A US Senate report released on Monday found "systemic and catastrophic failure" by the Securities and Exchange Commission in regulation of failed energy trader Enron Corp.
The 127-page report by the Senate Governmental Affairs Committee blasted the SEC for failing to detect dubious business practices at Houston-based Enron, for example, by failing to review any of Enron's post-1997 annual reports.
The report said one reason the SEC didn't notice the fraud that has surfaced in numerous recent US corporate scandals - not just at Enron - is that it was not actively looking for it.
"The public filing review process is designed almost exclusively to assure compliance with the form of disclosure requirements, not to detect wrongdoing," the committee said in a letter summarizing the report to SEC Chairman Harvey Pitt.
"If the SEC is to play a role in detecting and rooting out financial fraud, it will need to make this an explicit goal and develop new processes to support it."
The committee, chaired by Joseph Lieberman, a Connecticut Democrat, sent the report along with the letter to Pitt. But much of the time period covered by the report dated to before Pitt's arrival at the agency in August 2001.
Enron filed for bankruptcy protection in December 2001 after a spectacular collapse that wiped out billions of dollars in stock and bond investments and damaged investor confidence worldwide.
The company's former finance chief, Andrew Fastow, was charged last week with money laundering and conspiring to defraud. During his tenure at Enron, Fastow controlled scores of special partnerships designed to hide debt.
The SEC's job was to protect investors, but "investors were left defenseless," Lieberman and the Senate committee's ranking Republican, Fred Thompson, said in the letter to Pitt.
"Red flags" had appeared in Enron's reports as early as 1999 in the form of "opaque and questionable references" to transactions run by Fastow, it said.
"If the SEC had pressed Enron about those and other troubling disclosures when they first appeared in Enron's 1999 annual report, some of the enormous losses suffered by workers and investors might have been prevented."
SEC Chairman Pitt said in a statement reported by The Wall Street Journal that he had not had a chance to read the full report, but that the SEC would carefully consider its conclusions.
Pitt's defenders point out that the alleged accounting chicanery at Enron, began while the SEC was chaired by Arthur Levitt, who served from 1993 to 2000.
The Journal also noted that Lieberman had been a leading opponent of proposals to treat stock option compensation as an expense on corporate income statements, a reform that many have said might have helped head off recent corporate collapses.
"It's amazing that the very people who blocked the efforts of the SEC and FASB (the Financial Accounting Standards Board) to improve financial reporting for investors are the ones who are now acting much like the executives of Enron and trying to blame everyone but themselves," Lynn Turner, the SEC's chief accountant from July 1998 to August 2001, told the Journal.
The Senate panel also noted that other private-sector watchdogs such as credit rating agencies and Wall Street securities analysts had failed to detect Enron's problems, or if they did, done nothing about them.
"The investigation revealed a story of systemic and catastrophic failure - a failure of all the watchdogs to properly discharge their appointed responsibilities," it said.
The report said the SEC had not followed up to make sure Enron was adhering to the agency's limits on exemptions - for example, the SEC did not monitor its 1992 decision to let Enron use mark-to-market accounting to record the value of energy contracts.