Tuesday, October 24, 2006

Skilling's Sentence: What It is Good For and What Is Still Required

White collar crime while not a violent crime can be in many ways more brutal in the collective harm in inflicts on our society. White collar crime harms not only the company and its direct victims (shareholders, employees, and company creditors) but the integrity of our financial markets.

When there is any doubt as to the reliability of financial information the collective market capitalization of our public companies suffer resulting in lost wealth such as reduced pensions benefits to retirees, higher costs of capital, and higher costs of debt. Higher costs of doing business reduce employment and taxes. Therefore, white collar crime is a scourge that destroys our economic fabric.

The sentencing of Jeffrey S. Skilling to 24 years and 4 months in prison recognizes these important facts. White collar crime must be taken seriously for what it is – a brutal crime which inflicts collective harm on the innocent and often inflicts collateral damage on society.

However, while we must hold white collar criminals fully responsible and accountable for their actions long prison terms do not by themselves prevent white collar crime.

The sentencing of Mr. Skilling will not stop any crimes in progress or cause any criminal to wake up the next day with any new found morality. Criminals can only be prevented though effective deterrents though barriers such as strong internal controls, effective oversight, and “checks and balances.”

We must require all organization types (businesses, non-profits, and governmental organizations) to have strong and verifiable internal controls. Such internal controls must be monitored, evaluated, and audited by competent fully independent external auditors.

We cannot retreat from the reforms legislated under Sarbanes-Oxley as some persons have proposed but must instead strengthen them with increased educational standards on the accounting profession that enforces this important law. Auditors must do no consulting work for their clients.

We must require the internal audit function to report to an Audit Committee made up of only independent members of the Board of Directors and not report to the CEO or CFO. The internal audit profession must be licensed by the states similar to way CPAs are.

Punishment and prison are important. However, unless integrated with prevention, professionalism (competence), and power (legislation) there will be many more Enron’s to come.

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