Enron Inspires Congress to Try Reform

As Enron-triggered legislation sweeps through Capitol Hill, and with it the prospect of watershed reforms, a battle is shaping up over how far Congress should go in riding herd on corporate America.

Nearly three dozen bills have been introduced that would affect company pension plans, accounting and corporate whistle-blowers, among other subjects. Taken together, the legislation amounts to a rewriting of the ground rules for publicly traded companies.

But as the focus in Congress shifts from televised investigative hearings to the work of crafting legislation, sharp differences have emerged between Democratic and Republican lawmakers on a number of key issues.

Democrats want to go further in restricting accounting firms from providing consulting services for companies they audit, contending that such a step is necessary to prevent lucrative contracts from compromising their duty to the investing public. Republicans want to increase the budget for the Securities and Exchange Commission to pursue corporate wrongdoing, but Democrats want to increase it more.

Just about everyone on Capitol Hill wants to better protect workers from the same fate that befell Enron employees who were left with virtually worthless company stock in their retirement accounts. But Democrats and Republicans differ--even among themselves--about the best way to do it.

And then, there is the perennial disagreement between Democrats and Republicans over whether reforms are best left to regulators and corporations themselves or should be imposed by legislation.

With these divisions, some say that Congress will end up passing relatively weak laws or that the major changes would be implemented by companies themselves eager to restore public confidence and investment.

“Although both sides want to claim the mantle of ‘Protector of People’s Pensions’ in time for the November elections, substantive disagreements do exist regarding what reform should look like,” said Patrick Basham, senior fellow at the libertarian Cato Institute think tank in Washington. “These disagreements--in tandem with the overriding need for something to club the other side over the electoral head with--will probably forestall the enactment of any major reforms until next year at the earliest.”

Others, however, expect that Congress will adopt significant legislation on corporate governance--eclipsing business reform measures sparked by abuses in the savings-and-loan industry in the late 1980s.

“The S-and-L crisis was a set of corporate failures and ... it was hard to focus on just what went wrong,” said John W. Dienhart, chair of business ethics at Seattle University. “Enron, on the other hand, is a single, high-profile company with high-profile personalities, internal whistle-blowers and a suicide [by a former executive]. The targets are big and the money trail fairly clear. This gives legislators many pegs on which to sell legislation to their constituents and fellow lawmakers.”

There also is a political imperative: Many lawmakers would rather be remembered as reformers than the recipients of the political contributions that Enron doled out in Washington.

“If we do nothing, if we don’t learn the lessons of Enron and apply the steps to stop it from happening, there is nobody, Republican or Democrat, who thinks this is not going to happen again,” said Sen. Patrick J. Leahy (D-Vt.), chairman of the Senate Judiciary Committee.

On Thursday, the House Ways and Means Committee passed a bill, dubbed the Employee Retirement Savings Bill of Rights, that would permit workers to sell company stock from their 401(k) plans after three years and pay for investment advice with pretax dollars deducted from their paychecks.

“We are still learning the lessons of Enron’s collapse,” said Senate Majority Leader Tom Daschle (D-S.D.). “But two things are already clear: We need to restore the confidence of pension holders and investors. And we need to restore basic standards of corporate accountability.”

Enron filed for Chapter 11 bankruptcy protection Dec. 2 after questions about its accounting practices and the revelation of off-the-books partnerships that hid hundreds of millions of dollars in losses caused its stock to plummet, costing investors billions of dollars and more than 6,000 Enron employees their jobs.

New rules for accountants, securities analysts, financial disclosure, pensions and off-shore tax shelters have been proposed. They are designed to ensure that companies provide an accurate picture of their finances, auditors deliver the unvarnished truth about a company’s books and investors are aware of conflicts of interest at Wall Street firms advising them on stock purchases.

Some of the more radical proposals, such as one to create a federal Bureau of Audits to take over the job of auditing company books, are unlikely to get to a vote.

But many measures stand a good chance of passing. These include proposals to:

* Create a new board to police accountants.

* Require corporate insiders to disclose sales of company stock in a more timely manner.

* Prohibit such stock sales when other employees are subject to a lockdown on their 401(k) retirement accounts.

* Require companies to disclose more financial information, including off-balance-sheet transactions such as the ones that helped undo Enron.

There also is strong support for increasing the SEC budget. But--as with many of the Enron-inspired reforms--Democrats and Republicans disagree over how far to go. President Bush’s 2003 budget proposed $481 million for the SEC, a 6% increase. Congress wants to hike that figure--House GOP leaders advocate $700 million; House Democratic leaders $876 million.

Some experts say that the accounting industry, corporations themselves and federal regulators, such as the SEC, are moving faster than Congress to address problems spotlighted by Enron’s collapse.

“The market will fix some things even before any legislation would take effect,” said Dana Hermanson, director of research of the Corporate Governance Center at Kennesaw State University in Georgia.

In fact, change is already evident, said Robert E. Litan, economic studies director at the Brookings Institution think tank in Washington.

“Even without any legislative or regulatory reforms, corporate America has already changed the way it does business,” he said. “Boards are asking tougher questions, especially audit committees. Managements are feeling more market pressure to provide more detailed and useful disclosures. Accounting firms have been frightened by the prospect of liability suits and more government regulation into tightening up their audits.”

Others are more skeptical of whether business will reform itself--or if Congress can be effective in mandating change.

“The most difficult problem in the Enron situation,” said David S. Ruder, a former SEC chairman and now a professor at Northwestern University School of Law, “stems from attitudes by managements of some corporations that they are entitled to try to ‘game’ the system, seeking to find ways to evade accounting rules and disclosure laws and regulations without being in technical violation.

“The SEC seems to be trying to address this approach, but the solutions are very difficult,” he said. “As has been frequently observed, you can’t create good moral conduct by legislation.”

But Congress, which in the words of Rep. Sam Johnson (R-Texas) has become “all-Enron, all the time,” seems determined to try.

“It’s to no one’s interest to have the average investor on the street wondering if his $200 is really safe,” said Rep. Richard H. Baker (R-La.), chairman of the House Financial Services subcommittee on capital markets. “At the end of the day, we will have something.”