“The Securities and Exchange Commission, underfunded and undermined by politicians throughout the stock-market euphoria of the 1990s, now is promised big budget increases to clean up the mess the bull market left behind,” writes Michael Schroeder in today’s Wall Street Journal.

“The extra money, when it finally arrives, will go a long way toward making the agency more effective at finding, prosecuting and preventing financial fraud. The SEC’s workload grew by 80% between 1991 and 2000 while its staff grew just 20%, the General Accounting Office says.”

“But the SEC’s stretched resources have been only one factor hampering its effectiveness against financial fraud. Proving that books are cooked is more complicated and time-consuming than, say, catching insider traders, no matter how many staff are involved. The agency also will need to overcome a range of ingrained customs and legal hurdles that constrain it.”

“Indeed, its career accountants and lawyers have already begun overhauling how they operate in order to catch more fraud, sooner. And they’re showing some results: 130 financial fraud investigations so far this year, double the year-ago tally. At the same time, this stepped-up pace carries its own risks. Moving faster, which at the SEC usually means bringing charges in months instead of years, could weaken investigations and force the agency to settle for penalties too small to deter wrongdoing.”

“Harvey Pitt, the SEC’s embattled chairman, says he’ll take all the budget he can get but worries that increases will create an expectation the agency can catch fraud at every public company. “Even another 3,000 people isn’t enough,’ he says. ‘There is no system and no amount of money that will guarantee there will be no problems.’ “

“Since he was named chairman a year ago, Mr. Pitt has battled accusations that his past representation of big accounting firms presents so many conflicts of interest that he can’t do the job well. Mr. Pitt, who is resisting calls from some lawmakers that he step down, has recused himself from matters involving former clients until he completes a year in the job on Aug. 3, as the law requires. After then, he says he won’t routinely bow out, though he may do so on a case-by-case basis.”

“For all the attention the chairman gets, the heart of the SEC has always been its professional staff. But the staff simply has been unable to keep up with the demands imposed by an expanding financial market. The pay and low morale helped spur a third of its 3,000 staffers to depart between 1998 and 2000. Only this year did the SEC get money to match the salaries of bank regulators, and even that was not for everyone. The top salary for a second-year SEC lawyer this year is $72,000, half what big law firms pay.”