SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC 20549

                                --------------

                                 SCHEDULE 13D

                  UNDER THE SECURITIES EXCHANGE ACT OF 1934

                      		(Amendment No. 6)
                             --------------------

                             THE FIRST YEARS INC.
- ----------------------------------------------------------------
                               (Name of Issuer)

                         Common Stock, $O.10 Par Value
- ----------------------------------------------------------------
                         (Title of Class of Securities)

                                 337610109
- ----------------------------------------------------------------
                                (CUSIP Number)

         Lawrence J. Goldstein, Santa Monica Partners, L.P.
 1865 Palmer Avenue, Larchmont, New York  10538, (914) 833-0875
- ----------------------------------------------------------------
              (Name, Address and Telephone Number of Person
            Authorized to Receive Notices and Communications)

                                  1/17/02
- ----------------------------------------------------------------
      (Date of Event Which Requires Filing of This Statement)

      If the filing person has previously filed a statement on
Schedule 13G to report the acquisition which is the subject of
this Schedule 13D, and is filing this schedule because of
240.13D-1(e), 240.13D-1(f) or 240.13-1(g),check the following
box[ ].

     NOTE: Schedules filed in papers format shall include a
signed original and five copies of the schedule, including all
exhibits. See Rule 240.13d-7 for other parties to whom copies
are to be sent.

     The information required on the remainder of this cover
page shall not be deemed to be "filed" for the purpose of
Section 18 of the Securities Exchange Act of 1934 ("Act") or
otherwise subject to the liabilities of that section of the Act
but shall be subject to all other provisions of the Act
(however, see the Notes).
                         (Continued on following pages)



                                  SCHEDULE 13D

CUSIP No.     337610109
1  NAME OF REPORTING PERSON OR I.R.S. IDENTIFICATION NO. OF
ABOVE PERSON
    Santa Monica Partners, L.P.
- ----------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
(a)[ ]
(b)[ ]
- ----------------------------------------------------------------
3  SEC USE ONLY

- ----------------------------------------------------------------
4  SOURCE OF FUNDS
     N/A
- ----------------------------------------------------------------
5  CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
PURSUANT TO ITEMS 2(d) OR 2(e)         [ ]
 ---------------------------------------------------------------
6  CITIZENSHIP OR PLACE OF ORGANIZATION
     N.Y.
- ----------------------------------------------------------------
7  SOLE VOTING POWER

					0
  NUMBER OF     ------------------------------------------------
   SHARES               8  SHARED VOTING POWER
 BENEFICIALLY
  OWNED BY      	 	684,648
    EACH        9  SOLE DISPOSITIVE POWER
 PERSON WITH
			   		 0
- ----------------------------------------------------------------
                        10  SHARED DISPOSITIVE POWER

                         684,648
- ----------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON

               684,648
- ----------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES
CERTAIN SHARES                           [ ]
 ---------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
                8.4
- ----------------------------------------------------------------
14 TYPE OF REPORTING PERSON
               PN
- ----------------------------------------------------------------



                      SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC 20549

                                --------------

                                 SCHEDULE 13D

                   UNDER THE SECURITIES EXCHANGE ACT OF 1934

                      		(Amendment No. 6)
                             --------------------

                               THE FIRST YEARS INC.
- ----------------------------------------------------------------
                               (Name of Issuer)

                         Common Stock, $O.10 Par Value
- ----------------------------------------------------------------
                         (Title of Class of Securities)

                                 337610109
- ----------------------------------------------------------------
                                (CUSIP Number)

         Lawrence J. Goldstein, Santa Monica Partners, L.P.
 1865 Palmer Avenue, Larchmont, New York  10538, (914) 833-0875
- ----------------------------------------------------------------
                 (Name, Address and Telephone Number of Person
               Authorized to Receive Notices and Communications)

                                    1/17/02
- ----------------------------------------------------------------
            (Date of Event Which Requires Filing of This
Statement)

      If the filing person has previously filed a statement on
Schedule 13G to report the acquisition which is the subject of
this Schedule 13D, and is filing this schedule because of
240.13D-1(e), 240.13D-1(f) or 240.13-1(g), check the following
box[ ].

     NOTE: Schedules filed in papers format shall include a
signed original and five copies of the schedule, including all
exhibits. See Rule 240.13d-7 for other parties to whom copies
are to be sent.

