The Crackdown Cracks
Getting tough on corporate crime is so yesterday. The pendulum is swinging back, hitting everyone from gumshoes to judges
Schlein, who sits on the board of several small companies, says accountants charge $1 million to $2 million to perform a full audit. That can often wipe out a small company's entire annual profit. "And what did the investors get?" he wonders, saying that very few of the audits reveal significant problems. At the very least, lobbyists expect the SEC to push back this summer's deadline for small-business audits to allow Congress to hold hearings and hash out a proposal.
Some of the toughest investor advocates agree that a few reforms--such as reducing some corporate fines, since they typically just come out of investors' pockets--are needed. But they worry about the overall trend. "Four years after President Bush said it was the most important legislation since the Depression ... I have been stunned by the willingness to say Sarbanes-Oxley was a big overreaction," says Nell Minow, founder of the Corporate Library, which helps investors analyze companies' governance. It all seems sadly familiar to corporate-crime experts like Dan Dooley. He is a Pricewaterhouse-Coopers forensic accountant for more than 30 years who conducted internal postmortems of several corrupt savings and loans, disgraced junk bond powerhouse Drexel Burnham Lambert, and, recently, Xerox. The current crackdown has made investing in American companies safer by "removing temptation from honest people who might go astray," Dooley says. But he doubts much can be done to deter the 3 to 5 percent of business people he believes are incurable fraudsters. So just as the cleanup of the savings-and-loan frauds left loopholes that eventually led to Enron, the recent retrenchment and investors' seeming relaxation of vigilance may sow the seeds of the next investor debacle, he says.
Where will scandal strike next? Watch out for foreign companies, Dooley warns, especially those in developing countries. Americans hunting for juicier profits have been pouring dollars into companies in countries whose investor protections are even laxer than those here. Foreign investments took 77 percent of all new mutual fund stock dollars last year. Many investors, it seems, may already have forgotten the painful lessons of Drexel and Enron: Bigger rewards generally reflect bigger risks.
advertisement
