In practice, of course, it's enormously difficult to reduce to a handful ofuseful numbers the complex operations, spread over many countries, of a modernindustrial enterprise. But in recent years, that task has been badly skewed byWall Street's obsessive focus on short-term results and by an array ofexecutive-compensation schemes that provide corporate officers huge personalincentives to manage--that is, manipulate--earnings to meet those marketexpectations. The public's primary line of defense has been, now as always, theauditors, whom we expect to remain not just skilled and diligent but, above all,independent. Independent of whom? Management, of course. The auditors' realclients are the boards of directors and the investing public.
That line of defense, however, has proved porous. Accounting firms have cometo see auditing not as a governmental mandate and matter of public trust but,rather, as an opportunity to garner consulting and other business fees from thevery management from whom they purport to be independent. Auditing has become aloss leader--one that brings in only 25 percent, sometimes far less, of the BigFive accounting firms' fees from a large company, thus making them increasinglylikely to bless sham transactions and whatever else it takes to let Wall Streetapplaud what in fact is a so-so performance. In the last four years alone, morethan 700 companies have been forced to restate their earnings, thus acknowledgingthat their auditors had, for whatever reason, failed to follow the rules.
A nasty set of problems--though remedies have become easier now that Enron andthe like have brought accountants front and center. Here are five easy proposals.
What is the likelihood of success? It's not clear--until and unless boards of directors cease giving executives perverse incentives to seek short-termstock gains at the expense of investors and employees. The legislative remedylies with state lawmakers and with Congress. Will Enron give our legislators thenerve to enact these reforms? Unless public indignation rises, don't hold yourbreath.