Man Without Qualities

Wednesday, July 31, 2002

Vuja De III

The Wall Street Journal now says about the new accounting oversight board:

The big losers are the accountants, for whom it is very hard to have any sympathy. American capitalism will live to fight another day.

The accountants are going to have to endure a new layer of government oversight as well as new conflict-of-interest restrictions. This is the price they're paying for trying to live like investment bankers off the federal audit mandate and for refusing to go along with former Fed Chairman Paul Volcker's proposals to fix the industry on its own.

If SEC Chairman Harvey Pitt is smart -- hope springs eternal -- he'll play it straight and resist the urge to pack the board with his accounting allies. The best way for the board to work is the way the NASD does with securities broker/dealers, as a credible, independent enforcer.

Even for accountants, however, it could have been worse.

Well, the Journal gets the last part of all that right. And NASD is hardly a narrow, "independent," government regulator.

Perhaps one might focus on an aspect of "regulatory capture" not particularly associated with George Stigler - the "life cycle":

Marver Bernstein in Regulating Business by Independent Commission (1955) ... develops the idea of a regulatory life-cycle. Regulatory agencies, he argues, go through four stages:

Gestation in which regulatory agencies are created, usually as the reaction to some perceived problem or crisis

Youth in which the agency is full of zeal, but is outmaneuvered by the regulated industry which usually has more experience to draw upon in conflicts with the agency

Maturity As political attention fades, the agency becomes less crusading, and co-operative relationships between the agency and industry are established. The agency becomes more sensitive to the needs of industry.

Old Age Priority is given to the needs of the industry, whose interests the agency begins to identify with as its own.

Both the Journal and Professor Coffee focus on the "Gestation" and "Youth" of the oversight board - and those periods could be annoying for the accountants. No one thinks of Winter when the grass is green.

But the accountants can look forward to the far future of, say, six months from now, when the events of this summer have passed beyond living memory of most of the electorate and investing class. Those can be seen as the beginning of the board's comfortable golden years of "Maturity" and "Old Age."

And the best thing for the big accounting firms is that the SEC will probably still not even have even worked out the new rules by the time Maturity, at least, sets in. Those firms should be cheerful, for surely:

"Bliss was it in that dawn to be alive/ But to be young was very heaven!"

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