12:25 AM CDT on Friday, May 26, 2006

By SUDEEP REDDY and BRENDAN M. CASE / The Dallas Morning News

Once symbols of corporate America's new-economy prowess, Kenneth Lay and Jeffrey Skilling became the ultimate poster children of corporate fraud and deceit.

To much of the public, they were closely linked with everything that went wrong in American business during the 1990s. To some corporate leaders, they were bad apples who tainted an otherwise honest system. To government officials, they were a jolt underscoring the need for greater scrutiny and new oversight laws.

The conviction of Enron Corp.'s former top leaders Thursday will seal their wrecked images and enshrine the sweeping governance changes that Enron inspired, experts say.

The verdicts may also serve as a reminder to top executives of the harsh penalties for misleading investors.

"It makes it imperative that companies pay more than just lip service to corporate governance," said Constantine Konstans, a professor at the University of Texas at Dallas' School of Management. "We're not just talking about slaps on the wrist. Now we're talking about doing serious time in the slammer."

The fall of Enron was hardly the only corporate fraud of the last decade. Scandals also rocked WorldCom Inc., Tyco International Ltd., HealthSouth Corp. and elsewhere.

But Enron was the first big one, creating a political firestorm for the Bush administration and prompting sweeping bipartisan legislation just eight months after the company's stunning collapse.

For almost four years, many U.S. business leaders have resisted the Sarbanes-Oxley Act. The law increases the transparency and accountability in corporate financial reporting, requiring stricter financial controls and forcing top executives to swear by their books.

Sarbanes-Oxley also seeks to eliminate the so-called ostrich defense that might allow executives to get off the hook by saying they didn't know what miscreant employees under them were doing.

Today, few executives at publicly traded corporations can go a day without being reminded of their heightened legal responsibilities.

Many executives have said that the changes went too far by assuming that most corporations were guilty of Enron's problems. Small public companies often complain about the expense and time involved with compliance, leading some firms to go private.

A bipartisan group of lawmakers has sought to roll back some of the requirements on small companies to prevent them from going overseas where financial exchanges' rules may not be as stringent.

Acquittals for Mr. Lay and Mr. Skilling could have supported the argument that the new requirements were an overreaction. Instead, the guilty verdicts are expected to reinforce the new rules.

"The convictions tend to support the need for all the extra review that Sarbanes-Oxley calls for," said Alan Bromberg, a law professor at Southern Methodist University's Dedman School of Law. "Even though that's expensive and irritating, it works."

Sen. Paul Sarbanes, D-Md., and Rep. Michael Oxley, R-Ohio, both acknowledged Thursday that no law could completely prevent corporate fraud.

But they said their legislation has made illegal accounting tricks considerably more difficult, allowing investors to regain confidence in financial markets.

The verdicts, they said, were reminders of what could go wrong without strong oversight.

"Just the fact that the Enron trial was so high-profile brought back memories of the terrible time that these folks caused to employees and shareholders," Mr. Oxley said. "We really did need to step in."

Both lawmakers, who are retiring after this year, said that many corporate leaders have praised the Sarbanes-Oxley requirements for improving their controls and providing greater confidence to investors in small companies. The Securities and Exchange Commission and the Public Company Accounting Oversight Board are weighing the effects on smaller firms.

"Do you envision a public company listed on an exchange that doesn't have an adequate system of financial internal controls?" Mr. Sarbanes said.

"I think these people who want to get out of it ought to think twice because they may find themselves operating at a handicap when they seek outside capital," he said. "If they're not up to standard, that money will go somewhere else."

Even as other cases of accounting fraud surfaced, Enron – once the nation's seventh-largest corporation – remained the most prominent corporate crime case.

The government's success at combating accounting fraud rested on the four-year legal effort in the Enron case. Accounting fraud cases are considered among the most difficult to prosecute.

"We have now trained prosecutorial officials around the country to prosecute business crime at major corporations," said John Coffee, a professor at Columbia University School of Law.

"Prosecutors, having learned to prosecute major business leaders, are going to continue doing so," he said.

The Bush administration came under fire in late 2001 and early 2002 for Mr. Lay's ties to President Bush, his Cabinet and many lawmakers.

But the successful prosecution by the Justice Department could take some heat off of Republicans, who have been under fire as supporters of the energy industry and other big businesses.

"No one, including the head of Fortune 500 companies, is above the law," Deputy Attorney General Paul McNulty said in a televised statement in Washington after the verdicts.

Analysts and executives say that Enron's legacy – beyond the employees who lost their jobs and livelihoods – can be viewed as positive because of the changes that came afterward.

"Corporations today are better structured to review the way they do business in order to make sure it's done in the most ethical manner that's possible," said Donald Hultgren, chief executive of SWS Group Inc., the Dallas-based financial services firm.

"Sarbanes-Oxley will be a constant reminder," he said. "The legislation that came on the heels of this behavior has put in place a structure that makes it virtually impossible to forget about an Enron."

Sudeep Reddy reported from Washington and Brendan M. Case reported from Dallas.

E-mail sreddy@dallasnews.com and bcase@dallasnews.com