Alan Greenspan, long a supporter of less government regulation, says the marketplace already is correcting the worst abuses exposed by the collapse of Enron Corp.
In the Federal Reserve chairman's most extensive comments on the biggest corporate bankruptcy filing in US history, Greenspan urged a significant change in how stock options are treated but otherwise cautioned against over-regulation.
Greenspan told his audience at New York University on Tuesday that it would be a mistake to see a need for a "significant expansion of regulation."
He said stronger investor scrutiny after Enron's December collapse already has imposed needed market discipline on corporate accounting practices.
"The sharp decline in stock and bond prices following Enron's collapse has chastened many of the uncritical practitioners of questionable accounting," Greenspan said.
He said companies whose earnings are reported "free of spin" are being rewarded.
"Corporate reputation is fortunately re-emerging out of the ashes of the Enron debacle as a significant economic value," the Fed chairman said.
"Corporate governance has doubtless already measurably improved as a result of this greater market discipline in the wake of recent events," he said.
Greenspan repeated a recommendation he made to Congress this month that it require companies to count stock options they reward top executives and other employees as company expenses.
The proposed change, being pushed in legislation sponsored by Senator Carl Levin, a Michigan Democrat, has already sparked a lobbying campaign in opposition led by executives of many high-tech firms.
Enron executives reaped millions of dollars in profits by cashing in stock options before the company's share prices plummeted. Critics contend the lure of huge stock windfalls created incentive for the executives to hide the company's real status with questionable accounting practices.
Greenspan said current accounting rules, which do not require stock options to be charged as company expenses, allow many corporations to inflate reported earnings. A Federal Reserve staff study, he said, estimated that annual corporate earnings growth between 1995 and 2000 was 2.5 percentage points higher for larger corporations because they did not have to count options as expenses.
Greenspan said a switch to expensing options would not bar companies from using the often highly lucrative incentives to attract top talent but would ensure that its impact on the company would be properly reflected.
Since a large number of US companies have used stock options, a change requiring that they be counted as expenses would cause many to report lowered earnings. Current rules require companies only to report the cost of providing options as footnotes in their annual reports.
A requirement that stock options be counted as expenses was the major regulatory change Greenspan outlined in his speech. Otherwise, he cautioned Congress against passing too many new laws, saying the marketplace should be allowed to work.
Greenspan said one change that probably would occur without government interference was increased use of databases to track past recommendations that brokerage firms have made about various companies.
Critics have charged that analysts at big brokerage firms failed to alert investors to the problems at Enron because they did not want to lose stock underwriting business with the company.
Greenspan said some method undoubtedly would occur in the aftermath of Enron that would allow investors to measure the success of past recommendations.
"I venture to say that with such transparency, the current upward bias of analysts' earnings projections would diminish rather rapidly, because investment firms are well aware that security analysis without credibility has no market value," Greenspan said.
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