Who's Really on Trial: Enron and Arthur Andersen, or the Free Market?

By Thomas J. Donohue

As Congressional, U.S. Justice Department, and Securities & Exchange Commission investigators circle Enron and its accounting firm, Arthur Andersen, it appears they've lost sight of the obvious suspects—the individuals responsible for wrongdoing—and instead have wrongly indicted the most innocent of bystanders—our free market system.

Make no mistake about it; what happened at Enron and Arthur Andersen was wrong and indefensible. But Enron was NOT a failure of the market—it was the failure of a relatively few unscrupulous individuals at both firms. From the outset, the U.S. Chamber of Commerce, the nation's largest business federation, has taken a strong public stand against these greedy and dishonest operators. We have called for full prosecution and punishment of those who broke the law and violated the trust of tens of thousands of employees and investors.

But, as often occurs when an incident attracts a media frenzy, lawmakers and regulators appear inclined to "overcorrect" the Enron problem. Instead of focusing on the real problem, they have rushed forward with proposed laws, rules and regulations that threaten to fundamentally alter the free market system—our nation's most treasured and distinguished institution.

For example, the House of Representatives has already passed a bill that would, among other things, limit the flexibility of employees to invest and divest stock in their 401(K) plans. Worse, several lawmakers intend to push alternative legislation with even greater restrictions on when and how individuals invest their money. Adding more regulatory burdens to retirement savings programs may force companies to stop voluntarily providing them, jeopardizing the nest eggs of some 90 million American workers.

These and other knee-jerk reactions to the Enron debacle are symptoms of "Enronitis," a malady in which government officials wrongly perceive the failure of individuals as a failure of the market, and, as a result, pursue comprehensive, fundamental free market changes in hopes of heading off the next Enron.

Those suffering from this disease have forgotten or failed to grasp the most basic lessons of Econ 101. Perhaps a quick refresher is in order. The free market system is based on risk. It is impossible to maintain free markets without risk, so we must accept and manage it. The alternative—eliminating risk from the system—is a "planned" economy, and the world witnessed how poorly that worked in the former Soviet Union. Clearly, a free market rooted in risk is the best economic system the world has ever known.

But managing risk depends on transparent, honest systems for transmitting information. We have laws that ensure the flow of sound information. In the case of Enron and Arthur Andersen, those laws were violated, and corrective steps must be taken.
First, government must punish the few bad actors who broke the rules. Second, if investigators can identify areas where information and oversight were lacking, then government should enact additional laws that would help to enhance transparency and integrity, restore investor confidence in risk-taking, and, hopefully, prevent another Enron incident.

What government must NOT do is attempt to eliminate or reduce risk from the free market system by attempting to over regulate retirement savings and pension programs. The free market cannot—and will not—tolerate government controls over when and how people invest their money.

The government also must NOT paint all Enron and Arthur Andersen employees with the same brush. The fact remains that the vast majority of these workers—from the janitors up to the highest-level executives—have always done their jobs with integrity and have cooperated with authorities in the ongoing investigation. By indicting Arthur Andersen the company—and not the individuals responsible for wrongdoing—the U.S. Justice Department has damaged the professional reputations of each and every one of the accounting firm's 26,000 honest, hardworking U.S. employees.

The market has, and will continue, to render its own independent judgment of Enron and Arthur Andersen. Already, Arthur Andersen has been "punished" with the loss of well over a hundred clients and hundreds more partners and employees who have left voluntarily. The market, in essence, has sent a clear and strong signal that it is uncomfortable with Enron and Arthur Andersen playing fast and loose with the rules.
There will always be dishonest businesspeople who violate the law for personal gain. But in the course of rightfully investigating and prosecuting these wrongdoers, government must be careful not to weaken the very system it purports to protect. From time to time, new laws and regulations may be required to refine and strengthen the free market. Improving transparency and accountability is one thing. Eliminating risk and investment choices is quite another.

Thomas J. Donohue is President and CEO of the U.S. Chamber of Commerce.