Friday, April 29, 2005

More on Costs of Compliance

As a follow-up to my previous post, I wish to mention the work of another faculty member I met this past week. Aleksandras Dobryninas, who is visiting Creighton from his home in Vilnius, Lithuania, spoke on campus earlier this week on the issue of corruption. As Professor Dobryninas pointed out, there are many definitions for corruption. Some we are quite familiar with, such as bribes. Others are less visible to us, such as public contracts that are awarded on a basis other than merit and the lowest cost to the public.

Professor Dobryninas is an expert in the issue, and he works with an international agency known as Transparency, International. You can find their website here:

Transparency, International performs surveys and other research on corruption in countries around the world. They have developed indices to measure various types of corruption, or the converse, the transparency index of a country. These indices are used by international economic development agencies to evaluate investment alternatives.

The United States fares very well on these indices, though it is not at the top of the list when it comes to corruption. In the Corruption Perceptions Index of 2004, the U.S. is tied for 17th with Belgium and Ireland. (See )
Finland tops the list, and Australia, Canada, and the UK all appear ahead of us. Bangladesh and Haiti round out the bottom of this list. It is quite clear that economic development and high corruption perceptions are negatively correlated.

This leads me to a follow-up comment on my previous post, focusing particularly on Sarbanes-Oxley. Though we don't like to spend resources confirming compliance with internal controls, some level of spending on these activities helps to support our economic structures. We are able to attract investors to U.S. companies because we have a system that works reasonably well. We don't have to pay bribes or other emoluments to officials to get something done (or to look the other way when we do wrong). True, we have had problems like Enron and Worldcom, but those are the exceptions, rather than the rule. Unfortunately, the examples of Enron and Worldcom remind us that the people watching over our companies are not all angels, and that agency monitoring costs are necessary. In the case of Sarbanes-Oxley, public laws are governing common standards and requiring private expenditures. These expenditures benefit not only the shareholders of the particular companies, but all investors (and perhaps others as well) to the extent it builds confidence in financial markets.

Such rules undoubtedly need fine tuning, particularly when you consider the context for their adoption. The public outcry after Enron and Worldcom was substantial -- and it stands to reason that rules coming out of that environment may well be oriented toward enforcing a higher standard than might otherwise have been generated in less turbulent times.


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