The guilty verdicts against former Enron executives Ken Lay and Jeffrey Skilling are a resounding victory for the Bush administration in its effort to close the book on the worst wave of corporate scandals in a generation.
Lay and Skilling are likely to be sentenced to lengthy prison terms, joining other high-profile white-collar criminals of the stock bubble era like Tyco's Dennis Kozlowski and WorldCom's Bernie Ebbers.
But despite the aggressive prosecutions and tough new laws designed to prevent a repeat of the deception that cost shareholders, investors and employees billions of dollars, fraud in the workplace is alive and well in the post-Enron era. From the mailroom to the boardroom, employees are still busy stealing from their employers and shareholders.
“We're not seeing a tremendous reduction in the amount of fraud out there,” said Bruce Dubinsky, a forensic accountant based in Bethesda, Md.
There is no question that tougher laws and more aggressive enforcement have had an impact on corporate accounting. Among other measures, the 2002 Sarbanes-Oxley Act, motivated by the Enron collapse and other scandals, required companies to set up comprehensive internal controls and established a new federal board to oversee auditors. It also demanded that top executives sign off on their companies’ financial statements — holding them personally liable if it was later found that someone else had cooked the books.
Penalties for those caught cheating have also been increased — in some cases dramatically. Fines and settlements now regularly top $100 million for cases that would have cost just a few million dollars a decade ago, according to John Coffee, a professor of securities law at Columbia University. Shareholder lawsuits are getting a better hearing in court, and settlements for those that prevail are larger than they were in pre-Enron era, he said.
“The imbalance between the incentive to cheat and the cost for cheating were so great that you got away with scandals,” he said. “That balance is closer (today), but it doesn’t mean we’re going to eliminate scandal.”
In one mushrooming current scandal, federal authorities are investigating stock options granted to top executives at several companies to determine whether those options were backdated to increase the value of those options.
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While new laws have helped expose fraud, and tougher criminal penalties are being handed out to those convicted, fraudsters continue find ways around them. U.S. losses from fraud rose to an estimated $638 billion in 2005 — up from $600 billion in 2002 and $400 billion in 1996, according to the Association of Certified Fraud Examiners, a trade group of accountants who are often called in when fraud is suspected or discovered.
“When you look at the underlying cause of fraud, the underlying drivers are still there,” said Dubinsky.
Worldwide, losses from fraud rose 50 percent from 2003, according to a report from PricewaterhouseCoopers.
“Globally, the trend is toward an increase in economic crime, not a decrease,” the firm found in its 2005 Global Economic Crime Study.
The report found that, since 2003, the number of companies reporting cases of corruption and bribery rose 71 percent; those reporting cases of money laundering were up 133 percent and reports of financial misrepresentation were up 140 percent.
There’s no question that Sarbanes-Oxley — and the complex and costly provisions it requires U.S. businesses to follow — has had a major impact on corporate financial accounting. For starters, companies have had to set up comprehensive financial controls to prevent fraud and catch it when it occurs. Outside accounting firms — chastened by the collapse of Arthur Andersen following that firm's conviction on criminal charges related to the Enron case — have gotten tougher with the clients they’re auditing.
“Managers everywhere are reporting that they’re having a more difficult time with auditors — and auditors are giving them less discretion,” said Coffee. “I think that’s essentially what the (Sarbanes-Oxley) statute was intended to do.”
