About the nicest things many have to say about the Sarbanes-Oxley Act is that it was put together promptly and printed on nice paper. The legislation was rushed through Congress and signed into law by United States President George W. Bush at the end of July in direct response to allegations of accounting abuses at a string of US corporates, but especially at Enron and Worldcom. Critics have been swift to denounce the act, saying that it is little more than a kneejerk reaction to media hysteria, aimed more at winning votes than restoring investor confidence. Others charge that implementation of the provisions of the Act, if workable at all, will be costly and chaotic. This may explain why some of Sarbanes-Oxley's detractors have leapt on Financial Statement Insurance (FSI), a proposal put forward by New York University accounting professor Joshua Rosen. At the heart of Mr Ronen's reading of the corporate scandals is what he calls the 'endemic conflict of interest', in that the auditors vouch for the accuracy of the financial statements of what are essentially potential clients. The temptation of lucrative fees for both auditing and non-auditing services means that auditors, as proven by Andersen's relationship with Enron, are often tempted to turn a blind eye to accounting misdeeds. To counter this, Mr Ronen proposes FSI, whereby the responsibility for hiring auditors would fall to an entity whose interests were essentially aligned with those of shareholders. Under the scheme, corporations would insure their financial statements against 'omissions and misrepresentations'. Insurance companies, glad for the new business but naturally wanting to avoid hefty payouts, would have to ensure as far as possible that the risks are properly gauged. This would mean that the auditors are hired by the insurers to assess the risks of coverage. 'Through the insurance mechanism, the interests of the insurance company would be aligned with the interests of the shareholders because the insurance company or institution would essentially want to minimise shareholder losses,' Mr Rosen says. But Mr Rosen then takes the proposal a step further, and this is what gets the anti-big government critics of Sarbanes-Oxley salivating. By making public the premium and coverage that the insurance companies charge, Mr Rosen said that the market would provide investors with a 'credible signal' about the integrity of the financial statement in question. 'Perceived as credible signals, the market would then price the securities of the insured corporations in such a way that the securities prices would accurately reflect the underlying quality of the financial statements,' he says. Sarbanes-Oxley, by contrast, at the very least threatens to add a new level of bureaucracy in the shape of the Public Company Accounting Oversight Board which, operating under the Securities and Exchange Commission, is intended to police the auditors. Mr Rosen says Congress' response to the accounting scandals will not address the fundamental problem at the heart of the auditors' role in assessing the accuracy of financial statements. 'This endemic conflict of interest is irreconcilable with regulatory regimes which add penalties and additional supervisory boards. What that will do, such as will be done by Sarbanes-Oxley, is essentially no more than add additional layers at additional social cost,' he said. Mr Rosen's proposal has certainly created a stir. After first appearing in a New York Times column in March, FSI has since been championed by the Wall Street Journal opinion pages and Republican grandee Elizabeth Dole, who intends to push the SEC to adopt the scheme in the present session of Congress. Best not mention it to the Sarbanes-Oxley voters then.