TCS Daily

Rules to Live By

By James K. Glassman - April 7, 2003 12:00 AM

Enron, Tyco, WorldCom, now HealthSouth. Will the scandals ever end? Frankly, no. There are more than 6,000 companies listed on the Nasdaq and New York Stock Exchange alone, and a few always will be led by unscrupulous managers who lie, cheat and steal. The U.S. has the toughest murder laws in the developed world, but about 15,000 homicides occur each year. Smart policy discourages and punishes but also recognizes that crimes still will happen.

Smart policy also recognizes costs. Inevitably, the HealthSouth accounting scandal will provoke loud complaints that the Sarbanes-Oxley law, enacted last year to boost the trust of investors, isn't enough. Actually, it's too much. Some top CEOs say one-fourth of their time is consumed by the new nit-picky regulations. And with changes in accounting rules ahead, the damage will increase, especially threatening innovative tech companies that use stock options.

At a time when Americans are losing their jobs, managers should be concentrating on running their businesses. Yes, trust is vital, but small investors aren't leaving the stock market because of the scandals. They're leaving because stock prices have plummeted. Profits are the problem, and Sarbanes-Oxley reduces them by increasing accounting and legal expenses. Needlessly.

Prosecutors allege HealthSouth's chief financial officer would produce the real figures each quarter; then top executives at secret "family meetings" would pump them up to meet targets. These charges disgust me. If they are true, the perpetrators should go to prison for a long, long time. Fraud is a brutal crime; we have laws to deal with it; they should be applied mercilessly.

The market also punishes. HealthSouth's manipulations sought to increase stock prices, but immediately after the SEC's probe was announced in September, the firm's stock fell from $12 to $3; it's now eight cents. Still, there are bad people in this world who simply won't be deterred.

For investors, the best protection is to shun firms run by flamboyant characters, to scrutinize cash flows as well as earnings and to diversify. For the nation, the best policy is to weigh the real costs and benefits of the Sarbanes-Oxley law. Honesty, rather than politics, will demand reducing the rules - not expanding them.

A version of this article appeared in USA Today.

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