How to Keep 'Em Honest
While Auditing

Very rarely does an idea come along as brilliant as the one described in Susan Lee's July 10 The Dismal Science column "A Market Remedy for Our Nasty Accounting Virus." As an equity portfolio manager for a large foreign bank, I would gladly adopt a policy, when practical, of purchasing equities only of those companies that have been audited by an accounting firm hired by an insurer who is willing to write a policy against accounting fraud. Widespread adoption of such a policy by investment managers and individuals would pressure companies to quickly find such coverage and submit themselves to insurance audits.

One beauty of the idea -- propounded by Joshua Ronen , accounting professor at New York University's Stern School of Business -- is that, because of the incentives, it is not difficult to imagine such a system taking hold in a matter of only a few years. Those companies that cling to the current method of hiring their own outside auditors would quickly be labeled as high-risk undesirables. We only need some major insurers to now step up to the plate and create such a product, perhaps in joint venture with the big accounting firms. No doubt such a product would be in high demand by clean companies. All the others would have to get clean fast.

H. Terrence Riley III, CFA
New York

Updated July 18, 2002