http://news.bbc.co.uk/hi/english/business/newsid_2130000/2130883.stm



With the recent scandals that have rocked the business world, it is understandable how there is public outcry that the government should do more to prevent future scandals from occuring. Last week President Bush outlined his new proposals on keeping corporate executives more honest.

My thoughts are this. We already have laws on the books. Did these scandals occur because these present laws were not stringent enough??? Or is it because the present laws failed due to complacency & a lack of enforcement??? What good would new laws do if we do not enforce them either??? What is it really going to take to keep the corporate world more honest when it comes to reporting their numbers???

To me this isn't about adding more laws and regulations. It's not about big government vs. small government. It's about human beings operating by the incentives they are given. It's about ethics and how incentives can cause us to justify wrong behavior.

As time changes, so do the way organizations operate. There are new and innovative ideas that are created on a daily basis (some based in new technologies, some based upon truly new ideas sans technology that don't seem to skirt rules), which is a good thing! Continual organizational improvement is rewarded and it has tremendous benefits not only for the organization, but also for the society.

However, sometimes these new innovations create unwanted (and what were hopefully unanticipated) side-effects. When these unintended results occur, things get set in motion to correct the undesired behavior. Such is the case with the current "corporate greed" scandals occurring in the US. These course corrections are also a good and necessary thing. They protect the little guy and the society as a whole.

Let's take a look at what it is going on in the world of compensaton for corporate executives in the US.

Every company wants the best leadership they can employ...the one(s) that will give them more profitability and more viability; but they don't always have the cash to hire them. So, a few years back, the innovative company said something to themselves like...."hey...we can hire them for little cash...but we can give them an incentive to come with us if we give them stock options as a reward. That way, we get the best talent, but we don't have to pay cash for it. And if they drive the stock price upward, it's a win-win...both for them, and for shareholders. Their reward isn't cash...but it's more valuable stock shares...which they can redeem for cash!"

It all sounds good...in fact sounds great!

Unfortunately, what has happened is that these incentives have driven corporate executives to drive their stock price up; sometimes when the real value would suggest it should NOT be incresing...and the system of measurement we have in place to determine that value is embodied in the discipline of accounting.

So when things get tight and the true value that a company is adding to our society isn't stacking up...there is one sure and accepted way to keep the stock price rising. And that WAY is to liberally interpret the standards of generally accepted accounted principles (GAAP). Good ol' fashioned "cooking the books."

Something most Americans don't know is that GAAP is a recognized concept throughout world in those countries that have market economies. So who determines what GAAP is in the United States? Again, most Americans have never heard of the Financial Accounting Standards Board (FASB).

Furthermore, most Americans, while they are upset with the corporate greed that is costing them their savings that are invested in the stock markets also do not know, that the FASB is a board of accountants that is funded by the nation's largest account firms. It's a huge conflict of interest without government oversight!!! The FASB is likely to make decisions on accounting standards that benefit corporations, not citizens; furthermore they have no "teeth" to enforce their standards of GAAP since they are not government.

Another major factor contributing to the current situation is that the US' largest accounting firms have assumed dual roles; that of accountant and that of consultant. The accountant part of an accounting firm will try to MEASURE value...the consultant part will advise them how to INCREASE value. When these goals conflict, the accounting firm is frequently faced with a decision, one that gets down to incentives. And their own incentive is going to be to maximize their own profit; even when it bends GAAP as promulgated by FASB.

Long post, I know. But for those that have made it this far, I'll leave it for you to decide whether we need better standards, regulations, and laws to get truer measures of value in corporate America -- and whether our existing standards of executive compensation vis a vis stock options, accounting standards vis a vis FASB, and accounting practices vis a vis consultant/account should be changed.

Strider0, thanks for the info.I had no idea about FASB. I will have to look into this organization. These guys are like the Supreme Court of Corporate America. Hmmm, how are they appointed?

Rosoph, therein lies the rub.

FASB members are not appointed. They are hired. FASB is NOT government, it is a "self-policing" (yea, right) policy board funded by members of the US' accounting profession.

And when there is a vacancy, FASB has an ENORMOUSLY difficult time hiring for these positions, despite the fact that entry-level pay for a new FASB member is somewhere on the order of a half-million dollars per year!!

Q: So why would an organization have trouble hiring somebody at an entry salary level of $500K/year?

A: Because anyone that's qualified to be a member of FASB is making about 10 times that much working for the likes of WorldCom, ENRON, Xerox, Qwest, Global Crossing, Tyco etc. fudging the books and ripping off Joe and Jane Average to fill their wallet!

OK, perhaps I exaggerate...but frankly, not by much.

Consider this: There is an employment marketplace for executive-level "expert" accounting professionals. The going rate for such talent is perhaps a few million dollars per year. FASB pays one half of one million dollars per year.

So...where does the best talent go? Conversely...where does the "low-demand" talent go?

And the answer here isn't raising the wages of FASB employees...the answer is a little more government participation (yup...regulation...and I nominate JohnGalt to oversee FASB in a newly-created gov't position) in this profession, the members of which deserve to be right there on a par with lawyers as subjects of our favorite jokes.

It took reckless greed and the Internet Bubble to show how the existing regulations can be manipulated, as needed...

A pro business political administration has to slap the hand that feeds it...

The little guy votes by staying out of the stock market, and protesting .."you haven't slaped hard enough yet"...and on it goes...

I still would like to know who all...brokerage houses etc..bet on the colapse of americas economy, with...puts and options after 9/11

puts,options, derivatives...a disgrace to America, all about greed(a strategy that is certain)..A disgrace

When individuals can no longer fill out their own tax forms without professional advice, there's something wrong. If you ever visit the IRS website looking for a tax form or instructions, you better be ready to sift through several hundered different publications.

We can contribute to paying off the national deficit by making a flat 15% federal tax rate (enough to cover withholding and social security) with no more special consideration for anything, except perhaps an exemption for poor people. This would effectively put 98% of the IRS out of work. All they would need is a staff to process the forms (all of which would be only 1 page).

Businesses need not account for anything except profit and loss, transfer the bottom line over as the taxable amount, and be done. No accountants needed for that, either.

We don't need a different standard or procedure for every different industry out there, and we don't need a different tax for everything under the sun. We've made our taxation and accounting so complex that we're spending large amounts of money just to keep it straight!

[This message was edited by mahal on 07-17-02 at 01:11 PM.]

No, generally new laws aren't needed. The existing ones aren't enforced. And there's too much economic incentive for large companies to at least bend the law. And the problem with new laws is that they're often passed in the heat of the debate/problem, as much for political effect ("Look, we did something") as for any real long-lasting effect they might have. As I've gotten older, I've gotten much more cynical...

What's important is the quality and not the quantity...and, of course, whether they are enforced or not.

I think it all depends on what kind of laws are being enacted. If capitalism goes unchecked, we will be slaves, not employees. The stockholders will get screwed. There needs to be an element of responsibility to the environment just to name a few examples.

You can't go too far being idealistic though. We have global competition to contend with today. We have to remain competitive as well as ethical.