- The Washington Times - Sunday, July 14, 2002

After the president spoke about corporate misdeeds, several radio interviewers asked me if what he had proposed was enough. The question presumes that more federal intervention in business must be an improvement, despite decades of experience to the contrary.
A wiser approach would begin with a list of goals and then examine alternative ways of accomplishing those goals.
Interest groups have been peddling miraculous new accounting gadgets without bothering to explain what they hope to fix. A few months ago, the task was "making sure there are no new Enrons." That implied big companies that make big mistakes should not be allowed to fail, which also implied taxpayer bailouts. Bankruptcy always hurts stockholders and workers, regardless of accounting coverups, but bankruptcy can be the best option when a company can't pay its bills.
In any case, "preventing another Enron" is out of vogue and "restoring investor confidence" is in. Both political parties are promising to boost stock prices this from the same bunch that frets about stock analysts promising too much. The main problem with the stock market is not a lack of confidence, but a lack of profits. For the first time in 30 years, earnings have been negative for six quarters in a row. The economy is growing, but a huge share of what business takes in is going out to creditors and tax collectors.
The big risks of terrorist threats and small risks of accounting scandals are now largely built into a lower price-earnings ratio. If the perceived risks and the P-E ratio now stay about the same and earnings go up, stock prices have to go up too. More confidence without more earnings just adds up to nothing. But how could political threats about making companies jump through more hoops help earnings? White House and congressional plans would clearly increase corporate legal and regulatory expenses.
Ironically, these proposals would also make it necessary to increase the pay of future executives and directors. That is because the new rules would make those jobs far more insecure (dozens of CEO are being fired each month) and also more risky in terms of lawsuits. The fact that "getting tough" on CEOs and directors must result in fatter pay packages is one of those "unintended consequences" that always follow hasty legislation.
The Washington Post's columnist Sebastian Mallaby says: "All the big unintended consequences come from not regulating auditors. Ask the employees and shareholders of WorldCom, who have just lost jobs and savings." That remark implies that fatal financial distress is just a matter of accounting. If only the figures had been reported differently, then WorldCom and Enron stock would now be valuable and neither company would have had to lay off anyone.
This is unadulterated nonsense. WorldCom and Enron are broke no accounting change could change that. Such confusion between bookkeeping and economic reality is running rampant in Washington, leading people to expect far too much from accounting. And those making the most noise about accounting are those who understand it least.
The Senate "reform" is described as tougher (not smarter) because it delegates to five nominally independent people the authority, as the CBO says, "to regulate and control entry into the accounting industry."
The five members of this Oversight Board would be appointed by the SEC after consulting with the Treasury and Federal Reserve. Only two would have to know anything about accounting, but they would all know all about keeping Congress happy.
This group could make or break an accounting firm at whim, without the nuisance of a trial, and could easily become a tool of political influence over accounting rules. To believe adding a new layer of omnipotent bureaucrats is likely to fix anything requires blind faith in central planning by a largely amateurish and unaccountable group.
President Bush had a better idea when he endorsed the New York Stock Exchange's carefully crafted proposals to make corporate directors truly independent of the CEO, not "yes" men. That is actually a far more potent long-term plan than anything likely to come out of the SEC or Congress. But deep structural changes of this sort have no interest group behind them because they do not create a new bureaucracy, throw money at an old bureaucracy or even make trial lawyers happy by making companies more vulnerable to lawsuits.
Proposing increased jail time for corporate fraud has been the easiest way for politicians to get applause. Yet the Justice Department has still not indicted a single person from Enron or Arthur Anderson. Arresting one or two persons might prove more effective than debating about how long the sentences might be if anyone were ever arrested.

Alan Reynolds is a senior fellow with the Cato Institute and is a nationally syndicated columnist.

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