Following The Money. By George Benston & Michael Bromwhich. ISBN 0815708904.pdf

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the AEI-Brookings Joint Center for Regulatory Studies Following the Money The Enron Failure and the State of Corporate Disclosure George Benston, Michael Bromwich, Robert E. Litan, and Alfred Wagenhofer
Following the Money
Following the Money The Enron Failure and the State of Corporate Disclosure George Benston Michael Bromwich Robert E. Litan Alfred Wagenhofer -      Washington, D.C.
Copyright © 2003 by AEI-Brookings Joint Center for Regulatory Studies, the American Enterprise Institute for Public Policy Research, Washington, D.C., and the Brookings Institution, Washington, D.C. All rights reserved. No part of this publication may be used or reproduced in any manner whatsoever without per- mission in writing from the AEI-Brookings Joint Center, except in the case of brief quotations embodied in news articles, critical articles, or reviews. Following the Money may be ordered from: Brookings Institution Press 1775 Massachusetts Avenue, N.W. Washington, D.C. 20036 Tel.: (800) 275-1447 or (202) 797-6258 Fax: (202) 797-6004 Library of Congress Cataloging-in-Publication data Following the money : the Enron failure and the state of corporate disclosure / George Benston . . . [et al.]. p. cm. Includes bibliographical references and index. ISBN 0-8157-0890-4 (cloth : alk. paper) 1. Disclosure in accounting—United States. 2. Corporations—United States—Accounting. 3. Corporations—United States—Auditing. 4. Accounting—Standards—United States. 5. Financial statements—United States. 6. Capital market—United States. 7. Enron Corp.—Corrupt practices. I. Benston, George J. II. AEI-Brookings Joint Center for Regulatory Studies. HF5658.F65 2003 657'.95'0973—dc21 2003000068 9 8 7 6 5 4 3 2 1 The paper used in this publication meets minimum requirements of the American National Standard for Information Sciences—Permanence of Paper for Printed Library Materials: ANSI Z39.48-1984. Typeset in Adobe Garamond Composition by R. Lynn Rivenbark Macon, Georgia Printed by R. R. Donnelley Harrisonburg, Virginia
O nly a few short years ago, after the Asian financial crisis of 1997–98, Americans held out their systems of cor- porate governance and financial disclosure as models to be emulated by the rest of the world. Thomas Friedman, in his best-selling book The Lexus and the Olive Tree , cited these features of the U.S. economic system with approval. It was with some embarrassment then, and no little dismay, that begin- ning in late 2001 American policymakers and corporate leaders found themselves facing the largest corporate accounting scandals in American history. Although accounting irregularities had shown up in several large corporations in preceding years, they paled in comparison to the abuses uncovered at Enron, WorldCom, and a handful of other American corpo- rate giants. Both Enron and WorldCom went bankrupt. Criminal and civil investigations and lawsuits were pending in those and several other cases as 2002 drew to a close. The scandals led the Bush administration to call for far-reaching reforms in both the corporate governance and financial Foreword v
vi  disclosure regimes. Congress quickly followed by enacting most of them,

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