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• The federal government made at least $37 billion in overpayments in 2005. Current
estimates are between $40 billion and $100 billion in annual overpayments.
• The Heritage Foundation reports:
Federal spending has reached $22,000 per household, in constant dollars, for the first time
since World War II. “Discretionary” spending voted on each year by Congress has jumped
49 percent in just three years, and entitlement spending nears 11 percent of gross domestic
product (GDP) for the first time ever. Furthermore, the upcoming retirement of the baby
boomers will put an enormous strain on Social Security, Medicare, and Medicaid and
sharply increase spending. It is imperative for lawmakers to get the nation‟s finances in
order immediately by restructuring entitlement programs and reducing federal spending.
Putting off the difficult decisions until the federal budget‟s condition deteriorates further
will result in much harsher and more expensive policy choices. 7
Summary and Conclusions
Clearly ethics, the rule of law, and property rights have great importance in financial reporting. But
this statement needs to be elaborated as follows:
• The laws have to be based on sound economics in order to be cost-effective and efficient.
SOX seems to be cost-effective and efficient in several ways, but the SOX provisions on whistleblowers
and internal control face serious doubts about being cost-effective and efficient.
• The proportion of stocks held by individual persons has greatly declined, and the
proportion of stocks held by institutions such as mutual funds, pension funds, and hedge funds
has greatly increased. As a result, the property rights of individuals in stocks have become
diluted, so the vigilance of stock-owning individuals over top management has been eroded. Now
the financial institutions do less to scrutinize the performance of top management and do more to
pursue their own profit from money management fees. This dilution of individual property rights
also dilutes economic efficiency, because people tend to be more careful with their own money
than with other people‟s money.
• The relationship between corporate owners and managers used to be one of principal
(owner) and agent (manager). Now it is one of principal (owner), agent (financial institution), and
subagent (manager). The new relationship is more distant, more remote, more bureaucratic, and
more inefficient. The previously efficient ownership society has become the less efficient agency
society.
• If laws that handicap corporate raiders were repealed, more stock would end up in the
hands of individuals, and less in the possession of financial institutions. That would slow down
the dilution of individual property rights that also dilutes economic efficiency.
• But one thing has not changed. Our economy and our society are as dependent on ethical
behavior as they ever were. On the one hand, ethics cannot be forced upon the unwilling. On the
other hand, unethical behavior can be punished and deterred with greater force. That is the main
accomplishment of SOX.
Downloadable Resources for this chapter available at
www.wiley.com/go/portablembainfinance