In recent years our corporate and investment sectors have been roiled by scandals that could have been avoided had regulators been on the job. The collapse of huge entities like Enron was the result of blatant and self-serving accounting manipulations that misled investors. And the current crisis in mortgage-backed securities is largely a consequence of an eyes-averted approach by federal banking authorities.
The lesson from these debacles is that investors need better protections and regulation enforcement, not less. Which is why we should be concerned that the Securities and Exchange Commission — the very body charged with maintaining fair markets and looking out for investor interests — is preparing a series of regulatory changes that could reduce oversight of the accounting and reporting practices of large American-based international companies.
In an effort to move toward a more seamless global financial marketplace, the SEC wants to give American companies the option of adopting international accounting and reporting rules. If that were allowed, some of the practices established since the Enron scandal would no longer be binding. And American investors would have to rely on foreign regulators to enforce rules that the SEC had no hand in designing.
This plan is worrying some Democratic lawmakers who wonder if it isn't a parting salvo of the Bush administration to relieve the corporate sector of some of the new, stringent rules it has chafed under.
The concerns were summed up by James Cox, a securities law expert at Duke Law School, who was quoted in the New York Times saying: "We would not for a moment tolerate having American auto safety standards set by China or India. Why should we do it for the financial safety standards?"
If foreign financial rules were utilized, companies could skirt the post-Enron conflict-of-interest rules that restrict the ability of accounting firms to also provide consulting work to the same client.
These rules came into being because the former accounting giant Arthur Andersen appeared to allow gimmickry to invade its financial reporting of Enron's fiscal health in order to keep fat consulting fees rolling in.
Also, when international standards are used to report earnings, companies are generally able to claim higher revenues. That means it will be very difficult for investors to make fair comparisons among companies using American versus international standards.
We know from bitter experience that businesses will too often look for ways to keep investors from knowing the truth about their financial standing. Any move toward a more integrated international financial system has to safeguard U.S. investors and the American market by ensuring corporate transparency and accountability. It isn't clear that the SEC's new direction would do that sufficiently.
These changes should be carefully considered, well vetted and not rushed. And the fact that a new administration will soon take the helm and may have a different approach to regulation and oversight makes waiting all the more sensible.