School of Graduate Studies

Enron Fallout

Enron’s Fall Raised the Bar in Regulation

Brooke Masters, chief regulation correspondent DECEMBER 2, 2011 1
Financial Times
DECEMBER 2, 2011

For US regulators and prosecutors, Enron’s collapse in 2001 marked the start of one of the busiest and most successful enforcement periods ever seen.

The energy company’s bankruptcy was followed in quick succession by revelations of fraud at Tyco, Adelphia Communications, WorldCom and HealthSouth and a dozen Wall Street banks were hit with allegations of biased research.

By the time the dust settled, Enron’s chief executive and chief financial officer were in prison, as were nearly two dozen top executives at the other firms, and the banks and companies had shelled out more than $15bn in fines and pay-outs to disgruntled investors.

The scandals also fundamentally changed wider perceptions of and attitudes towards whistleblowers and led to higher sentences for white-collar crime.

“Enron changed everything,” said Jordan Thomas, a former US Securities and Exchange Commission lawyer. “Because of how challenging the Enron fraud was, how document-intensive and time consuming, it . . . led to far more sophisticated accounting fraud teams at the SEC. It raised the bar for law enforcement.”

The hit parade of fraud also prompted the US Congress to pass the still controversial Sarbanes-Oxley corporate accountability law, which forces corporate executives to take personal responsibility for the accuracy of company accounts and requires organisations to put in place measures to prevent fraud. Decried by the US Chamber of Commerce for high initial compliance costs, “Sarbox” became a recruiting tool for exchanges in London and Hong Kong seeking to lure overseas listings. But over time, the law became more embedded in corporate culture and its rules, requiring firms to set up websites and tip-off phone lines for would-be enforcers, seemed less of a burden and more common sense.

“In almost all cases of serious malpractice in the workplace there are brave and ethical people who want to speak out,” said Carol Sergeant incoming chairman of the whistle-blowing charity Public Concern at Work. “Organisations need a culture of openness, backed up by structure and process that makes sure their staff feel safe in raising their concerns and confident that they will be listened to . . . Sadly we see evidence every day, in all parts of our society, that we still have a very long way to go.”

The US also came to seem as less of an outlier after the 2008 banking crisis, when governments around the world cracked down on financial institutions and stepped up their enforcement of corporate bribery bans. Some observers say Sarbox’s tougher rules for auditors and corporate boards are one reason the current downturn has uncovered relatively few accounting frauds.

The latest big company to be hit by an accounting scandal, Olympus, is listed on the Tokyo Stock Exchange and does not file accounts with the SEC. “The process that came out of Sarbanes Oxley was costly, but it made a contribution to raising standards of corporate governance,” said Mark Wippell, a partner at Allen & Overy.

The Enron experience – particularly the unsuccessful efforts of insider Sherron Watkins to highlight and stop the fraud – also continued to resonate in Congress where it helped lead to provisions in the 2010 Dodd-Frank Reform Act that protect whistleblowers and give them a share of any penalties recovered because of their information.

“It took 10 years for law enforcement to understand that the best way to fight financial fraud is to incentivise and protect whistleblowers,” said Mr Thomas, who helped draft that section of the Dodd-Frank Act and now heads the whistleblower practice at the Labaton Sucharow law firm.

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