crisis for Enron started on October 16, 2001 when Enron
reported a $618 million third-quarter loss and disclosed
a $1.2 billion reduction in shareholder equity. The regulatory
agencies responded swiftly. Within a day, the Security Exchange
Commission (SEC) acted and sent a letter to Enron asking
for detailed information. By October 20, the Internal Revenue
Service (IRS) sought and obtained information from the Republican
House Majority Issues Committee to show how it raises and
spends its money, and it revealed large donations from Enron.
By October 22, the informal SEC enquiry was publicly acknowledged
by Enron; this news caused a 20% dip in Enron share value.
Oct 28 and 29, US Treasury Secretary O' Neill and Commerce
Secretary Evans were approached by Enron for help, but both
refused to intervene. By Oct 31, SEC enquiry was upgraded
to a formal investigation. By Nov 8, Arthur Anderson, the
accounting firm that destroyed key documents, received a
federal subpoena for documents related to Enron, and Enron
filed documents with the SEC revising its financial statements
for the past five years to account for $586 million in losses.
On Nov 29, SEC investigation was expanded to include Arthur
Anderson. On Dec 2, Enron filed for chapter 11 bankruptcy
protection, marking the swift collapse of the once trading
immediately began hearings on the subject. By Dec 12, Joseph
Berandin, the chief executive of Arthur Anderson appeared
before Congress. On Jan 3, 2002, Senator Joseph Lieberman
chaired the full Governmental Affairs Committee heading
the investigation of the White House's involvement in the
collapse. Top executives and directors of Enron were subpoenaed
by the Senate Committee. By Jan 10, the Justice Department
began criminal investigation of Enron's collapse. On Jan
24, congressional hearings on the subject began. On Feb
24, the Justice Department instructed the White House to
preserve any documents related to its dealings with Enron,
and the White House agreed to comply.
improvements followed equally rapidly. On Feb 14, SEC revealed
its plans to alter its policies on corporations' disclosure
of financial information. Within days, Judiciary stepped
in as class action lawsuits were filed against Arthur Anderson
and Enron by shareholders. The Congress filed an unprecedented
lawsuit against Vice President Cheney as he refused to disclose
details of interaction between Enron executives and Bush
administration's energy task force which he headed. On March
7, President Bush himself revealed to public a detailed
proposal to require corporate chief executives to vouch
personally for their companies' financial statements. On
March 20, the House and Senate proposed pension reform plans
to offer more legal protection to workers in the wake of
the Enron controversy. On April 2, the Senate called for
new laws and dramatic changes in American business executive
of investigations and policy changes started flowing by
April 2002. On April 9, David Duncan, Arthur Anderson's
lead Enron auditor pleaded guilty to obstruction of justice
in destroying Enron-related documents. On April 11, the
House of Representatives passed Bush's new pension reform
bill in the wake of Enron scandal. On April 17, a House
committee approved legislation passing a new auditor oversight
board. On April 24, the House passed accounting reform package,
calling for stricter oversight and disclosure policies.
Wonder of all wonders, prosecution already began against
Arthur Anderson in a Houston court, and the trial is in
final stages by June first week!
breathtaking speed is not peculiar to Enron or the US. The
junk bond scam occurred in the US in 1980s. The chief accused,
Michael Milken was tried swiftly and sentenced to jail term
and completed his sentence years ago. Nick Leeson, the accused
in Barings Bank scandal in Singapore was apprehended, tried,
and sentenced, and has already completed his sentence.
witness the securities scam of Harshad Mehta and the stock
market scam of Ketan Parikh. Years after the scam, Mehta
died of natural causes, and as of now nothing of consequence
happened. Ketan Parikh case is still under investigation.
The less said the better about Bofors, HDW and other scandals.
No wonder, our people exhibit little faith in capital markets,
governments, regulators and courts. We need to get our act
together if we want rapid economic growth. Rule of law and
trust in institutions are the paramount requirements for
a well-functioning market. Mistakes and accidents are bound
to happen in any system. The test of the system's resilience
is how it responds to events, internalizes lessons of past
experience, and institutes safeguards to protect its citizens.