You and me – an alternative to more regulations!

 For the second time in a decade we find ourselves in the middle of another financial crisis, with Congress debating new regulatory reforms.

A group of finance and accounting professionals are proposing a viable alternative to regulatory reform; i.e., they’re asking you and me to anonymously disclose information about the questionable business practices of U.S. publicly traded companies and executives on their website

Employees like you and me have the highest success rate for uncovering fraud, according to the latest research by Alexander Dyck, Adair Morse, & Luigi Zingales (Financial Economics, Feb 2007, “Who Blows the Whistle on Corporate Fraud”).

In testimony to Congress in March 2009, Scott M. Polakoff of the Treasury Department’s Office of Thrift Supervision (OTS) conceded that his agency “did not foresee the risk concentration and the profound systematic impact” caused by AIG’s $65 billion in credit default swaps.

Credit default swaps and other types of financial derivative contracts became a blockbuster industry that helped fuel the bust when many legendary Wall Street firms were unable to meet their obligations.  The extent of company losses came largely as a surprise to stock and bondholders as well as regulators charged with monitoring their performance.

University of Illinois professor of law Larry E. Ribstein suggests that the solution is “Better managerial incentives and more information…” not more regulations and more complexity.

Professor Ribstein adds that the Sarbanes-Oxley Act of 2002 was supposed to prevent market crashes like the currently unfolding disaster from happening and ponders whether the present turmoil will bring about a destructive Sox 2.0.

By design, there is a wealth of information missing from current public filings that is vitally important to shareholders; information that is key to putting an end to the perverse compensation practices that encourage executives to take excessive risk at the expense of their companies, shareholders, employees, and ultimately the American taxpayer. 

If you had a choice between full disclosure on or more federal regulation, which would you choose?


About zethics
CEO and founder of zEthics, Inc. Thirty years of experience with finance and accounting background in public private sectors.

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