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AOL/Time Warner and WorldCom:Corporate Governance and the Effects of the Deregulation Paradox
Unformatted Document Text:  23 about the efficiency of self regulation (Kuttner, 2002). The primary difficulty is that market discipline and self-regulation noticeably failed in several instances when it came to failed business strategy, insider trading, deceptive accounting practices and corporate governance. During the high water mark years of the 1990’s, investors went along for the ride, delighted as long as stock performance kept rising. US regulators and corporate boards were unwilling or unable to spot and regulate fraud when it occurred. And given the respect accorded deregulation and the low esteem placed on government regulation, the US Congress would not permit regulatory agencies (the FCC, the SEC, the FTC etc.) to challenge the activities of corporate America (Crew & Kleindorfer, 2002). One indication of this was the experience of Arthur Levitt, who served as SEC chairman in 2000. At that time, he publicly identified the potential conflict of interest when accounting firms could increase their income by offering consultancy services to the same companies they audited. He was concerned that such accounting firms would compromise their credibility. As such, he proposed a SEC rule that would bar accountants from acting as consultants. Levitt soon become the target of an intensive lobbying effort as the accounting industry got 46 members of congress to call or write personal letters to him questioning the proposed rule, with some threatening to withdraw funding from the SEC. It is only now, in the aftermath of Enron and WorldCom, that Levitt got an apology from former Senator Robert Toricelli (D-NJ), who was one of several high ranking congressmen who criticized Levitt. He told Levitt during a US Senate hearing, “You were right, we were wrong.” (Accounting Industry, 2002).

Authors: Gershon, Richard. and Alhassan, Abubakar.
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23
about the efficiency of self regulation (Kuttner, 2002). The primary difficulty is that

market discipline and self-regulation noticeably failed in several instances when it came

to failed business strategy, insider trading, deceptive accounting practices and corporate

governance. During the high water mark years of the 1990’s, investors went along for

the ride, delighted as long as stock performance kept rising. US regulators and corporate

boards were unwilling or unable to spot and regulate fraud when it occurred. And given

the respect accorded deregulation and the low esteem placed on government regulation,

the US Congress would not permit regulatory agencies (the FCC, the SEC, the FTC etc.)

to challenge the activities of corporate America (Crew & Kleindorfer, 2002).
One indication of this was the experience of Arthur Levitt, who served as SEC

chairman in 2000. At that time, he publicly identified the potential conflict of interest

when accounting firms could increase their income by offering consultancy services to

the same companies they audited. He was concerned that such accounting firms would

compromise their credibility. As such, he proposed a SEC rule that would bar accountants

from acting as consultants. Levitt soon become the target of an intensive lobbying effort

as the accounting industry got 46 members of congress to call or write personal letters to

him questioning the proposed rule, with some threatening to withdraw funding from the

SEC. It is only now, in the aftermath of Enron and WorldCom, that Levitt got an apology

from former Senator Robert Toricelli (D-NJ), who was one of several high ranking

congressmen who criticized Levitt. He told Levitt during a US Senate hearing,

“You were right, we were wrong.” (Accounting Industry, 2002).


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