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MENDOZA IN THE NEWS

Ethics experts weigh in on guilty verdicts

Professor hopes the Enron scandal serves as a warning to future leaders.

Publication: South Bend Tribune

May 24, 2006

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When the jury in the Enron fraud trial convicted the now-defunct energy company's former executives Thursday, it ended one of the largest corporate fraud eras in American history, local experts said.

Fred Naffziger, professor of business law at Indiana University South Bend, called the verdict "reassuring," saying that it "sends the message that people who are rich and powerful don't always escape from justice."

Several experts pointed to the Sarbanes-Oxley Act of 2002 as the lasting legacy of the Enron case, which cost the jobs of 4,000 employees and more than $60 billion in investor's dollars.

Sarbanes-Oxley requires chief executive officers and chief financial officers to sign off on quarterly financial reports.

Thursday's verdict also invalidated the once common defense of corporate ignorance, said Tom Frecka, an accounting professor who teaches a course on corporate fraud at the University of Notre Dame.

While some say the jury's judgment closes the door on the most extreme bout of corporate fraud in America's history, several experts say executive malfeasance is far from over.

"It's only a matter of time till we have other scandals," said Patrick E. Murphy, a professor of business ethics at Notre Dame. "We have creative people out there and they will find a way around laws at some point."

The last major collection of business scandals cropped up inside several savings and loan companies in the 1980s.

Still, said Murphy, the case has sparked increased conversation about corporate ethics, not only in the classroom but in the business world and public forums.

Hopefully, when today's students enter tomorrow's board rooms, he said, their experience watching Enron will help them make better decisions.

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South Bend Tribune
By: Christina Hildreth
May 26, 2006

Q&A

Professor James Seida teaches accounting at the University of Notre Dame and testified before Congress in February of 2003 about a $5.8 billion discrepancy between Enron's reported and actual earnings. We asked him about Kenneth Lay and Jeffrey Skilling's convictions last week.

Q: Will this conviction serve as a deterrent to future corporate leaders?

A: Sure. The penalties are fairly stiff. Anytime you wave jail time at someone it's a deterrent.

Q: How will you and other professors present this case to students in the future?

A: From an instructional standpoint, you would say that there may not have been as much reliance placed upon traditional financial measures. During that time, the Internet was booming, there was a lot of talk about using alternative methods to value firms -- number of hits to Web sites, for example, instead of financial information.

This case highlights the importance of accounting information. Not saying the accountants were completely innocent, but if one were to analyze the accounting statements of Enron, it becomes clear that there might have been a problem.

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