TIE: You have obviously been way out in front on concerns about misleading behavior by equity analysts, insider information, accounting failures, and other problems in the financial markets. We have always had some of these problems in our large market system but it seems we have never had the rash of activity that we've seen in the last year or so. In your opinion, what are the major reasons why this has happened?
AL: Over the past two decades we have experienced a gradual erosion of ethical values on the part of corporate America. A raging bull market, either a byproduct or consequence of the moral decline, seduced investors and created the kinds of excesses that ultimately resulted in the bear market and severe investor backlash.
TIE: To what do you attribute this kind of ethical breakdown?
AL: We have such a competitive economy that if companies A, B, and C begin to stretch the envelope then E and F can't be far behind. Behavior that verges on the ethical becomes less ethical and sometimes outright unethical in order to meet short-term demands of analysts and shareholders. The kind of hype and exaggeration that has always been present in bull markets becomes exacerbated by the leverage inherent in products such as derivatives and options. This gives greater velocity to the consequences of all investment decisions. The euphoria of the period persuaded analysts, brokers, and investors that all of their decisions made money and that their wisdom and insights would invariably lead to success.
TIE: Do you think some of the changes underway like the Sarbanes-Oxley Act or some of the other regulatory rule changes being proposed are going to correct many of the major flaws? And do you think these changes are headed in the right direction, or if not, what would you do differently?
AL: I personally believe that humiliation and embarrassment has already changed behavior. Whether that will endure depends upon some of the changes we've seen. I think that over the years the economics of the accounting industry changed to a point where accountants became either perceptually or actually compromised by relationships they had with their clients. Time for self regulation has passed, and to restore public confidence we need to have the kind of oversight promised by the Sarbanes-Oxley bill. Whether or not this legislation will do the job depends, to a large extent, upon the credibility of the people chosen to serve on the audit oversight board. They will...