Report Reveals “Systemic
and Catastrophic Failure”
of Financial
Oversight in Enron Case
Governmental
Affairs Committee Recommends Reform for
SEC, Wall Street Analysts, Credit Raters
October 7, 2002
WASHINGTON – Governmental Affairs Committee Chairman
Joe Lieberman D-Conn., and ranking member Fred Thompson, R-Tenn.,
issued a committee staff report Monday that charged the system
of public and private financial watchdogs with failing to
protect Enron employees and investors.
“What this report concludes is
that investors were left defenseless,” Lieberman said.
“The watchdogs were asleep at the gate.
Despite the magnitude of Enron’s implosion, virtually
no one in the multi-layered, public private system that is
supposed to protect investors - mostly hardworking, middle
class people - saw the disaster coming or did anything to
prevent it.”
The Securities and Exchange
Commission largely left the search for fraud to private
auditors and boards of directors - both of whom also failed to
execute their duties properly either because they were
“doodling at their desks” or embroiled in conflicts that
made tough oversight unlikely, Lieberman said.
Wall Street analysts were wracked with conflicts of
interest in reporting on companies their investment banking
firms were also promoting.
And credit raters simply performed their job with a
“woeful lack of diligence.”
“What we found was systemic and
catastrophic failure,” Lieberman said.
He and Thompson outlined the
report’s major findings in a letter dated October 7, 2002,
to SEC Chairman Harvey Pitt:
•
The SEC never adjusted to a rapidly changing
business environment in which accurate corporate information
was hard to come by. Companies
were filing corrected statements, acknowledging error, at an
ever increasing rate. Yet the SEC was reviewing a mere
fraction of the annual reports filed.
The SEC failed to review Enron’s annual reports at
any time after 1997, in the years leading up to its collapse.
•
When the SEC allowed Enron in 1992 to use a
particular accounting method that enabled it to inflate its
revenue and earnings, the SEC never followed up to monitor
whether the conditions it had set allowing use of the
accounting method continued to be followed.
•
An application Enron filed in April 2000
requesting an exemption from certain requirements of the
Public Utility Holding Company Act was mishandled. Enron was
already exempt, it turns out, but sought another waiver
because by merely filing a so-called "good faith"
application, it could get additional benefits from the Federal
Energy Regulatory Commission.
The SEC has yet to rule on the application, effectively
allowing Enron to retain these economic and regulatory
bonuses. The SEC
and FERC say it was the other’s responsibility to evaluate
if the application was made in good faith.
•
Wall Street analysts are exposed to so many
conflicts that objective, hard-hitting analyses are hard to
come by. Too
often, they tout the companies they cover rather than report
accurately for those who rely on the information -
middle-class people trying to save for their retirement or
their children’s education.
•
The credit rating agencies were dismally lax in
their coverage of Enron. They
didn’t ask probing questions and generally accepted at face
value whatever Enron officials chose to tell them.
And while they claim to rely primarily on public
filings with the SEC, analysts from Standard & Poor’s
told committee staff that not only did they not read Enron’s
proxy statement, they didn’t know all the information it
contained.
Among the recommendations in the committee staff
report:
•
The SEC must review more filings and find better
ways to identify the high risk ones.
•
The Commission must step up its efforts to root
out financial fraud by using better technology and a more
vigilant staff to pro-actively look for fraud and not rely as
much on others to do this.
•
The SEC must put in place a means for monitoring
compliance with its decisions.
•
Wall Street firms should institute
performance-based compensation and promotion systems to
encourage accuracy and independence by their analysts.
•
The SEC recommends placing conditions on the
special designation the SEC confers on the credit rating
agencies that makes them so powerful.
The SEC should establish one set of standards credit
raters must use in devising their ratings and another set of
standards for training the analysts.
The SEC should then monitor compliance with both those
sets of standards.
Lieberman concluded: “I hope this report stimulates
closer, more effective oversight by the SEC and a greater
commitment to honest, independent information from the private
sector watchdogs so that we can rebuild America’s trust in
our system of financial oversight and restore strength to our
economy and growth to our markets.” |