Allowing corporations to purchase financial auditing insurance would protect investors against losses suffered as a result of misrepresentations in financial statements, says accounting professor Joshua Ronen of New York University.
So the new system needn’t be more expensive. The total cost to the corporations premiums plus the reimbursement of the audit fee would not be much different to what they currently pay in audit fees and premiums for directors’ and officers’ liability insurance.
By knowing how much (or how little) insurance coverage comes with the securities they buy, investors would be able to tell which stocks are more reliable and which companies are more trustworthy.
Such an arrangement has the advantage of utilising market mechanisms, Ronen points out, is practical and efficient and avoids the complications and pitfalls of many other proposed remedies.
Source: Joshua Ronen (New York University), A Market Solution to the Accounting Crisis, New York Times, March 8, 2002.
For text http://www.nytimes.com/2002/03/08/opinion/08RONE.html
For more on Business Insurance http://www.ncpa.org/pd/iss/leg
FMF Policy Bulletin\12 March 2002
