As chairman of the Securities and Exchange Commission from 1993 to 2001, Arthur Levitt warned that inadequate disclosure and the conflicts of interest entangling Corporate America with its auditors and analysts could ultimately damage confidence in the capital markets. It’s fair to say that during this period, the SEC and finance executives viewed each other as adversaries more than allies. Yet with the passage of time, Levitt has come to believe that, going forward, finance executives will play a crucial role in promoting and maintaining accuracy and transparency in financial reporting—the cornerstone of the U.S. stock market. He explained why in a speech that he gave to an audience of finance executives at the CFO Rising conference in Tampa this past March.
Three years and one week after the peak of the bull market, it’s hard to conceive of how much distance we’ve traveled.
On March 10, 2000, Nasdaq was at 5,048. Today it’s a little over 1,200. Three years ago the dot-com bubble had not entirely burst. Accounting firms bragged in advertisements about their aggressive consulting services, as their lobbyists fought ferociously to preserve their ability to offer those services. Now they are running full-page ads, like the recent one from PricewaterhouseCoopers, declaring that Corporate America has entered a new era of transparency. Hot-shot analysts were doling out millions in initial public offerings. Corporate governance was a topic best left to academics. Foreign policy ranked almost dead last on a list of America’s top concerns. Enron was trading in the neighborhood of $80 per share. And for the previous five years, Fortune magazine had touted the company as the most innovative in America. Little did we know that its most noteworthy innovations were not being done in their business, but in their books.
Enron’s fall brings to mind another massive bankruptcy. The company I refer to was one of the largest enterprises in the nation, and it collapsed under the weight of its multilayered, interconnected corporate structure — a structure supported, of course, by very creative accounting. This company’s fall touched hundreds of thousands of investors. Newspapers called it the biggest business failure in the history of the world, and this historic moment happened in 1931. The company was Insull Utility Investments (IUI), founded by Samuel Insull, a onetime private secretary to Thomas Edison.
Make no mistake, the fall of Enron, WorldCom, and the others, while massive in size and shocking in scope, is nothing particularly new. And neither is the market’s or the public’s reaction.
The historian Ron Chernow said that after the collapse of IUI more than seven decades ago, people felt so swindled that they never went near the market again. There was a lost generation of investors. Today we must ask ourselves: Will there be a second lost generation? Will the total collapse of investor confidence in our markets and trust in the private sector ever be rebuilt? These questions are ones facing all of us, from Wall Street to Capitol Hill, from those running million-dollar mutual funds to families sitting around their kitchen tables wondering how they are going to pay for college or prepare for retirement. And while our elected officials have passed new laws, regulators have issued new regulations, and many companies and boards have embraced new policies, the success or failure of those reforms rests in large part on the success or failure of our financial executives.