In the three years since the stock market peaked in March 2000, investors have lost more than $7 trillion in stock value. A major cause has been the corporate accounting scandals at Enron, WorldCom, and other high-profile companies, which have reduced investor confidence in the reliability of corporate earnings reports.

Congress has begun to act. In the Sarbanes-Oxley Public Company Accounting Reform and Investor Protection Act of 2002, legislators delineated new requirements for corporate CEOs and corporate boards. Congress also created the Public Company Accounting Oversight Board, and it imposed some obligations on auditors. However, it left to future regulations other standards for increased auditor ethics.

The first law provides a one-year "cooling off" period before an accountant who had been in a position of responsibility in the audit of a public company can switch to a job as a financial officer of that company.

A second law requires auditors to keep records that would enable a competent outsider to follow the work performed in an audit and to identify who did the work. Records must be kept for seven years. The California law creates a presumption that the work was not done if records are missing. By contrast, the federal Sarbanes-Oxley Act has a weaker standard concerning which documents are required, although it does prohibit their destruction.

The third law requires a majority of public members on the state board that licenses and disciplines public accountants, ending an era of self-regulation by accountants. It also requires accountants to tell the state Board of Accountancy when a company restates its earnings, allowing the board to investigate whether the accountant who had prepared the earlier audit violated professional standards.

Accurate and complete audits of publicly held companies are key to the fair marketplace. States can improve auditor conduct by following California’s lead in enacting a no-revolving-door standard on licensed public accountants, a strong no-shredding standard, and a public-member majority on the state’s Board of Accountancy. State legislatures can also protect consumers by passing laws similar to New York’s Martin Act, which allows the state attorney general to take punitive action against those who knowingly report or publish misstatements related to stock values.

Some of the special-interest groups that opposed the Sarbanes-Oxley Act are vigorously lobbying the federal government to remove certain provisions and to weaken the law. Policy-makers should not only stand firm, but they should strengthen the law. Congress should close the loopholes in the Sarbanes-Oxley Act that permit publicly held companies to pay their auditors for many types of lucrative nonaudit services.

Congress and the president should also ensure that the Securities and Exchange Commission has strong leadership dedicated to protecting investors, and that the commission has the budget for vigorous enforcement.