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Safe to go back in the water?

Here's an interesting one: A study by PriceWaterhouse Coopers, a major accounting firm, says that it's found most financial fraud is found by whistleblowers, not the SEC or outside auditors.

There's a lot of reasons for this, IMO. Accounting is more art than science. Securities law, ditto. And financial reporting has become monumentally complex, with corporations having teams of accountants and lawyers massaging the SEC filings until they appear, at least, to be on the up and up. Layer on top the Sarbanes-Oxley requirements, and what do you find? The accountants and lawyers increasingly at work into the wee hours of the night tweaking the filings.

These are smart people, and they have gotten very good at rigging things, as a general proposition.

Some suggest that the government completely step away from its fraud-detection function. I hear that, but fraud is essentially theft, and this sort of financial crime is basically impossible to leave to private litigation. To make the case for securities fraud generally requires access to information that investors simply can't get their hands on, and can't even know exists.

Sarbanes-Oxley's been a disaster, a regulatory approach that creates much heat, but little light.

Perhaps beefing up the whistleblower mechanisms this study alludes to would be a better way. Make it REAL easy and REAL confidential for a mid-level accountant, say, to step forward and blow the whistle.

-Robert Capozzi

Posted by Robert Capozzi on November 30, 2005 03:47 AM |

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