Editorial: Scandals a drag on the market

Thursday, June 27, 2002 | 8:55 a.m.

The U.S. economy is showing signs that it may be on the mend. Home sales were up sharply in May and there was good news for factories, too, with orders for manufactured goods posting a bigger gain than expected. Meanwhile, here in Las Vegas, it was announced last week that unemployment in May fell to 5.3 percent from the previous month's rate of 5.6 percent.

Despite the relative good news, the stock market is in a slump. Why? It's simple, really. People have lost a great deal of faith in publicly traded corporations due to fraudulent accounting practices that recently have been exposed at huge corporations, including energy trader Enron, pharmacy store chain Rite-Aid and fiber-optics communications conglomerate Global Crossing. The U.S. government even won a conviction against accounting firm Arthur Andersen for destroying documents relating to one of its clients, Enron. And now WorldCom can be added to the list of companies whose future is in jeopardy because of an accounting scandal. WorldCom, which owns MCI, the No. 2 long distance telephone company in the nation, revealed Tuesday that it inflated its cash flow by $3.8 billion over the past five quarters to cover up losses.

If investors are to regain their confidence in corporate America -- including the tens of millions of workers investing in 401(k) plans -- businesses will have to ensure that unethical accounting practices aren't tolerated. But the federal government has a vital role to play, too. There needs to be tougher government regulation of accounting firms because, for the most part, the accounting industry currently polices itself. A Republican plan in Congress would let the accounting industry have some members on a new federal oversight board. But the GOP plan is unacceptable; the industry's presence wouldn't engender public trust that the board would be tough enough. A plan backed by Democrats would prevent the industry from sitting on an oversight board. The Democrat plan is the way to go if we're going to restore faith that corporate accounting practices will be above board.