Crime and Consequences Still Weigh on Corporate
World; Four Years Later, Enron's Shadow Lingers as
Change Comes Slowly
By STEPHEN LABATON (NYT) 2900 words
Published: January 5, 2006
WASHINGTON, Jan. 1 - America's corporate chieftains would prefer that Enron just go
away.
But four years after the company's ignominious collapse, Enron's former top executives
are about to head to a climactic criminal trial later this month, serving as a reminder that
changes in the behavior of many American companies have been more muted than many
once expected.
Despite an array of new and expensive laws and regulations that were adopted to tighten
corporate oversight after the wave of scandals earlier in the decade, serious accounting
problems continue to trouble publicly owned companies. In the last year, a record number
have been forced to correct erroneous earnings statements, which often led to sharp stock
declines.
Moreover, for all the widespread criticism of high pay of executives at Enron and other
companies that later proved derelict, studies show that there is still little overall
correlation between the performance of many companies and the executive compensation
set by their directors.
Meanwhile, the Public Company Accounting Oversight Board -- the agency created by
Congress three years ago to oversee the accounting profession after the collapse of Arthur
Andersen for its role in the Enron debacle -- has yet to bring a significant enforcement
action. It has filed only four disciplinary cases against tiny firms in Texas, New York and
California.
''We certainly have seen some improvements in governance, but we've also seen some
areas of no improvement, and some areas where things have gone backwards,'' said Lynn
E. Turner, a former chief accountant at the Securities and Exchange Commission who is
now the managing director of research at Glass, Lewis & Company.
Christopher Cox, the chairman of the Securities and Exchange Commission, said in an
interview last week that a number of benefits have flowed from the laws adopted after the
major corporate scandals that plagued companies like WorldCom, Tyco, Adelphia and
Qwest, as well as Enron. But he agreed that more should be done. In the interview, he
disclosed that he intended to lead a commission effort early in 2006 to rewrite the rules to
force companies to provide more details about executive pay.
Despite a recent backlash by some corporate interests against the tighter rules, Mr. Cox
said it ''would be a mistake'' to roll back the major provisions of the Sarbanes-Oxley Act
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of 2002, the Congressional response to the corporate scandals, which imposed new
obligations on directors, accountants and lawyers.
''The shocks were so big that no director could miss the lesson,'' Mr. Cox said. ''And if
they did miss it somehow, the significant changes in law made it absolutely certain that
they are now more focused.''
''With just a few years of Sarbanes-Oxley under their belts,'' he added, ''most companies
are begrudgingly admitting that the exercise has produced benefits.''
Still, Mr. Cox and some others have said, the changes have not come without significant
cost. They have begun asking, as he put it, ''whether we are getting everything we're
paying for.''
Certainly there were fewer large corporate scandals in the last year. Surveys at large
companies show that boards have more outside directors, and slightly better qualified
audit committees.
But the lack of major debacles lately is due as much to the current stage in the economic
expansion -- which has not been going on long enough to encourage the financial
excesses and inflated stock prices that often lead to trouble -- as to major changes in
corporate governance. And the collapse of Refco three months ago showed how short the
memories of previous scandals are at the boards of some companies.
Alan G. Hevesi, who as New York comptroller is one of the nation's largest institutional
investors, has been leading a group of other top state pension fund managers seeking to
make companies more accountable to shareholders.
''We've had some successes in corporate governance reform,'' he said, but ''in other areas - such as giving a greater voice to shareholders to elect independent directors and curbing
excessive executive compensation -- we haven't been as successful. I worry about
whether the necessary reforms have really been institutionalized.''
Corporate executives say audit committees generally have been spending more time
going over problems. They also say that auditors have become more emboldened since
the collapse of Enron and are less likely to be in the conflicting situation of serving as
both consultant and auditor to the same company. Those changes have come about even
though the accounting industry has become so consolidated that four large firms do the
work for more than 90 percent of publicly traded companies.
Yet problems remain.
Earnings restatements, for instance, were more than 50 percent higher in 2005 than in the
previous year. The restatements often involved plain-vanilla accounting issues, such as
when to recognize earnings or properly calculate interest accruals. About a quarter of the
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restatements were related to a failure by companies to follow accounting rules issued
more than 30 years ago on how to account for leases.
