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Corporate Scandals Trigger Suggestions for Reform - 2002-07-12

Recent revelations of corporate misconduct have triggered an outpouring of suggestions of ways to improve U.S. business ethics, including accounting reform and stricter law enforcement. Many are aimed at changing the relationship between companies and auditors.

The problem, says Illinois Wesleyan University business professor David Willis, is that accounting firms are hired by the same companies they are supposed to police. "They have to walk a fine line between being the tough cop and being the cop management wants to see around," he explained. "They can't afford to antagonize management because management pays them for this year and makes the decision to hire them for next year."

Some have suggested mandatory rotation of auditors, so the same firm is not auditing the same company year after year.

Stephens College business administration professor Christopher Prestigiacomo says having companies take out financial statement insurance might be a way of assuring financial statements are accurate.

"If the company's financial statements turn out to be fraudulent, it would be the insurance company that would be liable," Mr. Prestigiacomo reasoned. "So the insurance company would have incentive to find very good and reliable auditors to come in and make sure the company's records are indeed sound."

Other suggestions are aimed at halting the trend of paying executives with stock options. The rationale behind stock options was that owning shares in the company heightens the desire to make the company strong.

But instead, Mr. Prestigiacomo said, stock ownership has pushed many managers to go for short term stock price rises instead of long term profitability. "Stock prices reflect what is going to happen over the next quarter, as opposed to what should be happening over the next five or 10 years for that company," he said. "It provides a great motivation for managers to look for short term performance in their companies."

Everyone wants stiffer penalties and stiffer enforcement. But financial fraud is so complicated, Professor David Willis says, it might be difficult to get convictions.

"One almost needs an MBA [Masters of Business Administration degree] to be able to follow the intricacies of actual economic transactions," Mr. Willis said. "It will be quite complicated to explain this to a jury so they can understand what happened and then whether someone did something they shouldn't have."

But that won't stop lawmakers from trying. As it stands now, one senator complained while introducing new legislation, "If you steal a $500 dtelevision set you go to jail. If you steal $500 million from your corporation, nothing happens."