NCPA - National Center for Policy Analysis

Does Congress Bear Some Responsibility for Enron Debacle?

January 24, 2002

Some members of the accounting profession are faulting Congress for obstructing accounting reforms that might have alerted shareholders to Enron's predicament long before the company collapsed.

At issue are accounting standards set by the private Financial Accounting Standards Board (FASB) which the government's Securities and Exchange Commission (SEC) requires companies to follow. But if Congress is unhappy with an FASB standard, it can pass a law directing the SEC to ignore it.

  • In the 1970s and the 1980s, members of Congress -- mostly from oil-producing states -- pressured the FASB and the SEC not to demand tougher standards for financial reporting in the petroleum industry.
  • From 1991 to 1994, members of Congress prevented the FASB from issuing a standard that would have forced companies to take a charge against earnings when they issue employee stock options.
  • Despite bipartisan opposition in Congress during the 1997-98 session, the FASB adopted a new standard on derivatives to ensure that corporate financial statements accurately reflected certain risks.
  • But in the 1999-2000 session, Congress successfully placed barriers in the path of proposed standards to mergers and acquisitions and the way corporations involved in them account for the value of intangible assets like good will.

Some accounting professionals suggest the FASB propose restoring to balance sheets many liabilities, like certain kinds of leases that are now considered "off balance sheet"; adjusting reported earnings for changes in prices of assets; and recognizing and amortizing many intangible assets that are currently not even seen on balance sheets.

Each of these changes, observers believe, could have helped regulators and investors see the Enron-Andersen debacle coming, or even helped to prevent it.

Source: Michael H. Granof (University of Texas) and Stephen A. Zeff (Rice University), "Unaccountable in Washington," New York Times, January 23, 2002.


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