(Page 9 of 18) - CORRUPTION: Dare We Compare the United States & China? authored by Johnson, Roberta Ann.

Economic Corruption

- All around the world, in every country, the goal of business is

not to serve the public; it is to make money. When that drive for profit produces corrupt
behavior and erupts in major scandals, it can have a demoralizing effect. The early twenty
first century scandals in America over revelation of business fraud followed by
indictments and punishment included corporations such as WorldCom, Qwest, Tyco,
Adelphia Communications, ImClone and Global Crossing. The series of revelations
started with one of the world's largest electricity and natural gas traders, Enron
Corporation.

In 2000, Enron’s reported revenues made it the seventh largest company in

America. Questionable methods and strategy and misrepresentations to the public of their
financial status were used to expand this natural gas pipeline company. It exploded in
growth until 2001, when the technology bubble burst (Morse and Bower 2002: 55). The
Securities and Exchange Commission (SEC) investigated and Enron admitted that it had
been overstating earnings by nearly $600 million since 1997. Enron’s fraudulent
accounting methods, hidden by fraudulent bookkeeping was exposed. The SEC also
investigated Enron’s auditor, Arthur Andersen and in two years, as Enron imploded, its
investors lost $6 billion.

In December 2001, Enron filed for Chapter 11 bankruptcy protection and

announced the layoff of 4,000 employees. Bankruptcy caused a $1 billion loss in pension
and retirement funds. It was a financial catastrophe. The FBI investigated and Congress
held hearings and “Enron went bankrupt without ever reporting a poor quarter relative to
recurring earnings,” according to whistleblower Sherron Watkins. (Watkins 2003:10) The
exposé rocked the business world as the fallout expanded. Predictions were that
eventually, there would be at least 25 indictments related to Enron, including jail time for
some (16).

The American response to the corporate scandals and corporate failures of the

past had been to pass laws that addressed the problems and that strengthened regulations.
For example, after the stock market crash of 1929 followed by a lengthy and devastating
economic Depression, They were the United States put in place a series of reforms that
included the establishment in 1934 of the Securities and Exchange Commission (SEC) to
regulate an agency that could address the fraudulent behavior that contributed to the stock
market crash exchanges and brokers, and oversee company financial disclosures and
fraudulent stock manipulations (Schilit 1993). Almost a century later, when the Enron
scandal was unfolding in the fall of 2001, the response was the same as the one after the
stock market crash --- to pass new and stronger laws.

Less than a year after the Enron revelations, Congress passed a new corporate

fraud and accounting bill, the Sarbanes-Oxley Act (H.R. 3763). The bill increased
penalties and prison terms, improved transparency, increased SEC resources, and created
a new oversight board, the Public Company Accounting Oversight Board.

Lawmakers believed that serious, not just symbolic action would be the only

thing that could help reduce corrupt practices and build public confidence in publicly
traded companies. But laws control business corruption imperfectly because enforcement
agencies are faced with the problem of modern financial mechanisms so new and
complex, and practices so esoteric, that external control may at times seem close to
impossible. They are also faced with the problem that punishing wrongdoers with fines,