usuallynoble, laws areblunt instruments thatoften create
newproblemsintheprocessofsolvingoldones.Restrictions
onthegranting ofoptions toemployees mayprevent their
abuse in compensation systems but they also undercut
attemptsto makemanagershavea stakein thecompany’s
successinfinancialmarkets.Restrictionsonspecialpurpose
entitiesmaytakeawaylegitimateavenuesforfirmstoreduce
their cost of borrowing.
Auditing and Accounting Integrity
Accounting standards and rules are usually rewritten in
response to corporate failures. No matter how strict
accounting standards are, financial statements will be
reflections of a firm’s true standing only if accounting
principles arestrictly adhered to and auditorsmonitor this
adherence. We can do five things to make this happen:
1.Conflictsofinterestcreatedwhenauditorsreceiveincome
for other services provided to the firm (consulting, for
instance) undercut their objectivity. Consequently, auditing
firmsshouldeitherspinoffordivesttheirconsultingarms.If
they choose not to do so, firms should not use the same
accounting firm for both auditing and consulting services.
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2.Accountingrulesshouldbestreamlinedanddiscretionary
choicesshouldbereduced.Inotherwords,weshouldhave
fewerandclearerrules,resultinginlessvoluminousbutmore
informativefinancialfilings.Whilethismayseemtoreduce
disclosure,itwillincreaserelevantdisclosureandeliminate
the fog created by the disclosure of minor facts.