Not Just Bad Apples

Friday, May 26, 2006

WAY, WAY back, before dot-coms became dot-bombs, Kenneth L. Lay was part rock star, part high priest among rival energy executives. His company, Enron Corp., had seized opportunities created by deregulation and the Internet to transform the energy business, turning itself into America's seventh-biggest public company in the process. At an industry conference in 1999, Mr. Lay was asked how he could top the ninefold expansion of Enron's market capitalization over the previous decade. According to The Economist, Mr. Lay responded coolly: "We'll do it again this coming decade."

Not long after that forecast, Enron admitted that its profits for the years 1997 to 2000 had been overstated by $591 million. That confession began a downward spiral that ended in Enron's 2001 bankruptcy. But yesterday a Houston jury accepted the government's contention that Mr. Lay's bragging was deliberately dishonest rather than merely hollow. Along with Jeffrey K. Skilling, his right-hand man at Enron and briefly his successor as chief executive, Mr. Lay was found guilty of misleading investors about the true state of his firm. The sentencing phase of the trial will begin in September. Mr. Lay and Mr. Skilling may spend the rest of their lives in prison.

These convictions follow those of bosses from other firms that imploded around the same time, such as Tyco International Ltd., WorldCom Inc. and Adelphia Communications Corp. But Enron was the first and most famous of the corporate failures, and the Lay and Skilling verdicts are the most symbolically significant. The government's prosecutors, who were up against a defense team that cost almost $70 million, deserve credit. The criminals' victims -- investors who lost savings, and workers who lost both their jobs and their savings because their retirement plans were invested in Enron stock -- may now feel some emotional redress. Meanwhile, many plan to sue for financial redress as well.

There is a danger in this verdict, however. In the wake of Enron's bankruptcy, some argued that the problems of corporate America were the work of a few bad apples. That argument lost, for the good reason that fully 250 U.S. public companies had to restate their accounts in 2002, up from 92 five years earlier. Corporate America's problems reflected lax oversight of auditors, conflicts of interest at audit companies, accounting rules with too many inviting loopholes and so on. The Sarbanes-Oxley Act, passed in 2002 to fix these systemic weaknesses, now faces a backlash from firms that complain of stiff compliance costs. Although some tweaks in the way the law is implemented may be justified, the welcome Enron verdict should not color the regulatory question. This decade's business scandals were not just about bad apples, and putting those apples in jail is not going to change that.


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