Enron changed nothing

In the breeding grounds of executive crime, greed still rules. The only lesson corporate America has learned is how to blame everybody else.

By Gary Weiss

Read more: Opinion, Enron

May 31, 2006 | Enron's managerial miscreants Kenneth Lay and Jeffrey Skilling are facing a lifetime in prison, and the press is gleefully reporting every last detail. After all, this was a bracing confirmation of not just the glories of the American criminal justice system but also, implicitly, the idea that this time things are Really Going to Be Different in Corporate America. Henceforth, corporations will be caught and punished with the certainty that one would have expected at the end of an old "Dragnet" episode. More prosecutions are coming, count on that. As Gretchen Morgenson put it in the New York Times on Sunday, the Lay-Skilling convictions were, "at best, the end of the beginning of this dispiriting corporate crime wave."

All this is true, I suppose, if what we have is indeed a 1950s-style "crime wave," its parameters defined as a grim statistical count of arrests, convictions and sentencings. But that's not what we have at all. Like the pipe-puffing Freudian liberals of that era, I prefer to examine the root causes, the home environment, in which regulatory agencies like the Securities and Exchange Commission function in the manner of an indulgent, all-too-forgiving Montessori school headmaster. Corporate delinquents, having failed to respond to counseling, are turned over to the blue-uniformed constabulary of the Justice Department only when they become too obstreperous to control.

Alas, the root causes of Enron are still with us, and getting worse. I am pained to report that in the breeding grounds of corporate crime, the teeming Gold Coast mansions and sweaty polo clubs, little has changed in the executive attitudes that brought us Enron. If Ken and Jeff are the incorrigible Billy Halop bullies in this melodrama, we -- society as a whole, my friends -- must share the blame. Did we not hear their yelps of greed? Their defensive blame shifting? The keening of their flacks?

How easily we forget the root causes: the pampering, the permissiveness. How easily we forget the SEC's granting Enron, in 1997, the exemption from the Investment Company Act that it needed in order to structure its operations to shift debt off the books. The media functioned as an unofficial pep squad, and the earliest warnings were sounded not by reporters but by "short-sellers," market players who bet that stock prices will decline.

Shorts are always on the lookout for a good stock fraud, which makes them almost universally despised, particularly by corporations with something to hide. Short-sellers were the earliest naysayers concerning Enron, with short-seller James Chanos acknowledged to be a source for Bethany McLean's early groundbreaking article in Fortune. Chanos saw to it that the bad news about Enron traveled fast -- and, in the process, he made a few bucks. As both the bearers and profiteers of bad news, short-sellers are hardly winning popularity contests. They were already ancient, reliable scapegoats by the crash of 1929, and remain so today.

But the traditional hatred of shorts was forgotten after the Enron scandal broke in late 2001. During that brief window of time, Congress and the SEC were stirred to action, and even the somnolent financial press became enlivened. The details of Enron (basically a lot of crooked accounting with some insider trading thrown in) were murky, and that proved propitious when it came time for the putative guardians of our financial markets to come up with "solutions."

Sarbanes-Oxley, or "Sarbox," as it is known, was enacted in July 2002, when the post-Enron hysteria was at its highest. At the time, the Washington Post quoted some law professor as calling Sarbox "the most consequential reorientation of corporate behavior in living memory." However, the actual text of the legislation seems more attuned to the sleepy rhythms of the Federal Triangle than the rip-your-throat-out culture of Wall Street and corporate boardrooms.

The law set up something called the Public Company Accounting Oversight Board, whose purpose is to keep watch over the corporate auditors who failed so miserably to detect the book cooking at Enron. Its first chairman was former CIA director William Webster, whose qualifications included serving as the audit committee chairman of a company with accounting problems and a CEO who was a member of the Future Felons of America. Webster's successors had more humdrum backgrounds, and the PCAOB continues in existence to this day -- functioning innocuously, setting rules and occasionally disciplining some accountant you've never heard of.

Theoretically, Sarbox would have prevented Enron from happening. Realistically, it wouldn't have done a thing, because an exec with "derring-do" such as Skilling (to quote a February 2001 Business Week cover story) would surely have found a way around it. Not that it would have taken much effort. Sarbox requires, for example, that at least one member of every board audit committee be a "financial expert." It requires that an "internal control report" describe how management has done a good job of tackling all those pesky numbers and checked 'em real good. And, of course, the company must tell us -- immediately! -- about any changes in the "code of ethics" for its chief number crunchers. The cost of complying with these and similar requirements has annoyed some smaller companies, adding to the overall luster of Sarbox when viewed from afar.

What Sarbox has never done, and never could do, is change corporate behavior, anymore than you can stop a car thief by taping a Do Not Steal sign to the dashboard. Remember that CEOs who are going to pull off a mega-scam like Enron, or even a routine stock swindle or accounting trick, are not going to be deterred by a law book or someone with a stinkin' badge. They have a more pragmatic view of corporate responsibility -- they feel they don't have any. If you listened closely, you heard the Enron management credo at the trial. It is the same philosophy that has been employed by second-story men and Mafia bosses since the dawn of the first proto-scam. It can be summed up as, "If it's broke, it ain't broke, and anyway it ain't my fault."

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