|  | | 2006 News and Press Releases | | |
HEADLINE NEWS:
Auditing Reform: Mission Accomplished!
Steven Pearlstein
The Washington Post. December 15, 2006
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EXCERPT: What we have here is yet another success for what is called "supervisory" or "prudential" regulation -- a concept that is all the rage these days. Rather than an antagonistic, enforcement-oriented regulatory regime that makes examples of wrongdoers and requires detailed rules, prudential regulation rests on behind-the-scenes collaboration between regulator and regulated. … There's only one thing wrong. It's a terrible idea. First, as former SEC chairman Arthur Levitt and others wisely point out, there's a big difference between bank regulators, who care only about maintaining the "safety and soundness" of the financial system, and securities regulators, whose aim is to provide full disclosure, fairness and a level playing field for investors. If regulators like those at the Fed had been in charge of securities regulation, they would have lent Enron whatever it needed to avoid collapse, hushed up the investigation into financial chicanery and sent Ken Lay into a luxurious retirement. Second, as current SEC Chairman Chris Cox explains, principles-based regulation doesn't work so well in the context of the U.S. legal system. The theory is that regulators would set down general principles and leave it to each company to decide how to implement them, without all the thou-shalt-nots. The regulator, however, reserves the last word in deciding whether a company's actions or policies pass muster. That's the way it works in Britain, where nobody dares defy the FSA. But in this country, as soon as some company disagreed with the regulator, it would head straight to federal court to complain about "arbitrary" and "capricious" government oversight. In truth, the business community doesn't want to get lawyers out of the regulatory process -- just the government's lawyers. Perhaps the biggest problem with "prudential" regulation is that, by its nature, it overlooks the worst kind of abuses -- those that become so commonplace that everyone thinks they're acceptable. Recent examples range from "managing" quarterly earnings to doling out hot stock offerings to favored customers. At some level, the lawyers, the auditors and the regulators understood that they violated basic principles of fair dealing. And yet few thought to question these practices. In the end, it took whistle-blowers and outsiders like journalists and state attorneys general to expose these abuses and force new rules. But in the closed loop of a prudential regulator system, none of that would have happened. |
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