If the ongoing investigation by the Securities and Exchange Commission (SEC) uncovers irregularities by the once-mighty and now-bankrupt Enron Corp., the lead accountant for the agency assured House lawmakers Wednesday that it will deal “swiftly and completely with any wrongdoers.”

The SEC “will move expeditiously in the Enron matter and take appropriate actions,” said Chief Accountant Robert K. Herdman during a joint hearing before two subcommittees of the Financial Services Committee. Although he could not talk about the specifics of the agency’s still-active investigation, he indicated there would be “vigorous enforcement” of Enron if it turns up evidence of securities fraud. He declined to comment on potential penalties.

“I really can’t say at this point what led to Enron’s demise,” he noted. Herdman said it was too early to conclude that “systemic problems” may have contributed the company’s rapid descent into bankruptcy. He also said it was “premature” to speculate about whether there were more Enrons out there, but he later conceded “there may be.”

He said the agency already was taking action to prevent anymore corporate surprises. The SEC issued “cautionary advice” Wednesday to “remind management, auditors, audit committees and their advisors that the selection and application of the company’s accounting policies must be appropriately reasoned.” The agency said it plans to consider new rules next year to “elicit precise disclosures about…accounting policies” that corporations believe are most “critical.”

Some analysts have hit on the SEC itself for failing to set rigorous guidelines for financial reporting, thereby setting an environment for companies to be “extremely creative” in their accounting.

Financial Services Committee Chairman Rep. Michael Oxley (R-OH) said the joint hearing Wednesday was just the opening volley. The full committee plans in January to conduct a “comprehensive review of all the policy issues that this debacle raises,” he said.

House lawmakers believe the financial demise of Enron was a “wake-up call” on a number of issues — the need for more frequent and transparent financial disclosures by corporations, a review of special-purpose entities (SPEs) or off-balance sheet partnerships, re-evaluation of accounting standards and regulation of accounting firms, whether the SEC needs to maintain closer oversight of companies, why financial analysts didn’t detect the trouble at Enron sooner, possible modifications to the Employee Retirement Income Security Act of 1974 (ERISA) to prevent a “wipe-out of [pension] savings,” and the need for possible congressional legislation.

Some lawmakers questioned whether corporate financial disclosures have become too complex for even the SEC to adequately review. “I assure you [that] we have on the staff [people] who are quite expert” in the area of financial statements, the SEC’s Herdman said. But he agreed there was room for the SEC to “improve our review process,” adding that there’s lessons for everybody to take away from the collapse of Enron.

“I don’t think the Enron situation raises questions about our entire system of financial reporting.” In fact, he said it would be an “overreaction” to call the current system for financial reporting “not trustworthy.” He preferred to call it “challenged,” and agreed some steps should be taken to improve it.

But Rep. Ken Bentsen (D-TX) said he believes the problems are more deep-seated. “I think the increasing volume of [earnings] restatements is somewhat alarming,” he noted, adding that he hoped the SEC was looking at this trend more closely.

Herdman believes that “simplification” of the accounting rules, which exceed the breadth of the Internal Revenue Service tax code, “would be a good thing.”

CEO Joseph F. Berardino of Arthur Andersen LLP, Enron’s auditors, told the subcommittees that the energy trader was less than forthright with some information to its accountants. With respect to one of Enron’s SPEs, he noted “our audit team was not provided critical information.” Enron “flunked the test” for certain SPEs, which required outside investors to have at least a 3% interest in the partnership, he said.

Enron “had a history of not being forthcoming,” noted Rep. Spencer Bachus (R-AL). Andrew Fastow, the former CFO of the company, was quoted in a Fortune Magazine article as saying “we don’t want to let [anyone] know what’s on our books,” the lawmaker noted.

“I think this is a time for change” in the way companies are audited, Berardino said, adding that the “stresses” at Enron should prompt people to “think outside the box.”

There is a “need for improvements [to the] system,” agreed one lawmaker, but the question is “where do we [Congress] start.” He suggested that Capitol Hill might begin with the issue of corporate governance, requiring audit committees to be made up of members who are outside of a corporation, so that they will not have a “vested interest in doctoring earnings.”

With respect to financial analysts, “there were some analysts issuing negative ratings on Enron,” said a House lawmaker. The question is “what did they know that others didn’t.”

Rep. Richard Baker (R-LA), who chaired the joint subcommittee hearing, called Enron’s recent slide into bankruptcy the “most stunning business reversal in recent history.” While many saw Enron as a “new business model,” it turned out to be “too good to be true.” The energy trader in retrospect became a “hedge fund that just happened to own an energy company.’

He and other lawmakers sharply attacked the way Enron handled its employees’ 401(k) pension plan. “Have you actually met a financial advisor that would tell you to put all your eggs in one basket?” asked Baker.

Several lawmakers made a point of noting Enron Chairman and CEO Kenneth Lay’s failure to appear before the joint hearing, despite the “numerous requests” that were made. Lay was a no-show because he had to participate in the first hearing of creditors in the company’s bankruptcy proceeding. They vowed, however, to get Lay in front of Congress before the investigation was completed.

A few members of the House subcommittees warned their colleagues to go-slow and to not reach “sweeping conclusions” about causes for Enron’s downfall, but the majority of them clearly had made up their minds already. A number were angry that Enron forced rank-and-file employees to “watch helplessly” as the value of the company stock that they held plunged to below the $1 mark, while several top management officials — Lay included — had dumped much of their stock months before.

The Department of Labor has estimated that Enron employees lost 70% to 90% of the value of their retirement portfolios because they were barred by company officials from selling the sinking stock. Labor has begun an investigation into Enron’s actions.

The Enron executives were allowed to grab for a “life raft,” while the company’s employees had to go down with the ship, remarked one congressman. If it’s determined that fraud was involved, the SEC’s Herdman said the agency could go to court to “disgorge” the proceeds from the stock sales of Enron executives, assuming they “still have the proceeds to the fraud.”

The issue of potential criminal charges against former and current Enron executives was not examined at the hearing. But BusinessWeek in its Dec. 17 issue cited an SEC source as saying that four different Attorney General Offices were looking into whether to pursue criminal charges against Enron and its officers.

©Copyright 2001 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.