From: "Charles Brown" <[EMAIL PROTECTED]>

Subject: [L-I] "Capitalism Is In Trouble:

"Capitalism Is In Trouble:

A Deliberate Scandal

Washington Post Editorial
January 27, 2002

SUMMONING UP contemptuous rage at the Enron hearings last Thursday, Sen.
Richard Durbin (D-Ill.) declared, "When the corporate insiders at Enron
realized the ship was sinking, they grabbed the lifeboats and left the women
and children, their workers and investors, to drown." But this scandal is
actually much worse than that. The bad guys did not merely grab lifeboats;
they deliberately created the leaks that brought the ship of Enron down.
What's more, the bad guys included not just Enron executives and Arthur
Andersen's accountants but also, to a different degree, many of Mr. Durbin's
own colleagues in Congress.

Start with Enron's managers. Until last week, it seemed likely that Enron
had taken on too much risk; that it had hidden this risk from shareholders
by parking it in secret partnerships; and that senior executives had urged
investors to buy stock even when they themselves were selling out. But fresh
details suggest worse than this. Enron's executives apparently used the
secret partnerships not just to hide risk but also to steal money from
shareholders. The small group of financiers and insiders that invested in
the partnerships reaped returns higher than ordinary shareholders could
dream of; one deal paid out 212 percent in just over three months. This was
a way of siphoning money that should have been declared on the company's
balance sheet. The money belonged to Enron's shareholders. They were robbed.

Next, consider Arthur Andersen. The company claims that one rogue partner
was responsible for shredding documents in an apparent coverup. But the
supposed rogue, David Duncan, did at least advise Enron against issuing a
misleading statement about its earnings; it was Andersen headquarters that
recommended he destroy the record of his misgivings. Yet even if other
Andersen employees were involved in shredding, that would actually
understate the scandal. For Andersen was colluding in a different kind of
coverup years before the bankruptcy, starting in 1997 when it signed off on
financial statements that it knew to be wrong. What's more, Andersen may
well have done the same at other companies; the Securities and Exchange
Commission has alleged that the firm's partners saw but failed to prevent
problems at two other companies, Sunbeam Corp. and Waste Management Inc.
Some Andersen managers seem to have made a business decision to condone
misleading financial statements, figuring that it is more profitable to
placate top executives than to protect investors. In consequence,
shareholders again got robbed.

Now consider Mr. Durbin's colleagues. During the 1990s Congress repeatedly
squashed attempts to tighten rules on auditors. Sen. Joe Lieberman
(D-Conn.), who chairs the Senate committee that held Enron hearings on
Thursday, fought in 1994 against proper accounting for stock options. Rep.
Billy Tauzin (R-La.), the chair of Thursday's House hearings on Enron,
opposed a plan to bolster auditors' independence from managers in 2000. Sen.
Chris Dodd (also D-Conn.), who now proposes reformist legislation, led a
battle in 1995 to limit auditors' liability. These and other members of
Congress would like you to forget this, or perhaps to believe it was an
honest error; "we were wrong," Sen. Robert Torricelli (D-N.J.) declared on
Thursday, in a show of graciousness. But in Congress there was never a fair
argument over the merits of audit regulation. The merits by and large were
on one side, and the campaign dollars were on the other. Of the 248 members
who sit on committees that plan to hold hearings on the scandal, an
extraordinary 212 received money from Andersen or Enron.

All the players in this scandal -- Enron's managers, its auditors, the
lawmakers -- helped to create the conditions for Enron's collapse. That
collapse cheated investors of their savings and cost thousands of jobs. It
has also called into question the whole premise of stock market capitalism,
which is that investors scrutinize honest financial statements and then
allocate capital to the companies that will use it best. If financial
statements aren't honest, then capitalism is in trouble. Corporate leaders,
auditors and lawmakers need to put aside venality-as-usual and start
thinking of remedies. The past pattern -- in which audit scandals have
yielded brief breast-beating but no action -- must not repeat itself.


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