If the immediate custodians of Enron's behaviour - its board, the auditors, stock market regulators - fell down on the job, so did the outer ring of watchdogs, such as credit rating agencies, stock market analysts and business reporters.

These weaknesses are not unique to the Enron story. In every country, corporate collapses have taken such observers by surprise. It is time for a global raising of performance.

Although the credit rating agencies never gave Enron a very strong rating, they failed to realise just how vulnerable its finances were to a falling share price. And they delayed too long in downgrading the company.

Critics of the rating agencies have sometimes called for external regulation to offset the potential conflict of interest in the way they are paid. The agencies get most of their revenue from fees paid by companies to have their securities rated.

But unlike auditors, rating agencies have a large number of clients each paying relatively low, standard fees. There are now three big rating agencies with worldwide coverage: enough competition to keep them honest.

But is it enough to keep them on their toes? Here, the agencies are more vulnerable to criticism. They are now focusing on the risks implicit in share price triggers, such as those in the agreements between Enron and its off-balance-sheet special purpose entities. They are promising to speed up ratings reviews. And they should have learnt not to delay a ratings downgrade in the hope that a rescue might appear.

This is not enough. The agencies must use their understanding of off-balance-sheet vehicles - many of which they are paid to rate - to provide better insights into parent company risk. They must also dig deeper into complex companies.

The rating agencies can console themselves with the thought that they always said Enron was a risky company. No such luck for stockbrokers' analysts who continued to rank Enron as a buy until it went bust.

The Enron story and the technology stock bubble have revealed three problems with the way that these commentators - known as "sell-side analysts" - work. The first is the conflict of interest inside investment banks, where analysts have found themselves increasingly assisting their colleagues in corporate finance. Those who have dared to issue negative verdicts on lucrative deal-generating clients have sometimes found themselves silenced, demoted or fired.

A new US voluntary code of conduct, promulgated last summer, bans the worst of this problem - for example, it rules out submitting analysts' research to the investment banking team for approval. After Enron, stock exchanges have introduced a code that goes a little further, but the industry is already quibbling about the cost and complexity.

A second problem is that analysts make far too few sell recommendations. The solution here lies in the hands of the investment banks' research directors. They should insist - as one firm already does - that analysts rate half the companies they cover as buys and half as sells.

The third problem is that there is not enough in-depth research. The solution here is also under the investment banks' control. A sharp cut in research output and an emphasis on original insight would greatly help.

The real solution, however, is potentially very unpopular - an end to the bundling of research with stock trading commissions, as proposed by the Myners commission in the UK. Few people have spoken up in favour of this reform, which would drastically change the way in which research is created and distributed. It would lead to mass sackings of me-too analysts and the creation of more boutique research houses, more buy-side research and fewer stars.

Analysts' relentlessly positive view of big companies is fed through - and amplified by - business media. Once Enron started to run into trouble last autumn, the press did a good job in exposing its vulnerabilities.

But before then, only Fortune magazine had published a significantly critical article on the company - a report by Bethany Mclean in March 2001 that highlighted the obscurity of Enron's accounting and its weak cash flow. (This achievement is somewhat offset by the magazine's choice of Enron as the US's most innovative company for five successive years.)

The business media can be accused, in general, of too much celebratory or routine journalis more from FT.com
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