Two former Securities and Exchange Commission officials said yesterday that Enron’s collapse underscores the need for sweeping changes in the current financial system, even though the Houston energy company ran into trouble because it failed to follow existing rules.
Former SEC Chairman Arthur Levitt and former SEC head accountant Lynn Turner, in testimony before the Senate Committee on Governmental Affairs, argued for the formation of an independent committee to oversee audits and for further scrutiny over securities analysts, many of whom gave Enron favorable ratings even as the company collapsed.
They said the audit committee should not be involved in the accounting profession. The Financial Accounting Standards Board that now serves as the auditing oversight entity is run largely by former employees of the Big Five accounting firms.
“Any reforms must recognize the importance of gatekeepers in safeguarding the interests of investors and the fundamental need to preserve and enhance these gatekeepers’ independence,” Mr. Levitt said.
Mr. Levitt and Mr. Turner asked for changes relating to corporate accounting rules, specifically for improved disclosure of events and transactions that might require a company to make payments to a third party. But while both men believe these changes would lessen the risk of investing, they said Enron’s troubles were the result of the company not complying with existing rules.
“We know that under existing rules, Enron’s financial statements should have provided a much clearer picture than they did when first presented to investors,” Mr. Turner said. “Based on filings the company made with the [SEC] in November of last year, there were four instances of noncompliance with existing rules.”
Committee members reiterated their amazement over the Enron collapse and asked several times about the likelihood of another company running into similar problems.
“There are a lot of corporations … are we looking at more Enrons out there?” asked Sen. Max Cleland, Georgia Democrat.
“With respect to manipulation of numbers, massaging of numbers, deceiving the public by talking about pro-forma numbers, I think that is prevalent throughout the system,” Mr. Turner replied.
Since Enron’s collapse, the relationship between companies and the accounting firms hired to audit their books has come under a microscope. Many critics of the current auditing system have suggested that companies be forbidden from hiring a firm to act as both a consultant and auditor, arguing that an accounting firm would be more inclined to approve questionable financial statements if it had a stake in the company’s success or failure.
“Out of my own experience, I have a little trouble with that,” said Sen. Robert F. Bennett, Utah Republican and former CEO of Franklin International Institute, a time-management company. Mr. Bennett said it would be too inconvenient, particularly for small-to-medium-sized companies to find two companies to act as auditor and consultant.
Committee members also raised the issue of compensation in company stock and retirement plans. Enron employees lost millions of dollars when the company collapsed, mainly because their 401(k) plans were heavily invested in company stock.
The company matched employee contributions with stock, and many employees chose to invest more of their retirement savings in company shares than the other 17 investment options they had. Enron employees had invested 62 percent of their 401(k) plans in company stock, according to the SEC.
Committee ranking member Fred Thompson, Tennessee Republican, said the employees should shoulder at least some of the blame if they chose to invest heavily in company stock.
“I think it’s important that the American public have a responsibility to keep and eye on their company,” he said.
“But they have to trust the numbers,” Mr. Turner interjected.
Committee members were intent on determining the ripple effects of Enron’s collapse.
“People have been shaken by this Enron story,” said panel Chairman Joseph I. Lieberman, Connecticut Democrat. “The question I keep getting is, ‘Is my 401(k) OK?’”
“I would not give them a blank reassurance that their 401(k) is necessarily OK,” Mr. Turner replied.
In a second round of testimony, Yale University law professor John Langbein criticized employers issuing stock to their workers.
“Employer’s stock is the single worst investment you can have,” Mr. Langbein said, arguing that because they were employed by the company, too much of the workers’ future would be determined by the company’s success.
He suggested that limits be put on the amount of employer stock in 401(k) plans and said employee stock ownership plans should exist in addition to, not in place of, regular pension plans.