     The information required on the remainder of this cover
page shall not be deemed to be "filed" for the purpose of
Section 18 of the Securities Exchange Act of 1934 ("Act") or
otherwise subject to the liabilities of that section of the Act
but shall be subject to all other provisions of the Act
(however, see the Notes).
                         (Continued on following pages)




                                  SCHEDULE 13D

CUSIP No.     337610109
1  NAME OF REPORTING PERSON OR I.R.S. IDENTIFICATION NO. OF
ABOVE PERSON
    Lawrence J. Goldstein
- ----------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
(a)[ ]
(b)[ ]
- ----------------------------------------------------------------
3  SEC USE ONLY

- ----------------------------------------------------------------
4  SOURCE OF FUNDS
     N/A
- ----------------------------------------------------------------
5  CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
PURSUANT TO ITEMS 2(d) OR 2(e)         [ ]
 ---------------------------------------------------------------
6  CITIZENSHIP OR PLACE OF ORGANIZATION
     U.S.
- ----------------------------------------------------------------
    7  SOLE VOTING POWER

					1,000
  NUMBER OF     ------------------------------------------------
   SHARES               8  SHARED VOTING POWER
 BENEFICIALLY
  OWNED BY      	 	695,648
    EACH        ------------------------------------------------
  REPORTING             9  SOLE DISPOSITIVE POWER
 PERSON WITH
			   		 1,000
- ----------------------------------------------------------------
                       10  SHARED DISPOSITIVE POWER

                         695,648
- ----------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON

               696,648
- ----------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES
CERTAIN SHARES                           [ ]
 ---------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
                8.5
- ----------------------------------------------------------------
14 TYPE OF REPORTING PERSON
               IN
- ----------------------------------------------------------------



	Item 4 is hereby amended to read as follows:

Item 4.  Purpose of Transaction

	Santa Monica Partners, L.P. had acquired the Shares for
investment purposes.  Santa Monica Partners, L.P.  intends to
review on a continuing basis its investment in the Issuer and
may, depending upon its evaluation of the Issuer's business and
prospects and upon futures developments, determine to increase
or decrease, or continue to hold as an investment or dispose of
the investment in the Issuer.

By letter dated January 17, 2002, Santa Monica Partners,
L.P. and Lawrence J. Goldstein proposed to the Chairman of the
Board, CEO and President of the Issuer that consideration be
given to increasing the number of independent directors and
reducing the number of family members who serve as directors.
The purpose of the proposal is to strengthen the Board of
Directors and to reduce actual or potential conflicts of
interest involving directors.  The proposal reflects policy
concerns recently expressed by, among others, Professor Burton
Malkiel, Professor of Economics at Princeton and former Chairman
of the Securities and Exchange Commission, Arthur Levitt.

	Item 5 is amended to read as follows:

Item 5.	Interest in Securities of the Issuer.

	Lawrence J. Goldstein, is the general partner of Santa
Monica Partners, L.P.  In that capacity, he makes the investment
and voting decisions for Santa Monica Partners, L.P.  Mr.
Goldstein is also the sole trustee of the L. J. Goldstein &
Company Incorporated Pension Plan (the "Plan").  In that
capacity, he makes the investment and voting decisions for the
Plan.

	Mr. Goldstein may be deemed to beneficially own 695,648
Shares or approximately 8.5% of the total number of Shares
outstanding.  These Shares consist of 1,000 shares which Mr.
Goldstein personally owns, 684,648 Shares owned by Santa Monica
Partners, L.P., and 11,000 Shares owned by the Plan.

	Santa Monica Partners, L.P. beneficially owns 684,648
shares or approximately 8.4% of the total number of Shares
outstanding.  Santa Monica Partners, L.P. shares the voting
power and investment power of such Shares with Lawrence J.
Goldstein.

	Prior transactions during the last sixty days with respect
to the Shares effectuated by Santa Monica Partners, L.P. and Mr.
Goldstein are reported on Exhibit E, attached hereto and
incorporated herein by reference.

Item 7 is hereby amended to include the following:

Item 7.  Material to be Filed as Exhibits.

	Exhibit E.  Prior Transactions during the last sixty days
with respect to the Shares effectuated by Santa Monica Partners,
L.P. and Lawrence J. Goldstein.

	Exhibit F.  Agreement among Santa Monica Partners, L.P. and
Lawrence J. Goldstein with respect to the filing of Amendment
No. 6 to Schedule 13D

	Exhibit G.  Letter dated January 17, 2002 to Ronald J.
Sidman, including as attachments thereto "Lapdogs and
Watchdogs," dated January 16, 2002, by Burton Malkiel and  "Who
Audits the Auditors," dated January 17, 2002, by Arthur Levitt.

