August 26, 2002

August 26, 2002 | Commentary on Regulation

ed082602a: The Real Accounting Problem

Is it me, or have recent business stories begun to resemble episodes of VH-1's "Behind the Music"?


Think about it: Executives cook the books and make millions. They live fast and high on the company dime, buying items such as $6,000 shower curtains and African safaris. Meanwhile, magazines praise their gutsy, maverick styles and hail them as the new captains of industry. Then financial reality bursts the bubble and everything comes crashing down. Kenneth Lay, meet Milli Vanilli.


It's an old script. Unfortunately, President Bush and Congress didn't seem to see it that way.


So this summer they created new laws governing corporate fraud. These measures, which among other things would quadruple sentences for accounting misdeeds, were the "most extensive assault on corporate fraud since the Depression era," according to The Associated Press. President Bush said he signed the law in response to acts that offended "the conscience of our nation.


I agree that what many executives did was offensive. To put thousands out of work, destroy their pension funds and weaken confidence in our economy just as we're trying to get out of a recession isn't just bad corporate citizenship. It's flat-out wrong, and it should be punished severely.


But the government's response to this wrongdoing is nothing to be proud of. As my Heritage Foundation colleague David John recently noted, there are already tough laws on the books designed to deal with the type of fraud committed by those in charge at Enron, WorldCom and others. Congress and President Bush merely followed the "Great Perception Rule" of Washington: If there's a national problem, real or perceived, the government must try to fix it-or at least be perceived as trying to fix it.


The perceived problem here is that the private-enterprise system has flaws that shady companies such as WorldCom exploited. But what happened with Enron & Co. didn't come about because of holes in our private-enterprise system. If anything, the scandals show that our system really works.


Remember, Enron and WorldCom executives weren't busted by government agents in some raid. Private stockholders and board members figured out that they were being duped and handled the situation appropriately. They fired the executives involved. They cut off their multi-million salaries. And in doing so, they put a serious hex on the executives' chances of working at that level of management (and pay) ever again. 


That's a pretty serious punishment-indeed, if you're a CEO, it's the worst-but Congress and President Bush decided to pile on anyway so they would be perceived as being on top of this perceived problem. "In their zeal to look tough, House and Senate 'reformers' even tried to outbid each other," John said. "One senator joked that a majority favored simply executing corporate executives."


Ironically, as Congress and President Bush congratulate themselves for "fixing" this problem, many of the government agencies they're in charge of preside over so much waste that it's a scandal all its own. But instead of shutting down the agencies, like angry shareholders did to Enron, policy-makers make a few muted complaints-and all too often give them millions or even billions more in tax dollars.


Such waste is a real problem in Washington. Too bad it's usually perceived as nothing more than the way government does business.


While the politicians are on their soapboxes calling for "corporate accountability," how about some real "government accountability"?


Edwin J. Feulner, Ph.D. is president of The Heritage Foundation, a Washington-based public policy research institute.

About the Author

Edwin J. Feulner, Ph.D. Founder, Chairman of the Asian Studies Center, and Chung Ju-yung Fellow
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