Accounting: Stronger Reforms, Please

Perhaps the only benefit of a major scandal is that it creates pressure for reforms. Politicians who would otherwise listen to special interests are forced by public pressure to make long-needed changes. Often, the legislative and regulatory changes that follow a scandal can help build a strong foundation for economic growth.

If you hoped that the Enron/Andersen scandal would provide an opportunity for just those sort of farsighted regulatory improvements, start worrying. There are signs that the Bush Administration, under pressure from the accounting lobby and business groups such as the U.S. Chamber of Commerce, is willing to support only mild changes in the current system. And there's a danger that Congress will acquiesce. The House of Representatives has already passed a very watered-down bill.

That's wrong. Halfhearted reform is bad for the public, bad for the economy, and even bad for the accounting industry, which needs to reestablish its credibility. Instead, we think the best bet for strong accounting and financial reform is the legislation proposed by Senator Paul S. Sarbanes (D-Md.), chairman of the Senate Banking Committee.

Sarbanes' draft legislation--which is opposed by Senator Phil Gramm (R-Tex.), the ranking GOP member of the Banking Committee, and the Bush Administration--would set up a strong private-sector board to oversee public-company accounting. It would severely limit consulting services that accounting firms can offer the companies they audit. And, not the least, the bill would require CEOs and CFOs to sign their company's audit reports and forfeit a year's worth of bonuses, incentive-based pay, and profits on stock sales if the company has to materially restate its earnings. That would reduce the aggravating sight of CEOs claiming they had no idea what kind of wrongdoing their company was engaged in.

Equally important, the Sarbanes bill would authorize more money for the Securities & Exchange Commission and permit the agency to hire at least twice as many professionals as the Bush Administration is willing to fund. These additional resources are essential for the SEC to do its regulatory duty. According to a report from the General Accounting Office, the SEC's workload increased by 80% in the 1990s, but its staffing rose only 20%. In 2001, for example, the SEC reviewed only 16% of all annual reports--way below the desirable level.

No business or profession likes closer oversight. But finding the right balance between markets and regulation is essential for a well-functioning economy. Reform is never easy--but history suggests that it's essential.

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