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Pressure builds for reforms after Senate finds Enron directors knew of crisis

Rupert Cornwell
Monday 08 July 2002 00:00 BST
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A Senate committee has delivered a damning report on the Enron debacle, accusing the energy group's directors of lying when they claimed they knew nothing of the gathering financial disaster.

Earlier this year Enron directors filed before various congressional committees to claim they had been duped by the company's management and its pliant auditors, Arthur Andersen, now convicted of obstruction of justice. But the committee is having none of it. "Much that was wrong with Enron was known to the board," its 60-page report says.

As America mulls action against corporate wrongdoing, the document's conclusions, though carrying no legal weight, are devastating. At Enron's height, before bankruptcy last December, it had between $15bn and $20bn (£10-£13bn) entangled in complex transactions aimed at keeping debt off its books and enriching dozens of its top executives.

There is scathing criticism of Enron directors for awarding themselves $750m in routine and stock performance-related bonuses for 2000 ­ compared with a reported net income of $975m. The Senate's permanent sub-committee on investigations said: "Apparently, no one on the board ever added up the numbers."

The report found that Enron paid its directors $350,000 a year, more than twice the average for the 200 largest US companies, and said the independence of directors ­ including the former British Tory energy minister Lord Wakeham ­ had been compromised by separate consultancy fees.

The report comes in a make-or-break week for the credibility of attempts to clean up America's financial system. The full Senate will begin discussion today of a bill that would crack down on insider trading and tighten rules for accountants. President Bush is to weigh in with a speech on Wall Street tomorrow in which he may endorse prison terms for corporate rogues who fiddle the books and issue misleading accounts to shareholders.

Adding piquancy to the occasion are the doubts still swirling around Mr Bush's own past dealings in the Texas oil industry ­ notably his sale of $800,000 of stock in a company of which he was a director just before it released figures that caused the share price to plunge. The authorities are also probing alleged accounting irregularities at Halliburton, an oil services company at a time when its CEO was Dick Cheney, the Vice-President.

In a few short weeks, the national mood has been transformed. What at first seemed a matter of rooting out a few "rotten apples" has turned into a crisis of confidence in the honesty of the financial system, and suddenly genuine reform seems possible.

Until last week the legislation promoted by the Maryland Democrat Paul Sarbanes, the chairman of the Senate banking committee, seemed doomed to die by a thousand quiet cuts from corporate interest groups and the powerful accounting industry lobby.

But the latest scandal, featuring the concealment ­ to inflate profits ­ of $3.8bn (£2.5bn) of expenses by WorldCom, the country's second largest long-distance phone company, has given the measure momentum. Opponents dare not show their heads, and Tom Daschle, the majority leader, predicts 80 of the 100 Senators will back it.

The real problem will be the reconciliation of the Sarbanes bill with a far weaker text passed earlier this year by the House of Representatives. The White House role will be crucial ­ and a test of the sincerity of Mr Bush's promises to impose tougher rules on the corporate class to which he belongs.

An important theme of the debate is how to strengthen the role of board directors ­ who are supposed to represent the interests of shareholders but who seem to have fallen so short on the job over Enron.

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