But the numbers still suggest there is more work to be done. Through the end of October,
there were 1,031 restatements, compared with 650 for all of 2004 and only 270 in 2001,
the year that Enron collapsed, according to figures compiled by Glass, Lewis. Mr. Turner
said he expected that by the time all the restatements through the end of the year had been
counted, the total number for 2005 would reach around 1,200.
The increasing number is partly attributable to the greater vigilance of auditors and the
new requirements of the Sarbanes-Oxley Act, which has prompted more than 1,250
public companies, out of a total of around 15,000, to report by the end of last October that
they had material weaknesses in their internal controls. Another 232 companies reported
deficiencies in their internal controls that were less serious, though significant.
Some executives see a silver lining in the earnings restatements.
''I don't mean to sugarcoat the figure on restatements, but I think it is positive -- it shows
a healthy system,'' said Steve Odland, the chief executive of Office Depot and head of a
task force on corporate governance at the Business Roundtable, an organization of chief
executives from the nation's largest companies.
''The general impression of the public is that accounting rules are black and white,'' Mr.
Odland said. ''They are often anything but that, and in many instances the changes in
earnings came after new interpretations by the chief accountant of the S.E.C.''
For large investors, an even bigger concern is executive pay. Even as the scandals
highlighted expensive compensation packages that prompted regulators to require stricter
accounting of executive pay, surveys showed that large investors were particularly upset
by underperforming companies that continued to provide outsize compensation to their
top managers.
One study, by Lucian A. Bebchuk of Harvard and Yaniv Grinstein of Cornell, found that
corporate assets used to compensate the top five executives at companies grew from less
than 5 percent to more than 10 percent of aggregate corporate earnings between 1993 and
2003. The result was a large decline in company and portfolio values with no associated
strengthening of management incentives.
A second study, by Mark Van Clieaf, managing director of MVC Associates
International, a management consulting firm, and Janet Langford Kelly, a Northwestern
University law professor, found that 60 companies in the bottom 10th of the Russell 3000
index lost $769 billion in market value and $475 billion in economic value in the five
years through 2004. They paid their top five executives more than $12 billion over the
same period.
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''The good news is we've seen more happen in the last 36 months than the last 30 years,
as boards start to recognize they have a job to do that is not just ceremonial,'' Mr. Van
Clieaf said. ''The bad news is they haven't always figured out exactly what that job should
be.''
In the case of executive compensation, ''there is a high level of denial on the performance
problem,'' he added. ''In part it is because low performance reflects on the board.''
Mr. Cox of the S.E.C. said that he expected the commission would begin proceedings
early this year to change the disclosure rules so that executive compensation became
more transparent.
''It's been over a dozen years since we've last revised these'' rules, Mr. Cox said.
Mr. Odland said the Business Roundtable had long advocated that boards do more to
assure that the pay of senior executives is closely tied to company performance and that it
is set by a compensation committee of independent board members.
''Shareholder value creation should be rewarded,'' he said.
Under Sarbanes-Oxley, senior executives are required to certify income statements
personally. Audit committees must include at least one person with expertise in financial
matters. Companies can no longer give cheap loans to senior officials.
Enron's collapse also spurred major accounting rule changes, including one requiring that
stock options be counted as a normal business expense on company books.
Some executives have complained that the mandated changes have come at too high a
cost, and a growing movement to create new exemptions, at least for many smaller
businesses, is gaining influence in Washington.
Those complaints have had some resonance at the Securities and Exchange Commission.
Mr. Cox, who took over last August, has promised to maintain the policies of his
predecessor, William H. Donaldson, and has moved cautiously in re-examining the
regulations that were adopted after Sarbanes-Oxley. But he has suggested that changes
may be warranted in some areas.
''As we work together to protect investors and stimulate capital formation, we've got to be
sure we don't choke on our own medicine,'' Mr. Cox said at a recent speech in Florida
before the Securities Industry Association. ''We understand that regulation that's intended
to improve the competitiveness of our markets can -- if we're not careful -- have the
opposite effect.''
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The fall of Enron was the first in a wave of corporate scandals that in some cases brought
down some of the country's biggest companies and their executives. Companies in gray
went bankrupt and were sold or liquidated.
*Enron
Its collapse revealed that much of its success had been built on sand. It is being
liquidated.
DEC. 2, 2001
The company files for bankruptcy protection.
JAN. 14, 2004
Andrew S. Fastow, former chief financial officer, pleads guilty to two felonies.
