Even as the former top executives of Enron head to a climactic criminal trial soon, the impact of the company's ignominious collapse on the behavior of corporations across America has begun to show its limitations.
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, publicly owned companies have continued to be troubled by serious accounting problems. In the last year, a record number have been forced to fix erroneous earnings statements by issuing corrective ones, a move that often led to sharp stock declines.
Moreover, despite the widespread criticism of the 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 that is set by their directors.
And the new 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, filing 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 Turner, a former chief accountant at the U.S. Securities and Exchange Commission who is now the managing director of research at Glass, Lewis & Co.
Christopher Cox, the new chairman of the Securities and Exchange Commission, said in an interview last week that a number of benefits have flowed from the changes in laws adopted after the major corporate scandals, which 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 this year 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, Cox said it "would be a mistake" to roll back the major provisions of the Sarbanes-Oxley Act 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," 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, Cox and some others have said, the changes have not come without significant cost. They have now begun asking, as he put it, "whether we are getting everything we're paying for."
Certainly there have been fewer large corporate scandals in the last year. Surveys at large companies show that boards now have more outside directors and slightly better-qualified audit committees.
But the lack of major debacles is also partially due to the current economic cycle - which has not been going on long enough to encourage the kind of financial excesses and inflated stock prices that often lead to trouble - as well as to major changes in corporate governance. And the collapse of Refco two months ago showed how short memories of previous scandals are at the boards of some companies.
Earnings restatements, for instance, reached a high in 2005, more than 50 percent higher than the previous year. The restatements often involved plain accounting issues, like when to recognize earnings or properly calculate interest accruals. About a quarter of the restatements were related to the failure by companies to follow accounting rules issued more than 30 years ago on how to account for leases.
But the numbers suggest that 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 Enron collapsed, according to figures compiled by Glass, Lewis. Turner said he expected the total number to reach about 1,200 restatements for all of 2005.
The increasing number is partly because of the greater vigilance of auditors and the new requirements by the Sarbanes-Oxley Act, which has prompted more than 1,250 companies to report by the end of October that they had material weaknesses in their internal controls, out of a total of around 15,000 public companies. Another 232 companies reported less serious, though significant, deficiencies in their internal controls.
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, chief executive of Office Depot and head of a task force on corporate governance issues at the Business Roundtable, an organization of chief executives from the largest U.S. companies. "The general impression of the public is that accounting rules are black and white. They are often anything but that, and in many instances the changes in earnings came after new interpretations by the chief accountant of the SEC."
For large investors, an even bigger concern is executive pay. Even as the scandals highlighted outrageous compensation packages that prompted regulators to require stricter accounting of executive pay, surveys show that large investors are particularly upset by underperforming companies that continue to provide outsize compensation to their top managers.
One study, by Lucian Bebchuk of Harvard University and Yaniv Grinstein of Cornell University found that from 1993 to 2003, corporate assets used to compensate the top five executives at companies grew to more than 10 percent of aggregate corporate earnings from less than 5 percent.
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 and Janet Langford Kelly, 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 five years through 2004, while they paid their top five executives more than $12 billion over the same period.
"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," said Van Clieaf, managing director of MVC Associates International, a management consulting firm. "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."
Cox said he expected that the commission would begin proceedings early in 2006 to change the disclosure rules to make executive compensation more transparent.
"It's been over a dozen years since we've last revised these" rules, he said.
The Business Roundtable has advocated that boards do more to assure that the pay of senior executives is closely tied to company performance, Odland said, and that it is set by a compensation committee of independent members.
"Shareholder value creation should be rewarded," he said.
Under Sarbanes-Oxley, senior executives are required to personally certify income statements. Audit committees must include at least one person with expertise in financial matters. And companies can no longer give cheap loans to senior officials.
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