Banking & Capital Markets

Wringing Some Good from Enron

Institutional investors offer ideas on how to fix the accounting profession. Your move. Plus: lots of defaults, few IPOs.
John GoffFebruary 5, 2002

With the Enron accounting scandal now a full-fledged stock market contagion, institutional investors are getting a little concerned. Yesterday, the Council of Institutional Investors — a group of 250 pension funds and investment-related firms — sent a letter to SEC Chairman Harvey Pitt calling for a complete overhaul of auditing and corporate governance systems.

The council, which sent a similar letter to congressional committees investigating the troubled Houston energy trader, appears to be concerned that the current media frenzy surrounding the Enron meltdown may not actually result in any meaningful reforms. “As tragic as the Enron case may be,” notes Council Executive Director Sarah A.B. Teslik, “it is also an opportunity for regulators and legislators to take a close look [at the] painful failure of some safety nets intended to protect investors.” According to the letter, council members lost hundreds of millions of dollars on their Enron investments.

The institutional investors suggested several steps for improving current investor safeguards. Here, in no particular order, are some of the suggestions:

  • Reform auditor independence standards by prohibiting auditors from providing any non-audit services to their audit clients.
  • Radically reform the oversight of auditors, making sure that opinions of all interested parties — and not simply Big Five accounting firms — be considered. Says the Council: “The accounting profession’s current system of self-oversight is not working.”
  • Require enhanced disclosure of director links to companies.
  • Toughen the stock exchanges’ listing standards on board independence and board composition. The Council wants exchanges to require that a sizeable majority of a corporate board (at least two-thirds) and all audit committee members qualify as independent directors.
  • Eliminate stock exchanges’ “broker may vote” rule, which allows brokers to vote on so-called routine proposals, including the election of directors and the ratification of auditors.
  • Update disclosure requirements for financial and other critical information.
  • Do not soften the SEC’s stance on enforcement.

Apparently, the Council does not think highly of Pitt’s suggested reforms. “Simply switching to more current disclosure, as Chairman Pitt has proposed, is not enough,” the Council noted in the letter. It went on to state it is “distressed by Chairman Pitt’s recommendation that the agency take a ‘kinder, gentler’ approach with the accounting profession.” Seeing how the institutional investors in the Council manage nearly $2 trillion in pension assets, their suggestions may actually get listened to on Capital Hill.

Default Lies in Our Selves

In case you missed it: Standard & Poor’s reported late last week that 41 issuers defaulted on $31.3 billion of rated bonds in January — a single month record. The old record for defaults was set way back in December, when 27 issuers defaulted on $25.3 billion of bonds. Expect the record to be broken continually up until the summer. “Typically, defaults reach a peak about six months after the bottom of a recession, which would suggest a peak at the beginning of summer,” said Diane Vazza, S&P’s head of global fixed-income research, told wire services. Eighteen of the 41 defaulters in January came from the United States, including McLeodUSA Inc.

IPO Market is the Weakest Link

As many as three companies plan to go public this week. They include two smaller companies that don’t currently make any money. One of those, Paypal Inc., is an Internet payment service. The company’s management is looking to sell 5.4 million shares at $12 to $14 each. The other IPO hopeful, NeoGenesis Pharmaceuticals Inc., a biotechnology firm, expects to sell 6.2 million shares at $12 to $14 a pop. In addition, ManTech International Corp., a defense information technology company, plans an launch an initial public sale of 6 million shares at $14 to $16 each. Wimm-Bill-Dann Foods, a Russian manufacturer of dairy and juice products, may also price this week.

Surprise of the week so far: Sunoco Logistics Partners, which operates oil pipelines and terminal facilities, sold 5 million units at $20.25 each, raising $101.25 million in an initial public offering. The limited partnership, formed by Sunoco Inc., had informed the SEC in October of its intent to go public. But given market conditions, the company has held off on launching the IPO. Sunoco Logistics has two pipeline systems and operates a number of terminal facilities. The underwriting was led by Lehman Brothers, Salomon Smith Barney and UBS Warburg.