The discovery of accounting fraud at WorldCom has ensured one thing. The US Congress will reform the supervision of accounting, creating a sort of junior Securities and Exchange Commission to babysit the wayward profession.

In this season of financial scandal, the idea has a lot of popular appeal. Someone has to pay for the disappeared billions, the loss in shareholder value. That someone will be the negligent book-keeper. Otherwise, it is feared, the world will lose confidence in US financial markets.

But the Senate version of the legislation, which suddenly stands a good chance of becoming law, does not stop at measures such as limiting consulting work by accountants. It includes reforms on a far larger scale. Paul Sarbanes, the Democrat senator who is sponsoring the legislation, says the current scandals show that auditors should not be left alone to set their own standards. But the bill is in danger of making matters worse.

Consider the changes, to be debated by the full Senate next week. Throughout its modern existence, US accounting has been largely self-regulating, like the medical and legal professions. Professional activity has been monitored by the American Institute of Certified Public Accountants (AICPA). The legislation would end self-regulation, setting accountants apart and making them something closer to brokers. The rules would even encompass non-US accounting firms.

At least four aspects of the legislation suggest enormous power for the planned new regulatory entity, the Public Company Accounting Oversight Board. First, the board would be initially chosen by the Securities and Exchange Commission, and dominated by non-accountants: only two of the five members would be from the profession, and those members would be barred from voting on enforcement issues.

Second, registration with the board would be mandatory for all accounting firms and accountants that audit publicly listed companies. Third, the board would set the profession's standards, including those for ethics. Fourth, the board would have the power to apply strong disciplinary measures to enforce its rules - as well as other securities laws - in order to keep accountants in check. It could levy fines and put firms out of business by expelling them.

The bill says that "the Board shall not be an agency or establishment of the federal government". But two reviews of similar legislation in the House - one by the Office of Management and Budget and the other by the Congressional Budget Office - have already determined that Washington would have to budget for the agency. It is hard to see how this does not amount to federal control of the profession.

In a public letter, AICPA has expressed distress about its loss of control of standard-setting. The red-faced profession has now backed so far into a corner that is not likely to offer more in its own defence.

But there are a few points worth making. The first is that the big errors on display today have to be measured against all the services that accounting, especially auditing, delivered to the US economy over the decades. Those services were based on a culture of pride and professional standards. "Think straight, talk straight" was the motto of Arthur Andersen, founder of the firm, and most of the profession has followed the injunction.

When auditors failed in their duties, they were punished in the courts of law - as Andersen has been in the Enron case. But the market's punishment was even more brutal. Even before the Department of Justice brought suit against it, Andersen's clients were deserting.

The new board would end the reliance on that dynamic. No longer free to establish their own standards, auditors would be forced to work from a cookbook that they did not write. The problem is that new standards would probably be designed to minimise the risk of accountants ever making a mistake, rather than to encourage common sense. Even more than now, US auditors would become form-fillers and scribblers, rather than analysts. Even more corporate corruption might result if auditors could escape blame simply by saying that they had followed the rules.

The second problem is that the accounting profession will find it harder to compete for the best talent. Until recently, the top accounting firms could outbid consultancies for young associates. Andersen's training programme, at St Charles, Illinois, was famous: accountants spent their careers seeking to earn a coveted place in the "Accounting Hall of Fame" (yes, there is one).

The fact that consulting by auditors will probably now be severely curtailed has already diminished the attractions of auditing. If they know that, even as auditors, they will be reduced to the level of paper-shufflers, many young people will choose law or even dentistry instead. Accountants are never likely to achieve the remuneration levels of brokers, which would at least provide some compensation for subjecting themselves to intensive scrutiny from Washington.

All this should concern non-US accounting firms as well. The bill's language suggests that any foreign accounting firm that plays a "substantial role" in preparing an audit report for a US-listed company would also have to subject itself to the board's disciplines. Senator Phil Gramm of Texas, the senior Republican on the banking committee and an opponent of the bill, is preparing a memo about its extraterritorial reach for European Union members.

But the general interest of the US is the immediate issue here. Proud professions are an important part of any economy, as important in their way as the rule of law. With cogs for auditors, we would face the prospect of more mindless action, not less. That is hardly a confidence-inspiring thought.

© Copyright 2002 Financial Times