Congress Criminalizes Capitalism


The

accounting scandals
that received so much government
and media attention involved about a half dozen firms.
Out of the thousands of publicly listed companies, the
malefactors comprised a few ten-thousandths of one
percent.

Such an insignificant percentage is
not a sign of a breakdown in business ethics and
accounting morals. Laws already on the books sufficed to
deal with the wrongdoers. No draconian

new legislation
was necessary.

When

murders
occur, we

apply the law.
We don`t pass legislation holding
people responsible for not doing enough to prevent
murder.

Judging by their behavior,
government and media view accounting scandals as far
more serious than

mere murder.
Hysteria took over from sound judgment
and rational deliberation. The result was the
Sarbanes-Oxley Act, [PDF] which
criminalizes

accounting mistakes
.

The Sarbanes-Oxley Act requires the
Chief Executive Officer (CEO) and Chief Financial
Officer (CFO) to attest at their personal risk of huge
fines and prison sentences that their company`s
financial statements contain no material mistake, the
correction of which would result in a restatement of
earnings.

There is no way two executives can
know whether a foreign subsidiary made an accounting
error or a computer glitch produced an incorrect figure.
To protect executives from human and computer mistakes,
companies are being advised by their lawyers and
accountants to implement more systems of internal
controls.

In the event of an error,
executives can hopefully avoid prison and fines by
demonstrating to prosecutors that every possible
procedure has been implemented to prevent material
errors. By eliminating both fraud and negligence as
causes of the accounting mistake, executives hope to
avoid career destruction from having attested to an
accounting statement that turned out to contain a
material error.

By putting every public company
under the thumbs of government and

prosecutors
, Sarbanes-Oxley guarantees that no
expense will be spared in implementing protective
procedures. Entire new departments will be created that
contribute nothing to productivity, output, sales, or
cost reduction. The expense will reduce reported profits
and adversely affect share prices.

Even worse, complying with the new
reporting requirements of Sarbanes-Oxley will divert the
attentions of managements and boards of directors to
self-protection away from the business purposes of
companies.

Other parts of the ill-considered
“reform” will drive up costs. Accounting firms are
required to more quickly rotate the team of outside
auditors overseeing a company`s books. Faster rotation
means that accountants who know a company well and can
sense when something is not right are replaced with
auditors who are totally unfamiliar with the company.

The purpose of this “reform” is to
prevent auditors from becoming too friendly with
management. But its practical effect will be to reduce
auditors` knowledge of companies precisely at a time
when faster reporting requirements increase the chance
of mistakes.

Chief safeguards of justice in

Anglo-American law
are the principles of

mens rea
–no crime without intent–and

actus rea
–evidence of a criminal act. These
protective principles have been breached by prosecutors.

Recall the case of the medical
doctor who was prosecuted for $300 in erroneous

Medicare billings
in accounts totaling one million
dollars.

Such a tiny insignificant sum was,
in reality, proof of a highly sophisticated and careful
billing practice, but

prosecutors
misconstrued the $300–three-ten
thousandths of one percent (.0003)–as fraudulent
billing.

In the mid 1990s I reported the sad
story of

73-year old Ben Lacy
, a northern Virginia apple
juice producer, who was prosecuted by the U.S.
Department of Justice (sic)
for making a few mistakes in filling out wastewater
report forms.

Federal prosecutors

indicted
Mr. Lacy on their theory that the mistakes
comprised a conspiracy to mislead the government with
fraudulent information.

The mistakes had a simple
explanation. The wastewater reports were due before the
written results could come back from the testing lab. To
meet the deadlines, the lab would read the results over
the telephone, and the results would be entered on the
forms. On a

few occasions
over a multi-year period, incorrect
results were entered or correct figures entered on the
wrong line. The vast majority of the reports were
accurate, and there was no evidence of systematic
misreporting in order to cover up unlawful behavior.

However, the facts meant nothing to
the federal prosecutors. They had a quota for
white-collar crime, and Mr. Lacy was part of that quota.
The Department of Justice (sic)
forced Mr. Lacy to spend his life savings defending
himself in court before dropping the nonsensical
charges.

The most egregious fault of
Sarbanes-Oxley is the act`s

supposition
that executives and accountants are
crooks requiring government repression at all costs.
Sarbanes-Oxley legislates the fantasies of the
anti-business political
left-wing
. To be incorporated in the U.S. is proving
to be a fatal business disadvantage.

Paul Craig Roberts is the
co-author with Lawrence M. Stratton of

The Tyranny of Good Intentions: How Prosecutors and
Bureaucrats Are Trampling the Constitution in the Name
of Justice
.

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