Accounting reform; watching the watchdogs.

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. (For more, see our mutual-funds report on page 32.) 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.

A MODEL STATE'S REFORMS

At least one state has imposed stricter accounting reforms. As of Jan. 1, 2003, public accountants licensed in California have had to meet higher standards under three new state laws supported by Consumers Union, the publisher of CONSUMER REPORTS:

* 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 ...