BROOKE GLADSTONE: From WNYC in New York this is NPR's On the Media. I'm Brooke Gladstone.
BOB GARFIELD: And I'm Bob Garfield. This week Congress passed sweeping legislation that would overhaul the way corporations report earnings and the way auditors check them. If you're the kind of market-watcher who thinks that government proposals have an immediate effect on the Stock Market, this plan did a lot better than George W. Bush's speech of a few weeks ago. This time the market rebounded --briefly. Companies that formerly had their way with the figures will become tightly regulated under these reforms with one important side-effect -- the media will be able to keep a more watchful eye on corporations. Before Enron, part of the problem was a media conflict of interest -- the bull market benefitted media too -- but much corporate malfeasance was simply out of the presses view. Our producer at large Mike Pesca asks why the press was caught so flatfooted.
MIKE PESCA: Tyco, Enron, Worldcom, Global Crossing, Adelphia, Qwest. This is the short list of the most prominent companies under investigation for fraud or misstated earnings. It's also a list of companies who are under investigation or whose stocks tanked more than 90 percent before any news organization reported on possible illegalities. That fact, taken with the undeniable bullishness of most business coverage has led press critics to wonder -- how did the media miss the story? A better question might be: if a tree booked phantom profits in a forest, the forest representing a runaway bull market, the tr-- You know what? That's not such a good analogy. Here's a better way to explain how companies cooked the books under the media's radar. It comes from Newsweek's Allan Sloan.
ALLAN SLOAN: If you're running out of the base line and you run a foot out of the base line, they call you out. If you're running a mile and a half out of the base line, no one even sees you! That's what happened here! If you're making up the numbers, then the numbers are all going to look good, aren't they?
MIKE PESCA: The point is that without rules, journalists are without their tools.
ALLAN SLOAN: The way you usually find these things is by finding a discrepancy between the reported profits and the cash flow numbers. What happened at Enron was, they made up all their numbers. At Worldcom it was even worse! And there's no defense against phony numbers unless you know they're phony, and you need to have some reason to know that they're phony because you normally don't go in assuming that!
MIKE PESCA: Which isn't to say that journalists were totally defenseless against indefensible accounting practices. Even when the numbers aren't available for crunching, people are. Workers at companies like Enron and Worldcom still go out to local watering holes and over a pitcher of Sangria may let slip details of an off-balance-sheet ledger entry. A long shot, but it could happen, according to Fortune Magazine's executive editor, Joe Nocera.
JOE NOCERA: To break a story like that, a news organization would either have to have an incredible intuition that this was going on and assign a reporter, or they'd have to get a tip from somebody.
MIKE PESCA: Fortune Magazine itself had an early article on Enron, which while it just scratched the surface of Enron's misdeeds, did at least raise questions about the balance sheet. The information came from a place that makes some news outlets nervous.
JOE NOCERA: One great source for red flags in my profession are the short sellers. Corporations hate them cause they view them as tainted because there's no question that as the stock goes down, they make money, because that's what short sellers do. On the other hand, it was a short seller, a guy named Jim Chanos, who really was the first one to basically say Enron in particular was an emperor with no clothes.
MIKE PESCA: But it takes a certain kind of journalistic institution, one with resources, patience and expertise to check the short seller's tips. Fortune was one such institution. The New York Times also issues frequent predictions of a bursting bubble, but Joe Nocera says the buying public didn't buy it.
JOE NOCERA: You know people really didn't want to hear bad stuff about companies.
MIKE PESCA: Former corporate headhunter Larry Elliott says that as a culture America is almost pathologically unable to receive warnings.
LARRY ELLIOTT: You know there -- we go back in history and say there were signs about Pearl Harbor, there were signs about the World Trade Center, there were signs about this marketplace, and there were some people who were trying to get some weak signals out, but people were not ready to hear the warning.
MIKE PESCA: Elliott is the author of the new book: How Companies Lie. His thesis is that companies lie because they can. Aided and abetted during the bull market by a news media acting, in 12 Step jargon, as enablers. He adds to the list of who bears the blame -- those who blame the bears -- the investing public itself.
LARRY ELLIOTT: There's nothing more dangerous than a hot market and an ignorant investor. If the market just started rolling upward right now and just looked like it was going to go again, these stories that we're talking about would kind of be lost and people would be jumping back on the bandwagon again -- or at least most of them would.
MIKE PESCA: Before you write that off as cheap cynicism, consider Joe Nocera's account of a recent Fortune article on a company that's alleged to have artificially inflated revenue, cheated investors and whose chairman stands accused of tax evasion.
JOE NOCERA: We wrote a tough Tyco story about 2 months ago having to do with some revenue issues, and I was astounded at even now the, most of the letters that we got said you know, how dare you say these terrible things about my wonderful company, and their stock is going to eventually go up and you're going to look like a bunch of dopes.
MIKE PESCA: Those letter writers probably represent a minority, which may shrink further as investigators bring to light more evidence of scandal. Congress just passed a variety of measures which would tighten corporate rules. That, to return to Allan Sloan's original analogy, would place the runner back within the baseline where he can once again be seen from the press box. For On the Media I'm Mike Pesca. [MUSIC]