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New 'Enron Opportunity'

April 29, 2002

Small investors raked by the Enron collapse are still licking their wounds, and here comes Wall Street with more scandal--investment companies accused of giving misleading advice to investors in order to bolster their own portfolios. Investor confidence can't be restored without regulatory reform. As made clear by the Enron case, that must include assurance that auditors will be honest watchdogs of corporate finance.

Legislation passed by the House Wednesday does not go far enough, but the Democratic-led Senate should resist the temptation to respond with virtuous legislation that has no chance of becoming law. Unless there is a reasonable compromise, nothing will get passed in this election year, and the next round of abuses will brew unseen.

The auditing industry has succeeded so far in muffling new regulations. No wonder; the nonpartisan Center on Responsive Politics reports that in 2000 the industry shelled out $12.3 million in lobbying fees and $14.7 million in campaign contributions. The industry is sponsoring a nationwide advertising campaign to resist reform, even though Enron's sudden collapse showed in gruesome detail the conflicts of interest that plague accounting firms. The accounting firm Andersen, accused of helping to conceal Enron's financial woes, earned $52 million in consulting fees in 2000 from Enron that had nothing to do with auditing. Probes into Merrill Lynch and Citigroup over their stock analysts' recommendations may well uncover other auditing abuses.

What's needed is not a cosmetic tuck but major surgery. The GOP-backed House legislation, which President Bush has endorsed, is only a start. It would create a board under Securities and Exchange Commission oversight and force companies to disclose transactions that did not appear on balance sheets, but it would not directly attack accounting abuses.

Senate Democrats want to prohibit accountants from carrying out consulting work for auditing clients, a step that is critical to reform. Sen. Paul S. Sarbanes (D-Md.), the Banking Committee chairman, would provide a new board more power to investigate auditing companies. Democrats hope to ban stock analysts from trading in companies that they tout to investors, and, in a related measure, Sen. Patrick J. Leahy (D-Vt.) is sponsoring a bill that would increase criminal penalties for security fraud and require auditing companies to retain all documents for five years.

Where Democrats are likely to have to make concessions is on the power of a new auditing board. In any case, the board's effectiveness comes down to the willingness of SEC Chairman Harvey L. Pitt to use new regulations to police the industry aggressively.

None of this will matter if no reforms are passed. House Democratic Minority Leader Richard A. Gephardt has already made it clear he will use the flawed GOP bill as an election-year club to bash Republicans as corporate lackeys. He should first seek an honest compromise. As with campaign finance reform, Enron created an opportunity. Shame on lawmakers if they don't seize it.

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