Paul O'Neill on the Enron Cleanup

The Treasury Secretary says the energy giant's fall has created a huge, healthy tightening at other companies

As the Enron affair has mushroomed into a sweeping reexamination of business ethics, Treasury Secretary Paul H. O'Neill has been at the forefront of the Bush Administration's efforts to contain the crisis. He helped put together the President's proposal for modest pension reforms and was the architect of the 10-point plan to improve corporate governance that Bush unveiled in front of business leaders on Mar. 7. The former Alcoa CEO sat down with a group of BusinessWeek editors and reporters on Mar. 15 to discuss what comes next. Here are edited excerpts from the conversation:

Q: Many people are saying that Enron auditor Arthur Andersen might not survive [it has been indicted by the Justice Dept.] and that we'll end up with just four big accounting firms. Is that a concern?


It's not good. But it's not so clear to me we're headed for a Big Four. There are a whole lot of other companies stretched out behind the Big Four or the Big Five.

Because the world is so much more interlaced, it's inevitable that we will have international accounting standards that become the norm. It's going to be harder to differentiate the Big Four from a larger number of internationally accredited auditing firms. I'm not too worried about too much consolidation.

Q: But in the short-term, won't there be disruption?


It's a problem. It's really a problem. But I wouldn't be surprised if out of this, for example, a bunch of Andersen partners get together and form their own firm. The people are needed. There's a demonstrated need and a demonstrated demand.

Q: Where are we heading post-Enron?


Everybody I know is scurrying around -- board members, CEOs, and presidents of nonprofits -- looking at their own situation. There's a huge healthy tightening [of scrutiny] in the last couple of months. We've had a beneficial rediscovery of the importance of getting this stuff right.

The question about whether it all ends up well depends on Congress not legislating things that are over the top, that create rigidities, or produce economic costs without value. One good thing about this situation is that it takes Congress a while to do anything. The more they deliberate, the more likely the answers will be reasoned and seasoned, rather than a hasty overreaction.

Q: One of the things Congress is talking about is requiring companies to count the cost of the stock options that they grant their employees as an expense to earnings. Where do you stand on that?


The cost of stock options ought to be charged to a company's earnings when the options are exercised. That's my personal view. It's not an Administration view.

Q: But won't that hurt high-tech startups that depend heavily on options to attract skilled workers?


If stock options are charged to earnings on a prospective basis [when they're granted], then you've got a legitimate case that this screws up the startups. There's a legitimate basis for saying we should not do a prospective reduction to earnings. But when somebody [exercises their option] and it costs you real money, it ought to go to the bottom line.

Q: Won't that make it difficult for companies, since they don't know when the options are going to be exercised?


So what? You gave yourself an exposure. You gave people a ticket to grab the brass ring. When it gets turned in, you ought to report to your shareholders, "They turned it in today, and we got to pay for it."

Edited by Rich Miller

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