Who Catches Book-Cookers?

As Americans watch their retirement savings melt away in a stock-market funk, the heat is on Washington to do something – anything! – and quick.

Elections that could reverse political power on Capitol Hill are just four months away, so the temptation for most members of Congress to appear as Mr. Fix-its for corporate America now almost equals their steady willingness to take campaign money from corporations.

President Bush, who's been late and minimalist in responding to a cascade of corporate scandals, has decided to become the 21st-century's Bull Moose president. Today, he's proposing Teddy Roosevelt-style rules on corporate behavior, while also trying to prevent further evaporation of investor confidence in the bookkeeping of big firms.

And this week, too, the Senate will likely vote on a bill that puts regulation of the troubled accounting industry squarely in government hands.

The measure would set up a five-member board under the Securities and Exchange Commission (SEC) to set down tougher rules than the industry has been willing to impose on itself up to now. And the bill would end the widespread practice of accounting firms doubling as consultants to their clients, with all the inherent conflict of interest that creates.

A House bill, passed last year after the Enron collapse, would largely maintain the industry's complex self-regulation, perhaps in the hope that recent scandals, such as WorldCom, will lead to investor pressure for internal accounting reforms.

If the Senate version prevails, the question is whether the new regulatory body will act more like the Post Office or the IRS in its competency.

Outside audits generally rely on system controls already in place in a company. Tougher measures could be demanded by investors through their company directors. These include fraud audits, where every paper trail is pursued. Or directors could set up powerful internal auditors who report to them.

But accounting can often be a matter of subjective judgment calls as much as a science. When to call something a capital expenditure or an expense may not fit neatly into a rulebook written largely by politicians.

Fraud is tough to catch when you don't know it's there. Auditors should be forced to fish for it more diligently, but Congress should be wary of overregulating an industry in the heat of the political season.

At the least, though, regulation is needed to remove any incentive for auditors to cook the books. Too many accounting firms want to keep clients by going easy on an audit, and too many of their employees try to land jobs with the firms they are auditing.

Investors will return to the market if Congress gets it right.

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