August 7, 2002

August 7, 2002 | Commentary on Regulation

A No-Account Law

"No more easy money for corporate criminals," President Bush said as he signed new anti-fraud legislation. "Just hard time."

Hard time is what John Rigas, founder of Adelphia Communications, and his two sons could face. The three were arrested recently on charges they had looted millions of dollars from the company.

But if they wind up behind bars, it won't be because of the new legislation. Laws already on the books would have assured that. In fact, the Adelphia arrests, along with a civil lawsuit brought against five executives of that company -- all logged before the new law was enacted -- prove that it's not additional laws we need to curb white-collar crime, but better enforcement of existing laws.

The Rigas case was the third major criminal case brought against business executives this year. Officers from both Tyco International and ImClone had been arrested just weeks earlier. And civil cases had been brought against executives from WorldCom, with criminal charges possible.

With all this action under way before Congress acted, why are lawmakers so proudly trumpeting the new law? It's a typical Washington response to a real or perceived crisis: Instead of ensuring that existing laws are enforced, Congress hurriedly creates an agency. The legislation is rushed through with more of an eye toward garnering good publicity than solving regulatory lapses.

In their zeal to look tough, House and Senate "reformers" even tried to outbid each other. When President Bush called for doubling penalties for white-collar crimes from five to 10 years, the Senate acted within hours. Not to be outdone, the House doubled those penalties to 20 years. One senator joked that a majority favored simply executing corporate executives.

A much-ballyhooed "achievement" of the new law is a new quasi-government agency to regulate the accounting profession. Although Congress took great pains to call it a private organization, its members will be appointed by the Securities and Exchange Commission (SEC) -- a government agency -- and it is charged with enforcing securities laws. Congress didn't bother to explain how a "private" organization can enforce laws.

Although hailed by editorial boards nationwide as a major step forward, the new law is unnecessary and unwanted. As the Adelphia prosecutions showed, existing law is quite capable of dealing with corporate crime. And those who insist the market can't police itself should note that the market already has imposed some new standards designed to prevent abuses.

On the same day the House passed the new law, the Nasdaq began requiring that each company listed on its exchange have a majority of independent directors (meaning they can't also be executives of the company). It also moved to strengthen the audit committees of corporate boards. The New York Stock Exchange made similar changes. Indeed, some experts worry that companies now will be so cautious in their accounting that they'll understate real increases in earnings.

Faced with public pressure to prove their books are clean, several companies also have announced they will "expense" stock options given to executives and employees (that is, deduct their cost from corporate earnings). Even online book giant Amazon.com, which has long relied on stock options to offset low salaries, will expense them starting next year.

In short, the market has proved more than capable of handling this crisis. No executive wants to be the next to see his or her stock decline by 20 percent in one day because of rumors about suspicious accounting or illegal activities. Just as existing law can deal with corporate criminals, so the market can enforce its own tough new accounting standards.

This fact isn't lost on the public. An NBC/Wall Street Journal poll shows that only 33 percent of Americans want new regulations. The other two-thirds said Congress and the president "should not pass new laws, but instead should focus on enforcing existing laws and investigating and prosecuting firms and corporate officials that have broken the rules."

Fraud is the same crime whether it's committed by crooks bilking senior citizens out of their savings or Harvard MBAs cooking the books. While Washington congratulates itself for saving the country from accounting fraud, the real work is being done by the SEC and the market as it prosecutes the guilty and improves accounting standards.

"We get it," said Rep. Richard Baker, R-La., chairman of the House Financial Services Committee's subcommittee on capital markets, as he hailed the new bill. Unfortunately, it's obvious that they don't.

David C. John, a former vice president with New York's Chase Manhattan bank, is a research fellow at The Heritage Foundation (www.heritage.org).

About the Author

David C. John Senior Research Fellow in Retirement Security and Financial Institutions
Thomas A. Roe Institute for Economic Policy Studies

Related Issues: Regulation

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