					Signature

	After reasonable inquiry and to the best of my knowledge
and belief, I certify that the information set forth in the
statement is true, correct and complete.

Dated:  January 24, 2002

						SANTA MONICA PARTNERS, L.P.


						By S/ Lawrence J. Goldstein
							Lawrence J. Goldstein
							General Partner





					Signature

	After reasonable inquiry and to the best of my knowledge
and belief, I certify that the information set forth in the
statement is true, correct and complete.

Dated:  January 24, 2002


						S/ Lawrence J. Goldstein
						Lawrence J. Goldstein







List of Exhibits

EXHIBIT E

	Prior Transactions during the last sixty days with
respect to the Shares effectuated by Santa Monica Partners, L.P.
and Lawrence J. Goldstein.


Date	     Transferor		      	        	Number of
	Price
						Shares Transferred		Per Share

12/18/01  Santa Monica Partners, L.P. 		20,554*		N/A

	*These Shares were transferred to limited partners of SMP
as a distribution.


EXHIBIT F

		Reference is made to Amendment No. 6 to a report on
Schedule 13D being filed on or about the date hereof with
respect to the undersigned's ownership of shares of Common
Stock, par value $.10 per Share of The First Years Inc.  The
undersigned hereby acknowledge and agree that such Amendment No.
6 to Schedule 13D is being filed on behalf of each of the
undersigned.  This agreement may be executed in one or more
counterparts, each of which shall be an agreement but all of
which shall constitute one and the same instrument.


Dated January 24, 2002

SANTA MONICA PARTNERS, L.P.



By:  S/ Lawrence J. Goldstein
						       Lawrence J. Goldstein,
						       General Partner

							S/
Lawrence J. Goldtsein
	Lawrence J. Goldstein


EXHIBIT G

		Letter dated January 17, 2002 to Ronald J. Sidman,
including as attachments thereto "Lapdogs and Watchdogs," dated
January 16, 2002, by Burton Malkiel and  "Who Audits the
Auditors," dated January 17, 2002, by Arthur Levitt.





SANTA MONICA PARTNERS, L.P.

1865 PALMER AVENUE

LARCHMONT, NY  10538

_____________________

914-833-0875

FAX: 914-833-7764

Email: ljgoldstein@bloomberg.net
www.santamonicapartners.com



LAWRENCE J. GOLDSTEIN
         GENERAL PARTNER


									January 17, 2002


Mr. Ronald J. Sidman, Chairman, President & CEO
The First Years Inc.
One Kiddie Drive
Avon, MA  02322


Dear Mr. Sidman:

	As you know, we are the first or second largest outside
shareholder in The First Years.  We are, arguably, the largest,
longest, such shareholder, having had a continuous investment in
TFY dating back to the nineteen seventies.  To say that we have
been patient, long-term investors in TFY is to state the
obvious.  We have great belief in the growth, profitability, and
valuation potential of this Company.

	You also know we have some concerns.  We have communicated
a variety of them to you over the years and particularly in the
past eleven months.

	I write to you today concerning one of the most important
matters of concern to us as outside shareholders.

	Please think hard and immediately about the following.

	I would like to draw your attention to the enclosed article
"Watchdogs and Lapdogs" by Burton Malkiel, which appeared
yesterday, January 16, 2002, on the Op-Ed page of The Wall
Street Journal.  I also would like to draw your attention to
today's New York Times, January 17, 2002, Op-Ed page article,
"Who Audits the Auditors?", authored by Arthur Levitt, Chairman
of the SEC, for the last eight years.

	There is one paragraph in each of these articles which
should be of particular interest to all investors, managers and
directors of public companies and therefore you and TFY Board
members.


From Professor Malkiel:

"In some cases, boards of directors have
their own conflicts. Too often, board
members have personal, business, or
consulting relationships with the
corporations on whose boards they sit. For
some "professional directors," large fees
and other perks may militate against
performing their proper function as a
sometime thorn in management's side. Our
watchdogs often behave like lapdogs".

From Chairman Levitt:

"We need to strengthen corporate boards.
Boards, and especially directors who sit on
audit committees, often fail to ask
management tough questions. Too many
directors fail to see their role as an
important public responsibility. To change
this attitude, stock exchanges, as a
condition for listing a stock, should
require at least half the directors on a
company's board to be independent. For
example, these directors should not be
allowed to take consulting fees, use
corporate aircraft without reimbursement or
receive benefits like corporate support for
their own favorite charities. In Enron's
case, at least three board members would
have been disqualified under a strict test
of independence.
The chain of loyalty must change, too. The
auditor's primary loyalty must be to the
board and investors".

