The costs of stonewalling

It's time for Corporate America to learn a lesson from the Roman Catholic Church: Stone-walling and playing down revelations of abuse, whether sexual or financial, cannot be sustained in the long run.

Moreover, delaying treatment of the problems allows malaise to spread. The latest revelation: the $3.8 billion cheat by WorldCom. The ensuing loss of trust encompasses not merely the perpetrators themselves, but also those who shielded them. It also costs an arm and a leg.

Initially, following the news about energy-trading company Enron and its accounting firm, Arthur Andersen, and the nearly daily disclosures of further dubious accounting practices in other firms, insider trading, and obstruction of justice, Congress drafted several bills to clean up the mess.

Accounting companies are tempted to overlook inappropriate business practices because these firms had increasingly also served as consultants for the businesses they audited. They didn't want to endanger large consulting fees.

Congress was moving to require the separation of the accounting and consulting business. Congress also seemed interested in requiring the formation of a new regulatory board to oversee the accounting industry. These straightened-out accounting firms were supposed to keep corporations from straying.

At first these draft proposals encountered demands by business representatives and Congress members close to them to dilute the suggested laws. Accounting firms should be able to do some consulting, they said. Other corporate representatives demanded the scaling back of the proposed regulatory body, reducing its subpoena powers and preventing it from establishing auditing or quality-control standards. Now the enactment of most, if not all, of these measures is in doubt, following intensive business lobbying against them.

CEOs often claim, when their corporations are caught violating the law, that they knew nothing, that whatever was done – deaths caused by medications used without FDA approval, pension funds raided, corporate funds used for large personal purchases – was done by one rogue employee or corporate officer.

Hence, the Securities and Exchange Commission proposed that CEOs and their financial officers be required to certify that they read their corporate quarterly and annual reports and attest to their validity. It may seem odd that such a requirement is not already in place. But this modest suggestion may not fly any farther than the others have.

The public has found out that analyses of stocks are highly tainted. Analysts almost invariably give stocks more optimistic evaluations than they deserve, because their firms get hefty fees from the companies whose stocks are evaluated.

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