After the Fall

The experts weigh in on how to prevent future Enrons.

Many observers complain that the financial reforms proposed so far by Congress, the Securities and Exchange Commission, and other government bodies in the wake of Enron Corp.’s collapse are a case of too little, too late. That’s clearly so for Enron’s shareholders and employees. But critics also worry that congressional hearings into the debacle amount to political grandstanding, and that any legislative or regulatory change in their wake will fall short of what’s necessary to prevent future Enrons. Those demanding more draconian action have already blasted proposals by SEC chairman Harvey Pitt aimed at better oversight of auditors, for instance, as Band-Aids for the emergency room.

To address the growing controversy, CFO invited representatives of the SEC, the Financial Accounting Standards Board, and Wall Street’s nexus of banks, credit agencies, auditing firms, and investors to take part in a roundtable discussion of the issues raised by Enron. The participants were Peter Clapman, chief counsel for TIAA-CREF, one of the nation’s largest pension funds; Cliff Griep, head of credit-ratings policy for Standard & Poor’s; Chuck Hill, director of research for Thomson Financial/First Call; Edmund Jenkins, chairman of FASB; Ed Nusbaum, CEO of Chicago-based accounting firm Grant Thornton; former SEC commissioner Laura Unger; and Robert Willens, a managing director at Lehman Brothers. The roundtable was moderated by CFO deputy editor Ronald Fink.

Given the participants’ divergent interests and agendas, it’s no surprise that their views often differed as to potential solutions. Yet they reached something of a consensus on important issues. Accounting rules for special-purpose entities (SPEs), everyone agreed, should be tightened. And no one disputed the need to assure greater auditor independence in light of Arthur Andersen’s failure to alert investors to Enron’s problems.

But the assumption that reform must go much further struck them as counterproductive and even dangerous. The system may need repairs, but it’s still the solution, not the problem, agreed the roundtable. So is the market, whose punishment of companies that indulge in Enron-like accounting may be the most effective deterrent of all.

Indeed, the roundtable expressed deep concern over the long-term consequences of what several participants labeled the potential “federalization” of accounting standard-setting. The fear is that due process could be distorted, if not stymied, by political interference. It’s hardly an irrational fear, as anyone who is remotely familiar with how politicians have pressured FASB in the past knows. Accounting for stock options is the prime example, but political interference also explains why FASB’s work on SPEs is unfinished, 20 years after the board first took up the subject.

Still, the panelists expressed confidence that, ultimately, cooler heads will prevail — and that the playing field of the capital markets will receive a necessary, but subtle, releveling.


We all know numerous proposals have been floated to deal with the implications of the Enron collapse. I’d like to go around the table and ask each of you, which are the most important proposals? What changes need to be made?


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