(And the Board's to its investors).

Neither Professor Malkiel nor Chairman Levitt may have been
thinking of TFY's Board, but they certainly seem to be
describing it.

	On the heels of Enron, many folks are thinking, and this
morning the SEC Chairman Arthur Levitt proposed, that rules be
made to have independent Board of Directors oversee companies.
The First Year's Board of Directors, in addition to you, Ron,
(the Chairman, President, & CEO) is comprised of seven other
persons.  Legally speaking your mother, your brother, your
brother-in-law, your cousin and your college friend (roommate?),
and a paid consultant, may qualify as independent directors, but
clearly they would be disqualified under a strict test of
independence.  It is also very clear where their allegiance and
interest lies.  Indeed we have never had the courtesy of a
reply, not a single word of reply, from any of the above six, in
response to our letters or calls.  Moreover, you indicated that
all the other directors would not want us, the largest, (and we
own more shares than the entire Board put together, excluding
you), and longest standing, outside, shareholder, or
representative, on the Board.

	I would appreciate it if you would carefully consider what
I am writing, what Professor Malkiel and Chairman Levitt wrote,
and reassure me and all stockholders of TFY, that our directors
are truly "watchdogs" and not "lapdogs".

	Thank you in advance for your response.


									Warmly,



									Lawrence J.
Goldstein
LJG/es
Encl.




