 |
|
 |
|
 |
|
 |
|||||||||||||||||||||
|
In life (I've been reminded over the years), there are positive incentives and negative incentives. The negative incentives discourage undesirable behavior while the positive incentives encourage desirable behavior. The requirement that executives certify the correctness of financial statements and be prosecuted criminally if they have misled investors falls under the rubric of negative incentives. This action may reduce the fraud and the occurrence of misleading information, as well as punish illegal behavior — all of which is good. But negative incentives do not encourage good behavior — they merely discourage bad behavior. And what we most need today is a series of positive incentives that can help eliminate a corporate manager's desire to produce financially engineered results. We must replace that inclination with the desire to pursue true economic profits. One simple way to move corporate officers and accountants in this direction is to require them to use only one set of accounting reports. Whether it is pro-forma or GAAP (generally accepted accounting principles), it doesn't matter. What does matter is that what they show investors they also show the IRS. If CEOs cook the books to overstate their financially engineered profits they will pay higher taxes and the shareholders will be unhappy. On the other hand, if the CEO's understate the profits the IRS will be unhappy. The use of a single set of books will force the shareholders and IRS to perform checks and balances on the corporate statements. This in turn will make the process more transparent. And what would make it less transparent is an overreaction and/or poor implementation of new laws attempting to remedy the current situation. If misapplied, the proposed changes now being discussed in Congress could make matters worse. They could result in a corporation having to generate a third set of books: one for investors, one for the IRS, and one for regulators. The driving fear, of course, is that the recent actions by Congress and the president could result in an increase in government regulations that could further slow down a fragile economy. To be sure, many of the popular criticisms about accounting standards can be directed at government accounting. We now have off-budget items, various deficit measures, the use of static analysis in forecasts, etc.Yet the same people who have developed our less-than-truthful government-accounting system are going to provide regulations to solve our problem? That seems unjustifiable. The current steps taken by the government to provide negative incentives to commit fraud will unambiguously raise the price of engaging in dishonest behavior. If enforced with vigor, we should observe a decline in dishonest corporate behavior. Almost everyone involved is in agreement that we need to restore transparency and integrity to the system. However, we do not need additional regulations that increase the regulatory burden on the economy; we do not need additional forms to file. We just need to redesign the current ones so that they will reflect the truth. Transparency and simplicity should be the guiding lights of the current reforms being considered. The market process will eventually give us such a desirable structure, but the government has to step in to reassure the markets of the integrity of the process. It would also be great if the government could streamline the process. If we can simplify the system, convergence of accounting definitions will occur. George W. Bush needs to find a way to move us all in this direction.
|
|
|
|
|||||||||||||||||
<% dim printurl
printurl = Request.ServerVariables("URL")%>
nvesting America has been presented a few proposals on how to cure the
malaise that's afflicting the stock market. We've had some very passionate
speeches by the president, and the Senate has passed a tough corporate-fraud
bill. Judging by the market response, neither the Senate nor the president's
actions have solved the crisis of confidence we now face.
