Scandal in corporate America: an ethical, not a legal, problem.

• Author: Frohnen, Bruce
• Position: Law & Justice

SCANDALS within some of America's largest corporations have brought about some long-overdue soul-searching among people in business and government. Presidential speeches and Congressional bills set forth useful ideas and policies regarding heavier penalties for fraud and clearer standards for accounting practitioners. Nevertheless, it would be a mistake to think that some new regulations from Washington will make everything right with the business community. The answer to corporate skullduggery is not more or stronger law. Over 2,000 years of lawmaking and lawbreaking have demonstrated that laws are important, but cannot do the job by themselves.

Statutes will be effective only where the human spirit and will are already attuned to the law's objectives. Law may solve a problem that stems from good-faith differences regarding particular public policies, but it cannot change the attitude that the law itself is something to be overcome as just one more obstacle to making the maximum amount of money in the minimum amount of time. As long as American business executives and their professional advisors believe in their hearts that greed is good and that the appearance of satisfying shareholders is more important than actually satisfying them, more law will be a futile response.

Business is not a machine. We can't simply "fix" it with a new law here or there. The U.S.'s free market economy is made up of real people, acting on the basis of real motivations that include, but are not limited to, the desire to obey the law. People's actions, in business as in all areas of life, are deeply affected by those they deal with every day. Nowhere is this more true than with securities laws. America's complex legal system requires people in business to rely on (and persuade) attorneys and accountants. The securities laws are clearly meant to check individual and corporate greed, limiting it and channeling it to socially useful ends. However, they do so through the persons of professional advisors and experts, and, to put it bluntly, those experts are not doing their job. Why? Because they don't know what their job really is or should be.

Too many accountants and attorneys have come to see their job as helping businesses get around the clear purpose of the law. Moreover, "watchdog" lawyers, claiming to represent "the little guy" and serve as the conscience of the marketplace, continue to file suits against those companies that fail to sacrifice everything else to painting a picture of continually increasing short-term profits. Thus, accountants and attorneys today are undermining business ethics, rather than serving their traditional role--the one anticipated by securities laws--of supporting and encouraging ethics. The results are proving disastrous for the public's perception of business and for the economy as a whole.

No economic system can perform as well as free markets, but no economic system depends as much as free markets do on trust. An efficient market requires that parties to transactions trust one another and trust that the information presented to them is accurate. The most-efficient method to establish that trust where substantial dollars are at stake is to have the person who is providing the information have it certified, at least in a limited way, by a reliable third party. Otherwise, everybody involved will have to spend money documenting the same state of affairs--principally, the health of a...