I was reading Fred Wilson’s post today on ESORS and it reminded me of another interesting solution proposed for the securities industry: Balance Sheet insurance
The idea is that the SEC requires companies to buy insurance against fraud/mistakes in their financials. Which would, in turn, require insurance companies who price this risk to create their own audit model to evaluate different companies’ financials. If you’re Enron, with an extremely complex set of accounting, your audit would be more expensive, increasing your premiums. This system would create an incentive for companies to simplify their accounting and/or build a strong level of trust with the insurance community.
If a company was caught cheating or with a mistake in their financials, investors’ losses would be reimbursed by the insurance policy. So, if Enron blew up, the shareholder value would not be lost.
I think this is a brilliant idea.