Sharper Teeth for the SEC

Investors should never forget the corporate chicanery and outright fraud that burned stockholders of Enron, WorldCom, Global Crossing, Adelphia Communications and Arthur Andersen. But with the stock market ringing up its best quarter in years and with savings accounts offering such frustratingly low returns, Americans may be feverish again about the stock market.

Now the question is: How long will it take for a devious executive to disguise a company’s crummy finances by huddling in a backroom with an eager-to-please accountant -- creating the volatile conditions that caused Enron to implode? The quickest way to keep corporate rogues in check is to give the Securities and Exchange Commission the money, staff, leadership and regulatory power it needs to police the public markets.

The Accountant, Compliance and Enforcement Staffing Act of 2003 -- a bipartisan bill that cleared the House and Senate in late June -- takes an important step toward bolstering the SEC. The bill streamlines the process to hire the 800 lawyers, accountants, economists and examiners the agency needs to support its current investigations, as well as to open new cases.

The SEC’s chief accountant plays a vital role in setting the agency’s direction. That office, unfortunately, has been vacant since November. SEC Chairman William H. Donaldson should fill the post fast with a leader who will put investors’ interests ahead of those of the accounting industry or corporate executives.

Tough enforcement won’t be enough; regulatory fixes also are required. The SEC in late June approved rules giving shareholders the right to vote on some executive compensation packages. But the agency has yet to make it easier for shareholders to nominate directors to corporate boards; shareholders usually face long, often costly proxy battles to do this now. In addition, the SEC should end the glaring conflict of interest that occurs because it lets auditing firms also handle lucrative tax work for customers.

Individual investors are lucky to have powerful allies in state capitols. California Treasurer Phil Angelides and officials in other states -- representing almost $500 billion in public pension assets -- promise to keep pushing Donaldson for reforms. As Angelides said last week in a teleconference call, “unless we keep [attention] on these areas of shareholder concern, they will be put on the back burner.” That can’t happen or shareholders risk getting torched yet again.