A Remedy for Executive Branch Lies About Budget Item Costs:
Should Congress Pass a Sarbanes-Oxley Act For the Government?

By EDWARD LAZARUS

Thursday, Feb. 17, 2005

Imagine that a large multinational company, in a document filed with the Securities and Exchange Commission, takes a $400 million charge against earnings, representing the cost of a new service that the company is going to offer. Now imagine, further, that the company's Chief Financial Officer has received from his top financial manager a cost estimate of more than $500 million for the service, and that the CFO has suppressed this cost report. Finally, imagine that New York Attorney General Eliot Spitzer and SEC Director of Enforcement Stephen Cutler learn about the suppression of the company's own estimate - and learn, further, that the real cost of the program is going to be $750 million, or even more.

I think we all know what would happen next. The investigations would start; the indictments and shareholder lawsuits would follow; and the company would end up paying a whopping fine while the CFO would, in all likelihood, be off for a stint in the pokey.

Now change the channel to the arena of national politics - and change the stakes from millions to billions of dollars. The Bush Administration proposes a new prescription drug program. It sells the program to the Congress and to the American people as costing $400 billion, even though the top bean-counter at the Department of Health and Human Services has estimated the true cost to be more than $500 billion and, it turns out, in real life the cost is likely to be at least $750 billion and perhaps much more.

So what happens? Nothing, of course. By the time the internal estimate of over $500 million comes out, the new prescription drug benefit is the law of the land and the presidential election that might have provided accountability for the Administration's lying about its cost is over.

The press reports the story, true. But its import disappears in the on-the-one-hand/on-the-other-hand style of reporting that the press almost universally employs -- as well as in the soporific haze that large budget numbers often induce in readers and viewers.

Can anything be done to curb Executive Branch officials' lying about the budget numbers that drive federal law and policy? I think the answer is yes.

When we learned corporate America was cooking the books on a massive scale, Congress passed a new law, the Sarbanes-Oxley Act, making corporate officers more easily and directly accountable for company accounting. Maybe it is time to think about a Sarbanes-Oxley for government.

The Key Aspect of Sarbanes-Oxley That Could Also Be Applied to the Government

Sarbanes-Oxley has many facets, of course, and most of them could not possibly be transferred from the context of corporate SEC filings to the context of Executive Branch budget numbers. But one important new Sarbanes-Oxley requirement could be imported - namely, the requirement that the CEO and CFO of a corporation must explicitly certify the integrity of the accounting in their periodic reports to the SEC.

More specifically, under Sarbanes-Oxley, the company's CEO and the CFO must certify that their filings are based on legitimate accounting methods, and that the filings contain no material misstatements of fact or material factual omissions related to the subject matter of the filings. Importantly, a CEO or CFO who falsely vouches for the integrity of company SEC filings risks criminal prosecution.

The purpose behind this new requirement is straightforward. In an effort to ensure that current and prospective shareholders of a company receive a full and accurate picture of the company's actual financial health, Sarbanes-Oxley places a heavy burden on top executives to ensure a high level of accuracy and transparency in their corporate disclosures. No more claims of ignorance when hidden bad news comes out will be tolerated. Sarbanes-Oxley puts the necks of the CEO and the CFO on the line.

Why should top government officials enjoy a lesser degree of accountability? As citizens, we rely on them to provide a full and accurate picture of the nation's fiscal situation, no less than investors in the market rely on the truth of company disclosures. Without a doubt, the budget numbers provided by the government have extraordinary influence over the direction of national policy, as well as over our electoral choices about who should lead the nation.

Perhaps, then, it is not so far-fetched to think that Cabinet secretaries and/or the head of the Office of Management and Budget should formally certify the integrity of their budget projections, much as top corporate executives now must.

As with corporate America, the prospect of legal sanction for deliberate misstatements or willful ignorance would surely improve the quality of current budget numbers and the accountability of those providing the figures.

The Need for Accountability For Wildly Wrong Projections of Iraq War Costs

I realize that what I have suggested is something of a "Modest Proposal." It would be difficult, for example, to define exactly which budget numbers and cost estimates should be covered by an Executive Branch certification requirement. It also would be difficult to separate honest mistakes from intentional connivance to hide costs from the American people.

To be sure, the costs of government initiatives are notoriously hard to project. Take the Iraq war. According to the Administration's initial assurances, the cost of toppling Saddam was going to be relatively modest and, moreover, would be covered in large part by sales of Iraqi oil.

We now know that this was a mistake - approximately a three-hundred-billion-dollar mistake. And quite possibly, it was a mistake that created a war that otherwise would not have been fought. After all, would the public have supported the invasion of Iraq had it known that the true cost (including an added $82 billion more, sought by the President, this week) would be so large?

Budget Lies Can Have Enormous Political Consequences

Historically, we have relied on the political process to create accountability for such mistakes. If an Administration promises a quick and cheap war, but ends up fighting a long and expensive one, the answer has been to vote that Administration out of office. And in the case of the Iraq war, that feels like the right answer - even though the electorate did not see this mistake as so egregious as to motivate it to vote Bush out of office.

But that said, we live in a world where budget estimates and accounting methods have potentially enormous consequences. We are contemplating a profound change in Social Security, a bedrock part of American life for 70 years. Our decisions about that program will be based in significant part on numbers: How much trouble is the Social Security trust fund really in, and how much would a partially privatized system really cost?

If the numbers are wrong, we will be in trouble. If we are intentionally presented with the wrong numbers, so as to skew our decisionmaking, that is serious misconduct.

The debate over tax reform will be much the same. How much will it cost to make the Bush tax cuts permanent? And what will these and other tax reforms do to a federal budget deficit that many economists believe is already imperiling the American economy? We need accurate estimates - and lies in this area can do tremendous damage.

Executive Branch Officials' Estimates, Which Guide the Debate, Should Be Conscientious

As these debates heat up, we will be bombarded with cost figures from any number of sources public and private. They will include estimates from various think tanks of the right and left, as well from the independent Congressional Budget Office. But the availability of competing figures should not diminish the responsibility of Executive Branch officials to put forward their best budget estimates based on sound accounting principles.

There is no public benefit to making such budget numbers the subject of massaging and spin. Inevitably, these numbers shape the policy debate. If they turn out to be wrong it is often too late - with legislation having already passed - to make amends.

With the stakes so high, is it really unthinkable that we ought to create legal sanctions for high Executive Branch officials who deliberately fudge the numbers? Most of these officials are appointed, and therefore never directly accountable to the people. Remember the lesson of David Stockman - Reagan's budget director in the 1980s, who cooked the books in order to advance Reagan's policy agenda, and then bragged about it after leaving office.

No corporate executive could ever get away with that. And isn't the country's economic future important enough at least to consider imposing higher standards of conduct for those who assume its stewardship? You know, a billion here and a billion there and pretty soon, you're talking about real money.


Edward Lazarus, a FindLaw columnist, writes about, practices, and teaches law in Los Angeles. A former federal prosecutor, he is the author of two books -- most recently, Closed Chambers: The Rise, Fall, and Future of the Modern Supreme Court.

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