It's Worse Than You Think. (Editorial)

Article excerpt

HERE IS ONE OF THE MOST REMARKABLE aspects of the still-unfolding financial scandals swirling around WorldCom, Xerox, Global Crossing, Enron, Arthur Andersen, Tyco and a growing number of other companies: The fraud occurred in the most heavily regulated and monitored area of corporate activity.

If an epidemic of corporate malfeasance could occur in the financial arena, how serious is the more general problem of corporate crime?

Consider the checks and balances in place that should have stemmed the wave of corporate wrongdoing which has reportedly angered even USA, Inc. CEO George Bush:

* Disclosure requirements for corporate financial performance are extensive, and by far the most detailed for any element of corporate activity.

* There is a distinct industry -- made up of accounting firms -- whose function is to review the financial numbers, audit corporate books and certify the financial statements.

* There is another distinct industry, separate from the accountants -- this is the Wall Street investment firms -- whose function is to scrutinize the corporate reports, interview corporate executives, analyze market performance and provide investors with independent evaluations of company prospects.

* There is a legal duty for corporate executives to advance the interest of an important and powerful class of people -- shareholders -- and significant numbers of these shareholders are increasingly organized and assertive of their rights (including through pension funds). There is no comparable legal duty for corporate executives to serve consumer or worker interests, say.

* An array of Securities and Exchange Commission regulations establish rules for financial reporting, and are backed by the enforcement power of the agency, as well as the threat of private litigation from shareholders in case of violation.

Other aspects of corporate activity are simply not subject to such robust scrutiny and control.

Given what is now the apparent blatant corporate disregard for the law, even in areas where executives are most closely watched, what should we expect is occurring elsewhere? What's happening with consumer rip-offs, sales of unsafe products, endangerment of workers, pollution of the environment?

Even with inadequate law enforcement, reporting requirements or organized countervailing institutions, we know enough to know that the epidemic of corporate crime, fraud and abuse is at least as severe outside of the financial arena as within.

To take just a few examples from recent months: In May, drug maker Schering-Plough signed a consent decree with the Food and Drug Administration, agreeing to pay a record $500 million in connection with charges that over a three-year period it produced about 125 different prescription and over-the-counter drugs in factories that failed to comply with good manufacturing practice. In April, the Justice Department announced that it collected more than $1. …