August 7, 2002 | Commentary on Regulation
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
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
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
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
"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.
John, a former vice president with New York's Chase
Manhattan bank, is a research fellow at The Heritage Foundation
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