Wall Street Journal


January 16, 2002
Commentary
Watchdogs and Lapdogs
By Burton Malkiel. Mr. Malkiel, professor of economics at
Princeton, is author of "A Random Walk Down Wall Street," 7th
ed. (W.W. Norton, 2000).
The bankruptcy of Enron -- at one time the seventh-largest
company in the U.S. -- has underscored the need to reassess not
only the adequacy of our financial reporting systems but also
the public watchdog mission of the accounting industry, Wall
Street security analysts, and corporate boards of directors.
While the full story of what caused Enron to collapse has yet to
be revealed, what is clear is that its accounting statements
failed to give investors a complete picture of the firm's
operations as well as a fair assessment of the risks involved in
Enron's business model and financing structure.
Enron is not unique. Incidents of accounting irregularities at
large companies such as Sunbeam and Cendant have proliferated.
As Joe Berardino, CEO of Arthur Andersen, said on these pages,
"Our financial reporting model is broken. It is out of date and
unresponsive to today's new business models, complex financial
structures, and associated business risks."
Blind Faith
It is important to recognize that losses suffered by Enron's
shareholders took place in the context of an enormous bubble in
the "new economy" part of the stock market during 1999 and early
2000. Stocks of Internet-related companies were doubling, then
doubling again. Past standards of valuation like "buy stocks
priced at reasonable multiples of earnings" had given way to
blind faith that any company associated with the Internet was
bound to go up. Enron was seen as the perfect "new economy"
stock that could dominate the market for energy, communications,
and electronic trading and commerce.
I have sympathy for the Enron workers who came before Congress
to tell of how their retirement savings were wiped out as
Enron's stock collapsed and how they were constrained from
selling. I have long argued for broad diversification in
retirement portfolios. But many of those who suffered were more
than happy to concentrate their portfolios in Enron stock when
it appeared that the sky was the ceiling.
Moreover, for all their problems, our financial reporting
systems are still the world's gold standard, and our financial
markets are the fairest and most transparent. But the dramatic
collapse of Enron and the rapid destruction of $60 billion of
market value has shaken public trust in the safeguards that
exist to protect the interests of individual investors.
Restoring that confidence, which our capital markets rely on, is
an urgent priority.
In my view, the root systemic problem is a series of conflicts
of interest that have spread through our financial system. If
there is one reliable principle of economics, it is that
individual behavior is strongly influenced by incentives.
Unfortunately, often the incentives facing accounting firms,
security analysts, and even in some circumstances boards of
directors militate against their functioning as effective
guardians of shareholders' interests.
While I will concentrate on the conflicts facing the accounting
profession, perverse incentives also compromise the integrity of
much of the research product of Wall Street security analysts.
Many of the most successful research analysts are compensated
largely on their ability to attract investment banking clients.
In turn, corporations select underwriters partly on their
ability to present positive analyst coverage of their
businesses. Security analysts can get fired if they write
unambiguously negative reports that might damage an existing
investment banking relationship or discourage a prospective one.
Small wonder that only about 1% of all stocks covered by street
analysts have "sell" recommendations. Even in October 2001, 16
out of 17 securities analysts covering Enron had "buy" or
"strong buy" ratings on the stock. As long as the incentives of
analysts are misaligned with the needs of investors, Wall Street
cannot perform an effective watchdog function.
In some cases, boards of directors have their own conflicts. Too
often, board members have personal, business, or consulting
relationships with the corporations on whose boards they sit.
For some "professional directors," large fees and other perks
may militate against performing their proper function as a
sometime thorn in management's side. Our watchdogs often behave
like lapdogs.
But it is on the independent accounting profession that we most
rely for assurance that a corporation's financial statements
accurately reflect the firm's condition. While we cannot expect
independent auditors to detect all fraud, we should expect we
can rely on them for integrity of financial reporting. While
public accounting firms do have reputations to maintain and
legal liability to avoid, the incentives of these firms and
general auditing practices can sometimes combine to cloud the
transparency of financial statements.
In my own experience on several audit committees of public
companies, the audit fee was only part of the total compensation
paid to the public accounting firm hired to examine the
financial statements. Even after the divestiture of their
consulting units, revenues from tax and management advisory
services comprise a large share of the revenues of the "Big
Five" accounting firms. In some cases auditing services may be
priced as a "loss leader" to allow the accounting firm to gain
access to more lucrative non-audit business.
In such a situation, the audit partner may be loath to make too
much of a fuss about some gray area of accounting if the
intransigence is likely to jeopardize a profitable relationship
for the accounting firm. Indeed, audit partners are often
compensated by how much non-audit business they can capture.
They may be incentivized, then, to overlook some particularly
aggressive accounting treatment suggested by their clients.
Outside auditors also frequently perform and review the inside
audit function within the corporation, as was the case with
Andersen and Enron. Such a situation may weaken the safeguards
that exist when two independent organizations examine
complicated transactions. It's as if a professor let students
grade their own papers and then had the responsibility to hear
any appeals. Auditors may also be influenced by the prospect of
future employment with their clients.
Unfortunately, our existing self-regulatory and standard-setting
organizations fall short. The American Institute of Certified
Public Accountants has neither the resources nor the power to be
fully effective. The institute may even have contributed to the
problem by encouraging auditors to "leverage the audit" into
advising and consulting services.
The Financial Accounting Standards Board has often emphasized
the correct form by which individual transactions should be
reported rather than the substantive way in which the true risk
of the firm may be obscured. Take "Special Purpose Entities,"
for example, the financing vehicles that permit companies such
as Enron to access capital and increase leverage without adding
debt to the balance sheet. Even if all of Enron's SPEs had met
the narrow test for balance sheet exclusion (which, in fact,
they did not), our accounting standard would not have
illuminated the effective leverage Enron had undertaken and the
true risks of the enterprise.
Given the complexity of modern business and the way it is
financed, we need to develop a new set of accounting standards
that can give an accurate picture of the business as a whole.
FASB may have helped us measure the individual trees but it has
not developed a way to give us a clear picture of the forest.
The continued integrity of the financial reporting system and
our capital markets must be insured. We need to modernize our
accounting system so financial statements give a clearer picture
of what assets and liabilities on the balance sheet are at risk.
And we must find ways to lessen the conflicts facing auditors,
security analysts, and even boards of directors that undermine
checks and balances our capital markets rely on.
Change Auditors
One possibility is to require that auditing firms be changed
periodically the way audit partners within each firm are
rotated. This would incentivize auditors to be particularly
careful in approving accounting transactions for fear that
leniency would be exposed by later auditors.
And, in the end, we need to create a powerful and effective
self-regulatory organization with credible disciplinary
authority to enforce accounting rules and standards. It would be
far better for the industry to respond itself to the current
crises than to await the likelihood that the political process
will do so for them.

URL for this Article:
http://interactive.wsj.com/archive/retrieve.cgi?id=SB10111452364
18110120.djm


Copyright c 2002 Dow Jones & Company, Inc. All Rights Reserved.



