The Enron debacle continues to fill the pages of newspapers around the country. Billions of dollars have been lost by investors. Senior managers appear before congressional committees and plead the Fifth Amendment. One of the five major accounting firms in the United States has become the object of intense investigation. Thousands of Enron employees have seen their life savings wiped out.

Eventually the media will lose interest in this case, and, undoubtedly, Congress will pass some new legislation designed to attempt to prevent such a thing from ever happening again. But what lessons will we have learned from all of this?

There are a number of crucial legal issues in the Enron case. Two, in particular, I think are critical. The first involves the extent to which employee investment in the stock of the company in which they work should be permitted by law. The second is the extent to which auditors can and must remain independent of their audit clients. Both of these issues lie at the heart of the Enron mess.

Over the past 30 years, Congress has passed laws designed to strengthen private pensions in the United States. One of the most important aspects of this pension legislation has been the encouragement given by these laws to the creation of pension plans for employees which invest in the stock of the employer. Originally the idea of employee stock ownership plans was hailed as a new and innovative step towards “corporate democracy.” It was seen as a way to give employees a true ownership interest in the companies for which they worked.

In theory, at least, it seemed to be a good idea. But Enron is only the latest and most devastating example of the great dangers inherent in employee stock ownership plans. Employees, as we all know, are always at risk of losing their jobs when the company for which they work suffers a financial setback. When you add to that risk the risk of losing their pensions because of a corporate financial setback, you create a situation like Enron where employees may find themselves left with literally nothing: no job, no pension, no savings.

A great deal of attention has been focused upon the fact that the senior management of Enron was able to sell their stock in the company at a time when ordinary employees were forced to hold their shares. But, in fact, while this seems unjust, it is not the true problem. If the senior managers had held onto their stock this would not necessarily have helped the rank and file. It would have meant that the senior management would also have suffered great financial loss.

In order to prevent the kind of financial devastation that has occurred at Enron it is necessary to require true diversification in employee pension accounts and to limit the total amount of company stock held in such accounts. Every investor understands or should understand the risks of failure to diversify. The concentration of company stock permitted today flies in the face of common sense and puts employees at unacceptable risk. No corporation should be permitted to establish rules which prevent the stock diversification necessary to ensure a minimum level of safety to the pension beneficiaries.

The question of auditor independence is a much greater problem. To begin with, audits of large corporations can generate millions of dollars in revenue for the auditing firm independent of any other business they might do. In addition, today the largest accounting firms are not simply auditors; they offer a diversified range of services.

Audit business is often only a small portion of the work they do for a corporate client. Thus, a failure to certify an audit for a client may well lead to the client becoming unhappy with the auditor and pulling not just its audit but all of its business away from that accounting firm. Unfortunately, a loss of a major client is something that can devastate a firm.

It requires a remarkable level of integrity for an auditor to risk a large portion of its revenue in order to do an honest audit in these circumstances. To expect “independent auditing” by accounting firms which constantly face increasing demands for profits from their partners is, perhaps, to put a huge burden upon the accounting firms.

For the most part, I believe that most accountants and auditors do maintain their independence, even in the face of financial pressure. But accountants are human and they, too, will occasionally, succumb to temptation and do something they should not. It would appear that this may well be what happened in the Enron case. How, then, can we prevent such problems in the future?

I believe, ultimately, that true independence can only be achieved by insisting on strictly enforced conflict of interest rules and by ensuring that those who do audits adhere to the strictest standards of ethics and professionalism. I do not believe that the separation of audit functions from other consulting businesses in which an accounting firm may be engaged is necessarily the right answer, though it seems to be the direction in which Congress and the accounting firms are moving. Such a rule will do nothing to alleviate the inherent value of the audit itself to the auditor.

Any legislation which is passed to prevent another Enron scandal must attempt to ensure that auditors have no incentives to cheat on behalf of their clients either by making audits truly independent, i.e. not paid for by the clients, or by ensuring that the highest standards of ethics are followed by imposing severe penalties upon those who breach them.

The worst thing that Congress can do in the wake of the Enron scandal is to pass legislation that looks good but does not solve the serious and fundamental problems which have now been uncovered.

Mike Hoeflich is a professor in the Kansas University School of Law.