by Margaret Gilling, Editor, Journal of Global Financial Markets

Joint venture of CCH INCORPORATED and Illinois Institute of Technology’s Center for Law and Financial Markets

A well-known fund manager, the former managing partner of Arthur Anderson, a law partner specializing in 401-K plans, and an investments professor sat down with the chairman of CLFM to talk about the regulatory and behavioral changes likely to result in the wake of the largest bankruptcy in U.S. history.

After Enron…

What may well be the immediate "Enron Effect" will be a return to audit quality and an increase in regulations. This was the expressed opinion of four leading financial experts who participated in a panel discussion held on April 4 at the Center for Law and Financial Markets at the Illinois Institute of Technology, moderated by the Center’s Chairman, Jack Wing.

Duane Kullberg, former managing partner of Arthur Andersen Worldwide, discussed the areas in which there is likely to be new regulation in accounting practices as a result of abuses uncovered during the Enron investigations. He questioned such practices as valuing securities by marking to model rather than marking to market and the use of special purpose entities as a means of hiding debt. Kullberg pointed out that American accounting practices are very complicated in comparison to those of our European counterparts, and warned that the desire to regulate ourselves out of the current crisis in investor confidence may actually exacerbate the situation rather than alleviate it. He suggested that it is the very complexity of the regulations that provides loopholes where misconduct may occur.

Ralph Wanger, Co-Portfolio Manager of the Acorn Fund did not exempt the investors for failure to do their part in seeing the Enron disaster coming. It is tempting, he said, in good times to go where the easy money is. He reminded listeners that it is not enough for investors to read the annual reports and company press releases. He pointed out how several failed businesses, including Enron, released reports with wildly varying numbers that should have been a flag that there was something amiss. Wanger predicted we may see investors return to a preference for dividend stocks as a means of assuring themselves of the soundness of the companies in which they invest.

Andrew Liazos, Managing Director of the Executive Compensation Group of McDermott, Will and Emery said that it is likely that we will see revisions in ERISA as a result of the losses employees suffered in the Enron affair. He believes that new regulations may even encompass a return to the Defined Benefit Plan. He discussed stock options as a method of executive compensation and posed the question as to whether stock options cause executives to make decisions that simply enhance the value of the stock as opposed to enhancing the value of the company.

Keith Black, Assistant Professor at the Center, suggests that one of the motivators for current businesses will be a desire "not to be the next Enron." He predicted that companies are likely to report lower earnings; that they will be reluctant to put themselves in positions where they have to restate earnings and that they are more likely to expense employee stock options. At the same time they are likely to bring debt back to the balance sheet and to reduce aggressive accounting practices, employing stricter adherence to GAAP standards and be less reliant on special purpose entities as a means of hiding debt. Black said he hoped there would be pressure on rating agencies to be more aggressive in downgrading companies at the first appearance of significant problems rather than a couple of days before the bankruptcy filing. In a word of caution though, Black reminded the listeners that corporations need to make the best possible decisions for their business, not just to avoid "being the next Enron."

All of the participants were in agreement that we are likely to see a large amount of regulation in the coming months as well as companies changing business practices so that they appear more stable and more conservative. The result may be an economy that is less volatile but with a much slower rate of growth.

A transcript of the panel discussion is available for separate sale as a special issue of the Journal of Global Financial Markets, publishing April 2002, offer # 77965001, for $20 a copy. To order yours today, call CCH Customer Service at 1-800-449-6435.