Little Guy Has Little Recourse

Remember the "ownership society" that the administration swore to promote and protect? Remember the admiration lavished on the so-called shareholding class? You probably thought that meant you, because you invest in the stock market and own mutual funds. You would be wrong.

Even with the corporate frauds of the '90s barely out of the headlines and 21st-century frauds taking over (rampant insider trading; backdated stock options for executives), your government is rolling back some investor-protection rules. It's also urging the courts to side with corporate captains against their trusting shareholders. Key people in Congress, mindful of campaign contributions, stand on the captains' side.

I have three cases in point.

Block the SOX: The Sarbanes-Oxley law, SOX for short, passed in the wake of the WorldCom and Enron accounting frauds. Its critical Section 404 orders senior managers to test the effectiveness of their companies' financial controls, with oversight by independent auditors. You probably thought that was already part of a manager's job, but as it turns out, only the better companies cared. The rest have been whining about SOX ever since it passed.

The scrutiny forced by 404 has uncovered thousands of cases of bad financial reporting. A record 1,538 companies had to restate their earnings last year. Not surprisingly, their stocks lost a median of 6 percent in market value, reports the consulting firm Glass Lewis, compared with a gain of 15.7 percent in the Russell 3000 Index. But once they improve their financial tools, their businesses should improve as well.

This idea cuts no ice with a blinkered cadre of overpaid CEOs who get sore when restatements reduce earnings (and their option awards). They're sobbing that 404 costs too much. So, to wipe away their tears, the Securities and Exchange Commission plans to reduce the amount of testing required—creating "404 lite." (It's probably churlish to add that good accounting costs pennies compared with the size of CEO bonuses, but then CEOs never think they cost too much.)