part of the SEC, but the agency has been grossly underfunded for two decades and that is Congress’ fault,” she said.
The Senate investigation found that the SEC had failed to review any of Enron’s financial filings since 1997, had allowed the company to utilize an aggressive accounting strategy that let it inflate the value of long-term energy contracts and had missed important signals in the late 1990s when the company was changed from an energy company to an energy-trading company and when the size of the company exploded after 1995.
In the first official post-mortem on the collapse of what was once the nation’s seventh largest company, the Senate committee documented the failure of an array of public and private layers of protection, which contributed to what the two senators called a “crisis of confidence” in the nation’s financial markets.
“Not one of the watchdogs was there to prevent or warn of the impending disaster,” the report found, then highlighted the failures: the board of directors, the auditor Arthur Andersen, investment banking firms, credit rating agencies and the securities analysts. Pitt said the SEC “will carefully consider the report’s conclusions.”
Former SEC chairman Arthur Levitt has also pointed an accusing finger at Congress. In his new book, “Take on the Street,” Levitt named lawmakers who opposed securities regulators on key issues, including attempts to restrain the use of stock options, to establish auditor independence and to regulate directives. “None was a more formidable foe than Sen. Joe Lieberman,” he wrote. In 1994, Lieberman led the successful effort to stall the Federal Accounting Standards Board when it hoped to force companies to record stock options as expenses. He successfully passed a Senate resolution then that called on the FASB to drop its proposal.
Lieberman said critics of his role were “grossly unfair” and insisted yesterday that his quarrel is with the way accountants value the options. “I would argue that there is no indication that that arcane accounting question [stock options] was involved in the kind of abuses and fraud and illegalities that Enron was involved in,” Lieberman said.