A Cleanup Job for Corporate America
Investors aren't waiting for the Securities & Exchange Commission or the accounting profession to clean up Corporate America's books. Post-Enron Corp. (ENRNQ ), they're taking action themselves. A huge cleansing is under way in the stock and bond markets as individuals and institutional money managers turn away from companies perceived to have flawed or opaque financial statements. Tyco International Ltd. (TYC ) is but one of many companies whose paper is being dumped for its accounting sins. The good news is that, under investor pressure, dozens of corporations are now scrambling to restate their earnings and make their balance sheets more transparent. The bad news is that the investor revolt could turn into a stock market rout and the growing strains on credit could produce a serious banking crisis. Policymakers and regulators would be wise to move quickly to fix what is a corrupted corporate reporting system. There is more at stake than the economic recovery. The integrity of American capitalism is at issue.
The financial markets are already showing deep strain. Corporate bonds are starting to suffer mightily as companies with questionable accounting throw a shadow over the entire bond market. Investors don't know which company will be hit next--or how hard. The commercial paper market is getting pummeled as well. When the Standard & Poor's rating agency cut Tyco by three notches in one fell swoop, it effectively shut the company out of the commercial paper market. Tyco then had to draw on its $8 billion backup bank lines of credit. If dozens of companies are forced to follow, banks may soon face a liquidity crisis of their own. That increases the chances of a double-dip downturn.
What should be done? The Federal Reserve, of course, should be monitoring the markets to make sure there's enough liquidity to keep them open and steady. There is every indication that it is doing its job. But not so the SEC or the auditors. It's critical for investors to regain confidence in the markets and believe that they have the tools to evaluate risk and value companies fairly. Those companies that are moving back toward more conservative accounting are heading in the right direction. But a new set of common standards for all companies is absolutely necessary and must include better uniform measures of true financial health: unencumbered cash flow or true operating earnings would get us closer to this goal. The SEC and the accounting profession must face up to their responsibilities and act forcefully.
So, too, must Corporate America. The silence of CEOs throughout the slow death of Enron is hurting the reputation of Big Business at home and abroad. With Enron, we have seen self-dealing, the breaking of corporate codes of conduct, the buying off of professional watchdogs, the destruction of pension savings, and widespread political corruption. Congress is investigating, the President is castigating, accounting firms are changing, but CEOs are not talking. Chief executives who are usually not shy about speaking out on taxes, health care, China, or a host of other issues are mum on Enron. The Business Round Table has issued a statement basically saying it was studying the matter. The U.S. Chamber of Commerce and the National Association of Manufacturers have spoken mostly to defend (401)k pension plans in the face of Congressional efforts to reform them. Where is the CEO criticism of Enron managers making tens of millions of dollars in inside, self-dealing partnerships while employees and shareholders are left stranded?
America needs its chief executives to speak out and help restore credibility to the nation's business culture. Who will be the first?