Paul Craig Roberts
Thursday, July 18, 2002

Before any accounting "reforms" are legislated or new SEC rules handed down, the public and policy-makers should come to terms with a basic fact: Past "reforms" and SEC rules are a prime cause of the latest scandals.

One of the scandals does appear to be a case of outright crookedness, and a couple of others seem driven by extraordinary greed – but most of the cases reflect companies going to extreme lengths to post good quarterly earnings reports, thereby maintaining share values for shareholders.

Just where did this focus on quarterly performance come from? It was the unintended consequence of previous reform, which had the good intention of providing more timely information about the profitability and financial condition of publicly owned companies.

The more timely quarterly reporting focused everyone on short-term performance. Now a stock is made or broken every three months, and accounting focuses on putting the best foot forward.

Another unintended consequence resulted from the move from a principle-based to a rule-based accounting system. In the old days, accounting was based on principles. People knew what the principles meant and, with the exception of outright fraud, the principles delivered good results.

But each time there was a failure or a case of fraud, the SEC responded by promulgating a rule designed to prevent a particular fraud or misleading result. As time passed and the rules multiplied, the rules took over from the principles.

Enron's trouble originated in this rule-based system. Accountants were able to justify Enron's offloading of debt on partnerships because it was within the rules. In effect, rule compliance forced accounting principles into the background, and the demand for quarterly performance stretched the rules and produced misleading statements.

What is needed are more accounting principles and less SEC rule-making. But the process is moving in the other direction. The SEC wants to shorten the time corporations have to release quarterly statements from 45 to 30 days.

Shortening the reporting period increases the chance for error. The government intends to make both the chief executive officer and chief financial officer personally responsible for the accuracy of the accounting statement. Thus, any error that requires restatement exposes executives to criminal prosecution at the discretion of a head-hunting prosecutor.

How would you like to be held criminally liable for a statement prepared in haste on a subject that you know little about? Companies work on trust. Chief executives seldom are accountants. They must go by what accountants provide. To make executives criminally liable for accounting errors is tyrannical.

The government's announcement that it intends to criminalize accounting errors by assuming they are fraud has produced no outcry worthy of a free people. This approach to accountability is unjust, especially in a rule-based accounting system where differences in interpretation exist about the meaning of the rules.

Holding executives criminally liable for the accuracy of accounting statements will make corporate executives toady to the government even more than they already do. Another independent voice and social institution will be squashed.

There are far more crooked government officials than crooked businessmen. Just the other day, Mary Ryan, the assistant secretary of state for consular affairs, was forced to retire because her department was selling U.S. visas to Arabs, including men linked to al-Qaeda, for $10,000 each. The same day, the general counsel for the District of Columbia pleaded guilty to stealing a quarter of a million dollars from the city and submitting false information on forms.

If we are going to hold business executives personally liable for the accuracy of accounting statements, it is only fair to apply the same standard of accountability to government executives. The president and OMB director must be made criminally liable for the accuracy of the government's budget, the Cabinet secretaries for the accuracy of their department budgets and trust funds, and members of the House and Senate for the accuracy of figures issued by the Congressional Budget Office and Joint Tax Committee.

Everyone knows that the real accounting fraud is in the government. The smoke and mirrors of government accounting are legendary. The Government Accounting Office has criticized government departments time and again for keeping such atrocious records that the departments cannot even be audited. If misleading taxpayers were an offense and carried the same penalties as misleading shareholders, the entire U.S. government would be locked away in prison.

The government, of course, never holds itself accountable. On the same day that the Senate added severe new penalties for "offenses" that might be nothing but differences in judgment over the interpretation of an arcane SEC rule, a House-Senate investigative committee exonerated the government of responsibility for the spate of government failures that made possible the terrorist attacks of Sept. 11. So far, no corporate accounting scandal has killed 3,000 people and forever altered the New York City skyline.

Dr. Roberts' latest book, "The Tyranny of Good Intentions," has been published by Prima Publishers.

Copyright 2002 Creators Syndicate, Inc.

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