CRIMINAL PENALTIES PROPER FOR ACTS OF CORPORATE FRAUD

July 19, 2002
Most political feeding frenzies in the US Congress are repulsive. The one under way over corporate governance is an exception.

Bob Tippee

Most political feeding frenzies in the US Congress are repulsive. The one under way over corporate governance is an exception.

The Republican-controlled House of Representatives finally got the message: Corporate executives who defraud investors belong in jail.

It is painfully evident that more than an aberrant company or two have tricked shareholders out of money. They thus have betrayed trust central to capitalism. They have participated in what Federal Reserve Chairman Alan Greenspan this week aptly described as "infectious greed."

The infection must be stopped. Criminal penalties are essential to the cure.

The House went soft in its April legislation on accounting and corporate governance, which didn't address criminal penalties.

Alert to political opportunity, the Democrat-controlled Senate passed a bill July 15 that made corporate fraud a crime punishable by lengthy prison sentences.

Then, with the stock market reeling despite a mostly healthy economy, and with disclosures adding up about corporate misconduct, the House woke up. On July 16 it passed a bill making corporate fraud a crime punishable by sentences longer than those of the Senate bill.

It's a contest to see who's toughest. Good. Modern compensation systems for the top levels of management create strong temptations to misrepresent corporate performance. Congress should create even stronger incentives to resist them.

The House and Senate bills contain provisions needed in other areas, notable among them government oversight of the accounting industry, where self-regulation has failed.

Because the House acted hesitantly on criminal penalties for corporate criminals, Republicans are taking heat for being too cozy with corporations.

While they deserve criticism for flinching on an important issue, corporate coziness doesn't make sense as the reason.

Executives of corporations that don't defraud investors will welcome criminal action against those that do. It's tough to compete for capital against companies that lie to investors. Republicans wouldn't have done honest corporations any favors by treating crooked ones lightly.

What's important is that both houses of Congress have passed legislation assuring ethically challenged executives that book-cooking isn't worth the risk.

The world's best economic system will be better for the cleansing.

(Online July 19, 2002; author's e-mail: [email protected])