Mises Daily Articles
Dances With Wolves
Once again, the nation has been graced with the mothering wing of its congressional collective. The Corporate and Auditing Accountability, Responsibility, and Transparency Act (CARTA) passed the House with a whopping 334-90 tally, opening the doors to unbridled regulatory madness in the wake of Arthur Andersen’s Enron-related transgressions.
CARTA is presented as an auditor oversight maneuver, one that would establish a public regulatory organization (PRO) to perform certain review and disciplinary functions with respect to accountants who certify financial statements and other documents filed with the U.S. Securities and Exchange Commission.
However, the greater ambition of the Regulatory Wolves is to unleash the government’s tentacles onto the private sector and drive out the various oversight bodies that currently watch over the accounting profession.
Closer review of CARTA reveals it is set in words too broad to accurately quantify in terms of regulatory specifics. Instead, the bill ensures that the regulatory doors are wide open for creative interpretations in regards to "market necessities" and "immediate needs." As SEC Chairman Harvey Pitt said to the House Committee on Financial Services, "We support the wisdom of having accounting standards set by the private sector, but subject to our vigorous oversight."
This vigorous oversight set forth by CARTA focuses on three main spheres for greater enforcement: financial statement disclosure, principles-based accounting standards (as vs. technical compliance), and corporate governance.
The first issue, financial statement disclosure, is in direct contrast to the goal of having principles supercede compliance standards. Public company financial statement disclosures are inherently technical in nature, being that they must meet the terms of GAAP, or Generally Accepted Accounting Principles. The disclosure rules encompassed within CARTA, however, are more centered on trampling the rule of law due to the political expediency of the day rather than refining the objective of reporting financial information.
In fact, the House bill sets forth notice that the SEC may indeed make determinations, by rule, for that which is "necessary in the public interest and for the protection of investors." The bill essentially provides for the cowboy enforcement of SEC rules by way of civil proceedings. That is, arbitrary rules that are made up along the way can be imposed and enforced at will by an obliging, State-supplied judge. Other than this stipulation, CARTA provides no new technical revelations concerning financial statement disclosures that aren’t already self-imposed by the accounting profession.
Second, the fact that the SEC--or any government agency--wishes to develop a moral domain from which to buttress an entire profession is absurd. Pitt supplies an eye-opener when he maintains that his Commission "seeks to move toward a principles-based set of accounting standards, where mere compliance with technical prescriptions is neither sufficient nor the objective."
This is further defined--in CARTA language--as allowing the SEC more authority in developing accounting standards, which are currently set by the industry’s own FASB, or Financial Accounting Standards Board. "The SEC," says Mr. Pitt, "should exercise its authority to ensure that FASB’s agenda is responsive to issues facing investors and accountants, and is completed on a timely basis."
Beware whenever a bureaucrat stresses "timeliness" and harps on the notion of a private industry body being submissive to the Regulatory Wolves. The stepping-up of such authority on the behalf of governmental agencies, more often than not, comes to mean total replacement instead of mere reinforcement. With such an increasing role for the SEC in the accounting industry, the rule-setting FASB is likely to become an extraneous body of idle figureheads.
Finally, there arises the goal of babysitting private entities. So important is the concept of corporate governance, we find our legislators already hard at work at devoting an entire bill to its being--the Shareholder’s Bill of Rights. Cloaked in the usual Orwellian turn of phrase, this bill that resides within a bill aims to control the conduct and compensation of corporate board members.
Maybe somebody forgot to tell our elected officials that shareholders in public companies already have an innate Bill of Rights via the voluntary nature of buying and selling stock and voting for corporate leadership. However, the notion that individuals can take care of themselves, make informed decisions, and voluntarily take risks based on the acquired knowledge at hand is a foreign concept to the self-nominated elites that ride roughshod over the real Bill of Rights.
Harvey Pitt, in his testimony before the House, wrapped up things with a plea to his bosses for additional funding in the budget and a minimum increase in staffers, consisting of 100 accountants, lawyers, and other watchdogs to help launch the SEC’s new controlling agenda. Once again, crisis begets the growth of a bloated Leviathan.
In his January 2002 State of the Union address, President Bush called for "stricter accounting standards and tougher disclosure requirements." The message from Washington, D.C., is that a Merry-Regulation-Go-Round is always the answer for each and every unfortunate event that transpires in the corporate world.
We hear that, without ground rules from our assorted government agencies, there is no "fairness" in the marketplace. We hear that government, and not the market, is the arbitrator of justice. Yet, Enron has been done in and Arthur Andersen will go bust, with or without the government’s tweaking.
It’s unfortunate that investors and innocent employees have to go down with the Enron-Andersen ship, but capitalism is never a guarantor of success, only a harbinger of opportunity. With the wolves watching the sheep, chances are the investor’s market will become more volatile than ever.