Thursday, June 20, at 9pm, 60 minutes

The meteoric rise and stunning collapse of Enron caused many to question why the watchdog system that was supposed to protect investors failed to sound any alarms about the company's dubious finances. But Enron and its accounting firm, Arthur Andersen, turn out merely to be the tip of the iceberg.

In the 1990s, Enron was just one of more than 700 corporations forced to dramatically correct misleading financial statements as a result of accounting failures, lapses or outright fraud, costing investors an estimated $200 billion. What went wrong?

In "Bigger Than Enron," airing Thursday, June 20, at 9 P.M. on PBS (check local listings), FRONTLINE examines an oversight system gone soft. Through interviews with SEC officials, corporate executives, members of Congress, and investor advocates, the one-hour documentary explores how the system of controls was eroded by conflicts of interests among watchdogs such as outside auditors, as well as congressional intervention that blocked efforts at protecting investors through improved checks and balances.

"Enron's collapse revealed systemic failures in the regulatory process that's designed to protect investors," says correspondent/producer Hedrick Smith. "Our investigation showed that the growing conflicts of interest within the industry were exacerbated by weakened regulations and a Congress that rejected any attempts to strengthen them."

"Bigger Than Enron" examines the investor frenzy of the 1990s--a market mania not unlike the stock market fever that gripped the nation during the 1920s. After that speculative binge led to the 1929 stock market crash, Congress passed laws to protect investors, establishing the Securities and Exchange Commission and requiring companies to have their books audited by outsiders.

So why didn't those safeguards protect the public in the 1990s?

"Since the Great Depression, gradually what has happened is that those laws have been eaten away--by corporate executives, by Wall Street, by interests--at the expense of investors," says Sarah Teslik, executive director of the Council of Institutional Investors. "The watchdogs now work for executives, accountants, and Wall Street. They don't work to protect shareholders."

Jim Chanos, manager of Ursus investment fund, agrees. "Many of these so-called corporate watchdogs are paid by the corporations themselves," he tells FRONTLINE. "The auditors are paid by the corporations. The bond rating agencies have an agenda where they, too, have consulting arrangements and are paid in many cases by the issuing corporations. Analysts are paid often on the basis of their investment banking fees that their firms bring in for the companies that they are either recommending to buy or sell. So we have all kinds of conflicts of interest that revolve around who is paying who."

Industry insiders also point to the so-called "options culture" of the1990s as a key incentive for pushing up the company's stock price and then doctoring the books to make the company look good.

"When an executive has a portfolio of a hundred million stock options, they can make far more money by getting the stock to move a few dollars in response to false information than anybody could do in most insider trader cases," says Richard Breeden, SEC chair from 1989 to 1993. "So, the size of the stock packages creates a temptation for economic gain that is very corrosive and will lead some people to be willing to lie, to cook up false income, to not tell the truth about negative factors. And in Enron's case, to create an entire picture of a company that didn't exist."

Yet again, industry executives stress that Enron wasn't the only company to provide investors with inaccurate financial reports. "If you go back and look over the last half dozen years...investors had lost probably close to a hundred billion dollars," says Lynn Turner, former chief accountant of the SEC in the late 1990s. "[Investors] suffered those types of losses from these situations like Cendant, Waste Management, Sunbeam, Microstrategies, Rite Aid, Lucent, Xerox...."

"Bigger Than Enron" examines several cases as well as several pivotal battles in Congress, concluding with an examination of the lessons learned from the Enron scandal and its lingering political and financial fallout.

"The Enron scandal has conveyed to the American investor that he can't have confidence in the traditional gatekeepers that protect America's markets," says Arthur Levitt, SEC chair from 1993-2000. "He can't have confidence in the auditor that presented him with the statements. He can't have confidence in the standard setter that created standards which were so fuzzy that Enron was able to hide the obligations of the parent in subsidiaries. You can't have confidence in investment bankers, in the lawyers for the company. You can't have confidence in the rating agencies that should have given him a clear picture of what Enron's obligations were."

Unless major reforms are undertaken to restore that confidence, observers say, it could spell trouble for the U.S. markets.

"Without reform, there's no question we'll see more damage inflicted--we will see more Enrons," Turner asserts. "We have seen a litany of cases, a big increase in cases in the last five or six years. That's not going to change. It's the result of fundamental flaws and shortcomings in the system. Any businessman knows that if you don't fix your systems when you have systemic problems, eventually the customer--the investing public in this case--won't buy. And when that happens, the money won't go into the markets."

Following the broadcast, visit FRONTLINE's Web site at www.pbs.org/frontline for extended coverage of this story, including:

• A deeper look into the story of Arthur Andersen and how the company built its once unimpeachable reputation;
• A primer on the various conflicts of interest in auditing, securities analysis, and corporate governance that have defined the Enron-Andersen scandal;
• An analysis of the political fallout in the upcoming 2002 elections, and beyond;
• FRONTLINE's extended interviews with key figures in the story, background readings, related links, and more.

"Bigger Than Enron" is a FRONTLINE co-production with Hedrick Smith Productions. The senior producer and correspondent is Hedrick Smith. The producer is Marc Shaffer. The editor is Cliff Hackel.

FRONTLINE is produced by WGBH Boston and is broadcast nationwide on PBS.

Funding for FRONTLINE is provided through the support of PBS viewers. National sponsorship for FRONTLINE is provided by EarthLinkÆ and NPRÆ.

FRONTLINE is closed-captioned for deaf and hard-of-hearing viewers.

The executive producer for FRONTLINE is David Fanning.

FRONTLINE XX/June 2002