FEB. 19, 2004
Jeffrey K. Skilling, a former chief executive, is indicted.
JULY 7, 2004
Kenneth L. Lay, former chairman and chief executive, is indicted.
KEY FIGURES
Kenneth L. Lay (UNDER INDICTMENT)
Jeffrey K. Skilling (UNDER INDICTMENT)
Andrew S. Fastow (PLEADED GUILTY)
*Global Crossing
The company, which spent billions of dollars building an international fiber optic
network, is a shell of its former self.
JAN. 28, 2002
The company files for bankruptcy protection.
AUG. 9, 2002
Singapore Technologies Telemedia agrees to buy a majority stake in the company for
$250 million.
DEC. 8, 2003
The company writes down its assets, creating more than $25 billion in losses for 2000
and 2001.
MAR. 19, 2004
The company and Gary Winnick, the founder, agree to pay investors and former
employees $325 million for their losses.
KEY FIGURES
Gary Winnick
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Mr. Winnick, who made $734 million selling company stock, has not been charged with
any wrongdoing.
*Adelphia Communications
Went into bankruptcy and was sold to Time Warner and Comcast.
MAY 2, 2002
Adelphia restates its results to include more than $1 billion in loans to the family of John
J. Rigas, the company's founder.
JUNE 25, 2002
The company files for bankruptcy protection.
JULY 24, 2002
Mr. Rigas and two of his sons, Timothy and Michael, are arrested and charged with
looting the company.
JULY 8, 2004
Mr. Rigas and Timothy Rigas are convicted on some charges. The jury does not reach a
verdict on charges against Michael Rigas.
KEY FIGURES
John J. Rigas (CONVICTED)
Timothy J. Rigas (CONVICTED)
Michael J. Rigas (UNDER INDICTMENT)
*WorldCom
Went into bankruptcy and emerged much smaller. It was subsequently bought by
Verizon.
JUNE 25, 2002
WorldCom discloses billions of dollars in accounting fraud.
JULY 21, 2002
The company files for bankruptcy.
MARCH 2, 2004
Bernard J. Ebbers, the former chief executive, is indicted. Scott D. Sullivan, former chief
financial officer, pleads guilty.
MARCH 15, 2005
Mr. Ebbers is convicted. He is later sentenced to 25 years in prison.
KEY FIGURES
Bernard J. Ebbers (CONVICTED)
Scott D. Sullivan (PLEADED GUILTY)
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Cendant
Before Enron and WorldCom, it had the largest accounting scandal.
FEB. 28, 2001
Three years after a huge accounting scandal is discovered at the company, Walter A.
Forbes, the former chairman, and E. Kirk Shelton, the former vice chairman, are charged
with fraud. Previously, three former executives, including the chief financial officer,
pleaded guilty.
JAN. 4, 2005
Mr. Shelton is found guilty of conspiracy and fraud. The jury does not reach a verdict on
Mr. Forbes.
OCT. 17, 2005
The retrial of Mr. Forbes begins.
KEY FIGURES
Walter A. Forbes (UNDER INDICTMENT)
E. Kirk Shelton (CONVICTED)
ImClone Systems
Erbitux, a drug for treating colon cancer, is the company's only product so far.
DEC. 27, 2001
After learning that the F.D.A. has rejected an application to approve Erbitux, Samuel D.
Waksal, the chief executive and chairman, tries to sell his company stock; his daughter
and his father sell their shares.
OCT. 15, 2002
Mr. Waksal pleads guilty. He is later sentenced to more than 7 years in prison.
FEB. 12, 2004
The F.D.A. approves the use of Erbitux.
KEY FIGURES
Samuel D. Waksal (PLEADED GUILTY)
Martha Stewart Living Omnimedia
The company has lost money for the last seven quarters and its stock price is languishing.
DEC. 27, 2001
Martha Stewart, a friend of Mr. Waksal, sells 3,928 shares of ImClone.
JUNE 4, 2003
Ms. Stewart is indicted.
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MARCH 5, 2004
Ms. Stewart is found guilty of lying to investigators.
OCT. 8, 2004
Ms. Stewart begins serving a five-month sentence.
KEY FIGURES
Martha Stewart (CONVICTED)
Tyco International
Since the 2002 scandals involving its former top executives, the company has reported
steady earnings.
JUNE 3, 2002
Facing an indictment for evading sales taxes, L. Dennis Kozlowski resigns as chairman
and chief executive.
