ECONOMIC SELF-INTEREST

Alan Greenspan voiced surprise over the accounting scandals because he felt

"accountants basically knew or had to know that the market value of their companies rested on the integrity of their operations and that, indeed, that signature that they put on an order form is where the net worth of the company comes from. And that, therefore, their self-interest is so strongly directed at making certain that their reputation was unimpeachable, that regulation by Government was utterly unnecessary and, indeed, most inappropriate. "

He did admit that "I was wrong."

(source: FEDERAL RESERVE'S SECOND MONETARY POLICY
REPORT FOR 2002, COMMITTEE ON
BANKING, HOUSING, AND URBAN AFFAIRS
UNITED STATES SENATE, JULY 16, 2002 )

Of course, there was no reason to be surprised at greed and incompetence. According to the Real Master:

The directors of such companies, however, being the managers rather of other people's money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own..Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.

The Wealth of Nations, Book V, Part 3, Article 1

To complete this lesson, we now have some empirical evidence from Moody's:

Moody's finds high pay, credit risk link
Jul 25, 12:33 PM EDT
NEW YORK (AP) -- Investors may want to take a hard look at stock options and bonuses going into top executives' pockets before spending their own bucks to buy a company's bonds.
Corporations doling out super-sized incentive compensation packages to chief executives appear to face a greater risk of potential default or a significant downgrade, a new study by Moody's Investors Service suggests.
The study "is confirming that there is a relationship between high pay and extra risk for the company," said Christopher Mann, a Moody's senior vice president and author of the report. "It's been seen in other ways, and now we are showing that for the debt markets it's apparently a significant factor."