Wrong Numbers.(corporate fraud)(Brief Article)(Statistical Data Included)

American regulators, business leaders and shareholder activists have been lecturing other countries for years about the need for more "open and honest" markets and for more transparency in the corporate sector. As the sordid Enron collapse makes clear, the U.S. system has serious financial-reporting problems of its own. Last week the Texas-based energy trader became the largest bankruptcy in U.S. history. In broad sketch this tale of investors throwing money at a hot company, of off- the-books trading operations, mysterious accounts and political cronyism evokes Asian or Latin American business crises in the 1980s. How could a paragon of corporate America be allowed to function the same way?

What's troubling about Enron is that it's not an isolated corporate flameout. Over the past three years scores of high-profile U.S. companies (among them Xerox, Waste Management, Lucent and Cendant) have been investigated for financial irregularities, and 464 firms have had to restate their earnings. Experts say those charged with safeguarding the numbers for investors--outside auditors, analysts and boards of directors--are often not doing their jobs. Is "corruption" too strong a word? "No, I don't think it's too strong at all," says James Chanos, president of Kynikos Associates, a New York firm that specializes in "shorting" stocks (among them, Enron). "There's all kinds of evidence to suggest that U.S. financial reporting and the audit function that backs it up have gotten increasingly corrupt the last few years."

Experts say that unless these reporting problems are fixed, the credibility of America's financial system will suffer. "Accounting problems devastate the confidence of investors in capital markets," says Michael Young, a partner at the New York law firm Willkie Farr & Gallagher and editor of a book titled "Accounting Irregularities and Financial Fraud." "The specter of [financial chicanery] causes uncertainty, increases risk and raises the cost of capital."

Some of this can be blamed on the Internet bubble, when American CEOs were pressed to compete with the skyrocketing shares of the dot-coms. Even the world's most demanding corporate-governance system was unable to keep up with increasingly aggressive bankers and accountants. During the '90s, investment analysts began hyping stocks rather than analyzing them, and politicians--flush with donations from the financial sector-- watered down attempts by the Federal Accounting Standards Board to toughen certain rules. "We got so greedy that everyone was just looking to make a dollar in the short run, not what would be better [for investors] in the long run," says Lynn Turner, former chief accountant for the Securities and Exchange Commission and now director of the Center for Quality Financial Reporting at Colorado State University. That mind-set ...