SEPT. 12, 2002
Mr. Kozlowski and Mark H. Swartz, the former chief financial officer, are charged with
looting the company.
APRIL 2, 2004
The first trial of Mr. Kozlowski and Mr. Swartz ends in a mistrial.
JUNE 17, 2005
Mr. Kozlowski and Mr. Swartz are convicted.
KEY FIGURES
L. Dennis Kozlowski (CONVICTED)
Mark H. Swartz (CONVICTED)
Qwest
The company is the weakest of the former Baby Bells and was recently spurned by MCI,
formerly WorldCom, in favor of Verizon in a takeover battle.
JUNE 16, 2002
Joseph P. Nacchio, the chairman and chief executive, is forced to resign.
JULY 28, 2002
The company says that it incorrectly accounted for more than $1 billion in transactions
from 1999 to 2001.
OCT. 28, 2002
The company says it will write down the value of its assets by $34.8 billion.
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DEC. 20, 2005
Mr. Nacchio is charged with insider trading.
KEY FIGURES
Joseph P. Nacchio (UNDER INDICTMENT)
Rite Aid
The company restated earnings downward by $1.6 billion and its stock price, once over
$50 a share, closed at $3.48 yesterday.
JUNE 21, 2002
Martin L. Grass, former chairman and chief executive, and Franklin C. Brown, former
vice chairman, are charged with conspiracy and fraud.
JUNE 17, 2003
Mr. Grass pleads guilty to conspiracy and obstruction of justice. He is sentenced to 8
years in prison.
OCT. 17, 2003
Mr. Brown is found guilty of conspiracy, witness tampering and other acts. He is
sentenced to 10 years in prison.
KEY FIGURES
Martin L. Grass (PLEADED GUILTY)
Franklin C. Brown (CONVICTED)
Computer Associates
The company restated sales figures for 1999 and 2000 and recorded large losses.
NOV. 18, 2002
With regulators looking into the company's accounting, Charles B. Wang, the founder
and chairman, resigns and is succeeded by Sanjay Kumar.
APRIL 8, 2004
Ira H. Zar, the former chief financial officer, and two other executives plead guilty to
fraud.
APRIL 21, 2004
Mr. Kumar resigns. Five days later, the company restates sales for 1999 and 2000.
SEPT. 22, 2004
Mr. Kumar and another executive are indicted.
KEY FIGURES
Sanjay Kumar (UNDER INDICTMENT)
Ira H. Zar (PLEADED GUILTY)
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Credit Suisse First Boston
The firm paid $100 million to settle charges that it mishandled the allocation of popular
stock offerings in the 1990's bull market.
MARCH 4, 2003
Frank P. Quattrone, an investment banker, resigns after refusing to cooperate in an
investigation of how technology stocks were allocated to investors.
MAY 12, 2003
Mr. Quattrone is charged with obstruction of justice.
MAY 3, 2004
Mr. Quattrone is convicted of obstruction.
SEPT. 8, 2004
Mr. Quattrone is sentenced to 18 months in prison.
KEY FIGURES
Frank P. Quattrone (CONVICTED)
HealthSouth
After discovering a huge accounting fraud, the company restated its results through 2004.
MARCH 19, 2003
The company and Richard M. Scrushy, the chief executive and founder, are charged with
fraud.
MARCH 26, 2003
William T. Owens, a former chief financial officer, pleads guilty to fraud. He is one of 15
executives to eventually plead guilty.
NOV. 4, 2003
Mr. Scrushy is indicted.
JUNE 28, 2005
Mr. Scrushy is acquitted.
OCT. 26, 2005
Mr. Scrushy is charged with bribery and fraud.
KEY FIGURES
Richard M. Scrushy (UNDER INDICTMENT)
William T. Owens (PLEADED GUILTY)
Hollinger International
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After problems surfaced at the company, some of its assets, including The Jerusalem
Post, were sold.
NOV. 17, 2003
Conrad M. Black, the chairman and chief executive, resigns after the company finds that
he and his partners received unauthorized payments.
SEPT. 20, 2005
F. David Radler, a partner of Lord Black, pleads guilty to fraud.
NOV. 17, 2005
Lord Black is charged with fraud.
KEY FIGURES
Conrad M. Black (UNDER INDICTMENT)
F. David Radler (PLEADED GUILTY)
* Went bankrupt and were sold or liquidated.
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