Corporate fraud alive and well in U.S.

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But those auditors — typically larger, big-name accounting firms — haven’t done such a great job, according to the Public Company Accounting Oversight Board, the body that was created by Sarbanes-Oxley to audit the auditors. After conducting inspections on those accounting firms' operations, the board found last November that three major accounting firms — Ernst & Young, PricewaterhouseCoopers and BDO Seidman — were failing “to identify and appropriately address errors” made by their clients, including mistakes that were “likely to be material to the firms’ financial statements.” The board and the firms say they are working to correct the problems.

Ironically the attention focused on the hefty penalties levied in high-profile corporate fraud cases may have distracted regulators from smaller but much more common schemes. That’s the view of Commissioner Paul Atkins of the Securities and Exchange Commission, who earlier this year called for a crackdown on the flood of scams involving small, unknown stocks. These “pump and dump” schemes typically involve touting the smallest, so-called “pink-sheet” stocks — often via e-mail — to inflate demand and push the stock's price higher before the scammer unloads and the price plummets.

“Beating micro-cap fraudsters is a fight that we can and must win,” Atkins said in a March 3 speech. “So why have we not been able to put more pink-sheet promoters out of business? I believe one reason is that junior (SEC) staffers believe that spending time pursuing pump-and-pump promoters is a poor career investment.”

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Meanwhile, there are signs that the pendulum may be swinging away from tougher regulation and enforcement. Critics of the Sarbanes-Oxley law say the costs of complying with tighter financial audits are too burdensome for smaller companies and have driven some new companies to list their stock overseas. A proposed bill in the House would exempt companies with market capitalization of less than $700 million and revenues of less than $125 million from complying. (Companies with a market cap of less than $75 million have already won an exemption until at least 2007.)

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Other critics are taking aim at the accounting oversight board, with a court challenge of the law setting up that audit watchdog on the grounds that members of regulatory boards must be chosen by the president. PCAOB members are currently chosen by the SEC.

At the SEC, belt-tightening is forcing staff cutbacks. Though the agency is asking for a small increase in it budget for fiscal 2007, part of that increase will go to pay for an upgrade of its Edgar electronic filing system. Total full-time staffing is expected to fall to 3,685 by the end of this year — down from 3,850 in 2005. SEC funding increased sharply after the Enron scandal broke in 2001, and staffing grew to more than 4,000 from about 3,000.

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