Governance, Supervision and Market Discipline:Lessons from Enron

drawnfrom thesee pisodesThis paper studies and documents the accounting scandals and corporate frauds that came to light during 2001 and 2002 at Enron and other companies in the United States and elsewhere. It then describes the failure of governance and supervision as well as the failure of market discipline that took place and goes on to analyse the lessons that can be drawn from these episodes.

The principal conclusion of this paper is that while the Enron and related scandals represent a massive regulatory failure, such failures are inherent in the regulatory process. Regulators are poor at detecting fraud, and therefore we must strengthen market discipline. This in turn calls for four important measures: encouraging hostile take-overs, allowing free short selling, permitting and facilitating class action lawsuits, and promoting competition in the securities industry.

The second important lesson is that the world must learn from the US to prosecute and punish wrong doers swiftly after they are caught.

Finally, changes in regulation and supervision could facilitate the process of market discipline. Measures proposed here include: drastic reform of the system for regulatory review of corporate accounting filings, vast improvements in accounting standards and a movement towards detailed real time disclosures going far beyond the traditional accounting statements.