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The Criminal Element
It's jail time for Enron and Arthur Andersen execs.


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Larry Kudlow

Jail ‘em. All the Enron and Arthur Andersen principals and then some. Why? To save our system of corporate governance, which used to be the best in the world. To save investor confidence. Maybe even to save our entire free-market system of capitalism.

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Now, I’m a pro-business guy. I can’t stand it when the Tom Daschles or Ted Kennedys of the world start bashing business or rich people. Business is the center of the American economy. You can’t have jobs without healthy businesses. And business is what we do best in this country — better than any other nation on the planet.

But the characters at Enron and Arthur Andersen are wrecking the very foundation of American business. Their shenanigans, chicanery, fraud, insider dealing, self-serving excuses, and hubris are undermining everything this free and democratic nation stands for.

Last week’s headline that Enron CEO Kenneth Lay sold a large block of his company’s stock within days of getting senior employee Sherron Watkins’ memo — that detailed how the company was about to collapse — sent me over the edge. A day or two after Lay sold his stock, if you can believe it, he then sent a memo to employees (and hence the public) saying the company’s outlook was never better. But the company’s future was never worse, and Lay knew it.

Hubris is really the best way to describe the psychology behind the Enron debacle. This is a gang that was hell bent for corporate growth and a high stock price. In pursuit of this end, they subverted normal business practices and twisted the law to create an incredible 3,000 off-balance-sheet partnerships to hide their excessive leveraging of debt. Among these partnerships, 900 were based off-shore, which allowed the Enron management to dodge tax bills and further hide the details of their corporate machinations.

This gang scored revenues before they existed, reported profits before they occurred, and did it all with the blessing of big-five accounting company Arthur Andersen — and, mind you, not just a couple of local Houston-based green eyeshades. The Andersen top brass in Chicago was party to all this cooking of the books, as reported by the Financial Times.

The Andersen accountants shredded Enron documents despite an SEC investigation, exactly the failed tactics used in the Waste Management debacle of a few years back. But for those improprieties, the Andersen accountants got off with an SEC censure. This time the penalty must be much worse. They too should be jailed.

If the principals at Enron had even an ounce of moral fiber, they would have taken their licks and honestly reported their losses. They bet wrong on energy, fiber optics, broadband and other commodities. So what? Everyone suffered in the stock market and the economy from the deflationary downturn created by Federal Reserve miscues. But the Enron gang couldn’t face the music. They had no moral fiber, no character, no courage and no corporate responsibility. Instead they tried a massive coverup, that failed massively.

The consequences of all this will be far reaching. Already, the Enron story has stopped the strong stock-market rally. Investors are shaking their heads, and like the Enron employees who saw their 401(k) plans go up in flames they’re going to question all forthcoming corporate statements of accounting and disclosure.

Floyd Norris of the New York Times put it well when he reminded us that auditors are supposed to “present fairly, in all material respects, the financial position” of the company “in conformity with accounting principles generally accepted in the United States of America.” This basic standard of corporate life must be restored and renewed, otherwise there will be no stock-market rebound and the investor class will boycott the capital formation which is so necessary to fund our high-tech economy of ideas and advances. Hence, there will be no strong economic recovery.

The Bush administration must show leadership on this issue, especially prodding its Security and Exchange Commission to forcefully reform and regulate the debasement of basic accounting guidelines and ensure the essential transparency of corporate information. This is a solvable problem as long as we learn from the Enron charade — and as long as decisive action is taken.

We could even launch a new era of conservative financial reporting as Mr. Norris and others believe possible. But in the meantime, the Justice Department must prosecute swiftly. Justice must be brought to bear.



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