- The Washington Times - Tuesday, February 5, 2002

Emerging evidence of Enron's "systematic and pervasive attempt" to misrepresent its financial condition rattled stock investors yesterday and evoked pledges of swift enforcement and stepped-up regulation on Capitol Hill.
"We found something more troubling than individual instances of misconduct and failure to follow accounting rules," said William Powers Jr., chairman of a special investigative committee established by Enron's board of directors to determine whether top Enron officials manipulated the company's balance sheets to enrich themselves and inflate the company's stock.
The energy giant's use of off-balance-sheet partnerships to hide billions of dollars of debt while pumping up the value of its assets was "systematic and pervasive," and could not be justified for economic reasons, he told the House Financial Services Committee.
In addition, Enron's former chief financial officer who created most of the partnerships, Andrew Fastow, earned "at least $30 million" for setting up the questionable arrangements, while his deputy Michael Kopper earned "at least $10 million" and four others in his office earned additional millions off the deals, Mr. Powers said.
"What we found was appalling," he said.
As he spoke, former Enron Chairman and Chief Executive Kenneth Lay announced that he is resigning from the board of directors, severing his last ties to the sprawling energy giant that he founded in 1985.
Mr. Lay backed out of previous commitments to testify on Capitol Hill this week, saying lawmakers already have convicted him. Several committees were studying plans to subpoena him.
The reverberations from the spreading scandal hit Wall Street again yesterday, sending the Dow Jones Industrial Average tumbling 220 points and the Nasdaq Composite Index down 56 points, or 3 percent. Investors fled the stocks of major corporations they fear may be hiding problems in their balance sheets, as Enron did.
The worries were fueled by Tyco International, which yesterday disclosed $8 billion in off-balance-sheet transactions for the first time, and Williams Cos., an energy trading company that is struggling to pay more than $2 billion in debt from an unprofitable telecommunications venture it spun off last year.
But even blue chip stocks such as General Electric and IBM have drawn increased scrutiny in recent days because of their companies' complex structures and opaque accounting practices.
A survey by Wall Street Reporter Magazine found that two-thirds of investment professionals say the Enron scandal has prompted them to perform more due diligence when purchasing stocks, and 43 percent are "extremely concerned" about the potential for widespread financial reporting fraud.
The industries thought to have the "most potential to be a minefield of balance sheet bombs" were financial services, technology, telecommunications and biotech.
The investment professionals, in an extraordinary measure of how the scandal has shaken Wall Street, said top officials at Enron and its auditor, Andersen, should be criminally prosecuted to set an example. Most said that auditors should no longer be allowed to provide other services to the companies they audit.
Edward Yardeni, chief investment strategist with Deutsche Bank Alex. Brown, said the market's reaction to the Enron collapse is a "healthy development" that will help root out balance sheet fraud, though the reassessment will drive down the prices of many stocks in coming months.
"The quality of earnings should improve significantly as a result of the Enron scandal," he said, because it has sent corporate accountants and their auditors scrambling to uncover possible errors or misjudgments in past financial statements.
Already, numerous companies have announced revisions or disclosed problems.
"This exercise could trigger a wave of restatements of previous results when companies release their first-quarter earnings in the spring," he said.
Mr. Yardeni said many "good managers went bad" during the bull market of the 1990s because investors came to expect increasingly good earnings and priced those expectations into the sky-high stock prices at the time. While well-managed companies were able to deliver such results at first, even the best-run companies often had to resort to gimmicks to give investors what they wanted toward the end of the bull market in 1999 and 2000.
"Investors mostly knew the quality of earnings was deteriorating. But they chose to ignore the problem. They were too busy getting rich in the bull market," he said.
Now that the stock market has dropped for two straight years and the excesses are being exposed, "the heroes of the bull market have become the villains of the bear market," he said.
Rep. Michael N. Castle, Delaware Republican, was one of many legislators yesterday to note that blame for the Enron scandal is widely shared by the company's officers, board, auditor, ratings agencies, stock analysts, and even greedy investors.
"All of these entities had a vested interest in keeping the stock price high" at whatever cost, he said.
"Shareholders have the same interest" but they differ from the company officers because "they can't do anything about it. There's a huge amount of self-interest in all of this."
Securities and Exchange Commission Chairman Harvey Pitt told the committee that he is pleased with attempts by the marketplace to address the problems raised by Enron including recent moves by the Big Five accounting firms to separate their auditing arms from their consulting services. But he said that will not be enough, and rigorous action by regulators and Congress is needed to prevent more Enrons from happening.
"I am committed to solving this problem by regulation or legislation," he said. "It should not have been possible for this to happen," he said of the Enron scheme. "Our system is capable of being gamed and it has been for a long time. We can fix it and avoid other Enrons."
Mr. Pitt said the SEC is combing through the financial statements of all the Fortune 500 companies "to see if anything jumps off the page."
"If there are cases of people parking money" off balance sheets and out of the view of investors, he said, "then it's a fraud."

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