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As watchdogs go, the SEC is proving itself a loyal companion of the very industry it's supposed to regulate. It's the businessman's best friend.
Just months after it advocated watering down post-Enron market reforms, the agency slipped a brief into a case before the Supreme Court, arguing for a legal standard that would make it more difficult for investors to sue public companies and their executives.
The same week, the agency's chief accountant, Conrad Hewitt, told a group of securities lawyers in Washington that it wants to protect accounting firms against legal damage awards.
Lawsuits by investors, you see, threaten the survival of the four large accounting firms, one of which Hewitt used to run.
I would love to tell you that business will always do the right thing, that corporate boards will always make sure the numbers are good, and every press release was as good as gold. Unfortunately, that is not the case. As Enron, Worldcom and the recent options backdating scandal indicate, business has a knack for stretching to rules to see how far it can go. That's where the SEC is supposed to step in.
The SEC serves a vital rule. An inherent understanding of the financial markets is the information supplied to the public is good information. If an investor looks at a company's 10Q and sees an increasing earnings trend, the investor is more likely to buy the stock. That's good for everybody. The investor makes money in the form of capital gains. The company's treasury stock increases in value allowing it to engage in mergers and acquisitions to make the company more profitable. If enough investors do this, the market goes up.
But if the information is bogus, investors lose trust in the market. They stop investing. While the markets may be cause for consternation among some, they provide much-needed financing to all sorts of companies. This financing allows the companies to expand, which creates jobs for more people.
In short, investors must trust the markets for the markets to work properly. That's where the SEC is supposed to step in. When a company does something that violates the public trust, the SEC is supposed to sanction the company. This threat of sanction helps to keep business honest.
Now the SEC wants to prevent lawsuits that might lead to accounting bankruptcies.
During his speech, Hewitt said that claims against some accounting firms now are so large that they could lead to bankruptcy
So -- a company does something wrong and investors sue the company to regain some of the losses. If the accounting firm goes bankrupt two things happen. First, accounting firms are reminded that if they break the rules, they could be sued into bankruptcy. This serves as a reminder that they shouldn't break the rules. Secondly, in a vibrant market economy (which the Republicans rightfully taut and promote on a regular basis) new accounting firms step into the spots vacated by the old firms. It's called a market based economy. When one company can no longer provide a service, a new and better one takes over. The new, up-and-coming firms have a great built-in marketing plan: we're honest. At least that's what would theoretically happen if the SEC allowed it to happen. Of course, the fact that the head of the SEC use to work for one of the big accounting firms probably effects his judgment somewhat.
Regulation has a purpose. To quote Eliot Spitzer, markets must be honest, have integrity and provide a level playing field. The government must be a referee on the field, calling and punishing fouls when it sees them. That's how you make sure everybody follows the rules.
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