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Partners in crime: Enron and WorldCom couldn't have happened without the help of accountants, bankers, and lawyers. After a decade of lax regulation and laissez-faire court decisions, these secondary actors are facing harsher scrutiny.

Article Excerpt
Wall Street has been rocked by a series of accounting scandals that have taken a staggering toll on the economy and investors' pocketbooks. According to one study, recent corporate malfeasance has cost Americans more than $200 billion in lost investment savings, jobs, pension funds, and tax revenue. (1)

These enormous losses, however, tell only part of the story. Many investors have lost faith in the integrity of U.S. equity markets. Many more lack confidence in the accuracy of financial reporting. This loss of trust, although not easy to quantify, could ultimately cost the U.S. economy billions of dollars in lost revenues, profits, exports, and jobs.

The factors that have led to the current spate of mega-fraud cases are complex. But even as investors and regulators continue to sift through the rubble of Enron, WorldCom, Global Crossing, and dozens of other high-profile accounting cases, one factor has emerged as a primary culprit: the relative ease with which dishonest corporate executives enlisted the support of accountants, lawyers, bankers, financial advisers, and others in devising shady business transactions and falsifying the finances of large, publicly traded companies. To paraphrase Hillary Rodham Clinton, it takes a village to commit securities fraud. In the case of Enron and WorldCom, it took a virtual metropolis.

Breakdown of corporate governance

Why have so many accountants, bankers, and lawyers abandoned their ethical, if not legal, obligations and helped corporate clients engage in wrongdoing? Why have so many become "enablers" of securities fraud rather than watchdogs and whistleblowers?

The answer is that beginning in the early 1990s, a number of events had the combined effect of greatly reducing the liability exposure of accountants, lawyers, bankers, and other secondary actors under federal securities law. In 1990, the Seventh Circuit ruled in DiLeo v. Ernst & Young--a securities case arising from the collapse of Continental Illinois Bank--that it was "irrational" to assume that an accounting firm would risk its reputation by aiding a client's fraud, since the accountant stood to gain nothing but relatively nominal audit fees. (2) The court stated, "An accountant's greatest asset is its reputation for honesty, followed closely by its reputation for careful work. Fees for two years' audits could not approach the losses [the accountant] would suffer from a perception that it would muffle a...

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