06/07/2002

-- Restoring trust in America's capital markets depends in no small part on regulators and capitalists restoring trust in the integrity of corporate accounting. That trust took another dive in the past couple of weeks with the revelation of massive irregularites -- or worse -- at Tyco, Adelphia and some other big companies. Over and over, we have seen managements (aided by "outside" auditors) inflate profits and revenue to fraudulently impress Wall Street and boost stock prices. But then, these managements and their compliant boards often richly reward themselves for their unethical behavior.

One step to help stop this would be enacting a bill sponsored by Sen. Paul Sarbanes (D.-Md.) that would restrict accounting firms' ability to provide consulting services to clients whose books they audit. Allowing auditors this blatant conflict of interest has helped spawn massive accounting scandals. Senator Sarbanes's bill would also create a powerful body to set and enforce rules for the profession. And the measure would mandate the rotation of a company's main auditor every five years.

Other necessary moves:

Require, by law, that boards of publicly held companies be composed mostly of disinterested outsiders, so that they can make independent decisions for the good of the company and not act primarily for the self-interest of senior managers.

To promote transparency, record off-balance-sheet partnerships when corporate debt is at stake.

Require that executive compensation derived from fraudulent activities be given back to the company, with interest.

Meanwhile, we'd be better off without Securities and Exchange Commission Chairman Harvey Pitt. He is far too close to his former colleagues in the accounting business. He has little credibility as a tough-minded campaigner against burgeoning business corruption. As Lawrence Kudlow -- no liberal! -- has noted: "We need a Paul Volcker at the SEC, not a Harvey Pitt!"

The aforementioned reforms would help. But, if we may be permitted some sermonizing, we would add that stopping the financial corruption of the past few years will also require a change in morality, wherein the public stops worshipping wealth for itself, especially extreme wealth created quickly -- often an indication of dishonesty. We all do better without the endless adoring tales of the accumulation of redundant luxuries by some narcissistic execs, of which Tyco's disgraced former chief executive, Dennis Kozlowski, is but one florid recent example. Americans' obsession with wealth during the past few years has helped lead to a Niagara of white-collar crime.

And investors would do well to remember that the long-term success of a business is not to be achieved by "managing" short-term earnings (if there are in fact real earnings) through corrupt means. A long-term approach creates much more reliable shareholder value than can the goose-the-stock-price gimmicks in the news recently. We would hope business schools might put more emphasis on this.

It also would be healthy if some of the business crooks we have been reading about the past couple of years spent some quality time in jail. That a CEO or investment mogul who loots millions can get away with a slap on the wrist while someone selling a couple of ounces of marijuana gets five years in prison doesn't say much for America's value system.