The Times had an article this morning about the effort by stock exchanges to merge across international borders. At one point, it comments about fears that this trend could make it easier for companies to shop among stock markets in order to list their shares in the country with the least restrictive accounting and reporting rules. This is a reasonable concern. It is a safe bet that if companies can evade regulations that cost them money, they will. But, there is a very important implicit assumption in this story which is worth noting, that investors don't value the regulations that impose high standards for corporate accounting. This is probably an accurate assumption, but one that deserves to be examined more closely. The Sarbanes-Oxley Act, and other examples of regulatory tightening, was prompted by massive fraud at companies like Enron, WorldCom, and Global Crossing. These companies were able to get away with their fraud because money managers that control billions of dollars of assets did not know anything about the companies in which they invested. No doubt these money managers received large bonuses when the soaring stock prices of these companies produced huge returns for their portfolios. When it turned out that the stock price was driven more by fraud than profits, the money managers played the "who could have known game." Maybe there was a money fund manager who lost their job for investing a large amount of money in one or more of the poster children for corporate fraud, but I certainly have not heard of such a person. In short, investing in companies that play with their books does not seem to carry a cost for money fund managers. They get the benefit of the high returns for as long as the fraud can be perpetuated, but then suffer no consequences when the fraud is exposed and the stock loses most of its value. In such a world, strong governmental regulation of accounting standards is especially important. But it is interesting to ask why highly paid money managers are not held accountable for their failings. This seems to be yet another example of an economy where those at the top enjoy employment security, even when their incompetence has huge costs. It is only factory workers and dishwashers who are responsible for the quality of their work.
--Dean Baker