________________________________________________________________




January 17, 2002
Who Audits the Auditors?
By ARTHUR LEVITT
As four government agencies and six committees
of Congress begin to investigate the Enron
failure, it's important to recognize that this
is not just about Enron and its auditor, Arthur
Andersen. We need to look at the entire system
of gatekeepers - auditors, corporate boards,
analysts, ratings agencies, investment bankers,
lawyers and accounting standard-setters - who
operate and regulate our financial markets. The
confidence of individual investors depends on
honest, independent gatekeepers. Sadly, the
collapse of Enron shows this system urgently
needs reform.
I know how tough a task this is. When I was
chairman of the Securities and Exchange
Commission, we put into place a number of
reforms to improve audits and minimize conflicts
of interest. But we were largely unsuccessful in
persuading accounting firms to separate their
auditing businesses from their consulting
businesses and in convincing the auditing
profession to do a better job of policing
itself. Congress and federal regulators should
use this scandal to demand some long overdue
changes.
Our financial reporting system - which is
supposed to inform investors about the health of
companies - has in many respects devolved into a
numbers game. Companies can't afford to
disappoint Wall Street's earnings expectations,
so they are tempted to push their earnings, even
to the point of deception. And aggressive or
sometimes creative accounting is often
overlooked by auditors preoccupied with the
desire to preserve lucrative auditing and
consulting contracts.
At the S.E.C., I advocated imposing significant
limits on accounting firms' performing auditing
and consulting work for the same client, and
maybe we should reconsider those limits. At the
same time, we need to establish a regulatory
body, possibly appointed by the S.E.C., to
oversee the accounting profession, particularly
the big five national accounting firms that
audit the vast majority of publicly owned
companies. This is the best way to ensure that
auditors are truly independent. Such a panel
must not rely on industry funding. It should be
able to set auditing standards, obtain testimony
and documents, and discipline unprofessional
conduct. Its conclusions should be made public.
We need to strengthen corporate boards. Boards,
and especially directors who sit on audit
committees, often fail to ask management tough
questions. Too many directors fail to see their
role as an important public responsibility. To
change this attitude, stock exchanges, as a
condition for listing a stock, should require at
least half the directors on a company's board to
be independent. For example, these directors
should not be allowed to take consulting fees,
use corporate aircraft without reimbursement or
receive benefits like corporate support for
their own favorite charities. In Enron's case,
at least three board members would have been
disqualified under a strict test of
independence.
The chain of loyalty must change, too. The
auditor's primary loyalty must be to the board
and investors. During my time at the S.E.C.,
boards were given the responsibility for hiring,
and if necessary for firing, the outside
auditor. In addition, the audit committee, not
company management, should pre-approve any
consulting contracts with the audit firm. Such
approval should be granted rarely, and only when
the audit committee decides a consulting
contract is in shareholders' best interests.
The Financial Accounting Standards Board - a
private organization, supported by corporate
contributions, that sets auditing standards -
needs greater ability and freedom to set new and
tougher rules when necessary. Its decisions on
new standards can be agonizingly slow. This
important agency must also be free from
Congressional pressure, which is often applied
when powerful corporations seek to undermine new
accounting rules that might hurt their earnings.
One way to help the F.A.S.B. move faster is to
give it adequate, independent financing. A
broad-based user fee should be assessed not only
on publicly traded companies but also on
institutions like mutual funds, securities firms
and commercial banks that do not now support the
F.A.S.B. but that depend on the transparency its
standards provide. The stock exchanges, which in
the past have contributed little, should pay
much higher fees.
Some stock analysts willingly overlook dubious
accounting practices because their compensation
is tied to bringing in financial deals to the
investment banks for which they work, not to
exposing accounting half-truths. The stock
exchanges, which oversee analyst behavior, need
to finalize a uniform code of conduct that
requires analysts and their firms to disclose
clearly all current holdings in, and investment
banking relationships with, the companies whose
shares they rate. Analysts should not be allowed
to trade the stock of any company for which they
have issued a recommendation in the last 30
days.
Credit ratings agencies should show greater
accountability. Because they have quasi-public
responsibilities, they should reveal more about
how they operate. The S.E.C. should also assess
their impact on the markets and consider
requesting new authority to oversee their
operations.
Lawyers, who can play crucial roles in revealing
or obscuring financial problems, should review
their own ethics codes. Under the American Bar
Association's ethical standards, lawyers who
uncover wrongdoing by clients cannot report it
to the S.E.C. or local authorities. This
inherent conflict needs to be addressed.
The Enron crisis is an opportunity to
reinvigorate the checks and balances in the
financial system. Bringing more transparency to
company statements, ensuring the independence of
public-company auditors, ending the numbers
games that companies play and revealing
analysts' conflicts can help restore public
confidence in our markets.
Arthur Levitt was chairman of the Securities and
Exchange Commission from 1993 to 2001.

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