Treasury Undersecretary Robert Steel is complaining about US regulation, stating that the US is losing business to Europe and Asia because of the strangling effects of its regulatory policy. It is said that “cumbersome accounting rules and litigiousness are deterring investors from US markets.” The problem here, as Steel believes, is not the problem of intervention itself, but rather the fact that in the US accounting is on a rules-based system as opposed to a more progressive, principles-based approach.
The Treasury’s reaction is to form yet another committee to look into this problem (but it’s non-partisan!). This committee plans to “strengthen the auditing industry,” analyze why the restatement of financial statements are on the rise, streamline accounting procedures, and “reform” the more burdensome aspects of Sarbane’s Oxley’s Section 404 requirement. Note that SEC Chairman Christopher Cox believes that this re-regulation of old regulation will strengthen the highly-regulated US capital markets and make them competitive again. See the video clip here on Bloomberg. I suggest a good place to start – regarding the restatement of financials – is the Fannie Mae restatement debacle. One can ask how a company is not de-listed from the NYSE even when it does not issue an annual financial report for over three years…
As a final comment, the SEC plans to design these numerous reforms so that they can be implemented without the approval of congressional legislation.
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Isn’t that how they try to sell the idea of the EU? More government to fix the problem of government.
Fannie Mae has not issued an annual financial statement in 3 years? By what rationale is this okay with the SEC?
I’m not familiar with regulation in the discipline of accounting. I am somewhat familiar with regulations affecting my industry, engineering and construction of energy and chemical plants. I have seen two types of what might be called “principles-based” regulations. One is where your proposal is submitted for approval, and regulators are free to critique the proposal and have broad discretion to require changes. The other type, and much preferable from a businessman’s standpoint, are regulations with wording that allows for professional judgment, containing wording such as “three levels of redundancy” or “as far as practicable”. These types of standards can be objectively determined by professionals, and result in both more rational outcomes and controllable costs. It is this latter type of principles-based regulation that is preferred. The worst type is the whim-based regulation sometimes referred to as “principles-based”. Between these two types are the explicit requirement type of regulation, which say things like “caged ladders are to be 34″ in diameter”. These can be complied with easily, but they often unneccesarily constrain work. If a vendor makes a mistake and produces a caged ladder that is 33″ in diameter, the principles-based regulation will allow you to accept it, but under a strict rules-based interpretation, the ladder will have to be reworked.
This is perhaps a fruitful area for better understanding the effect of regulation upon business. For instance, my current assignment is for an installation in Italy, which has a number of “whim” and “strict” regulations, both of which can result in very uneconomic solutions. The US has very few “whim” regulations, luckily. Also, US regulations often piggyback on industry-created standards (by bodies such as API, ASME, IEEE). These are not nearly as onerous, and are usually required for proper insurance coverage of the facility, anyway.
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