The Obama administration asserts that the financial reform bill the President will sign into law this week will prevent future crises. In fact, it will fail to do so because it does not effectively address those perverse incentives. Indeed, it increases the likelihood of the accounting scams that are the very reason why perverse incentives pay.

Over time, crises have gotten more severe because many reform policies have the unintended consequence of encouraging these types of incentive structures. Executive and professional compensation create the motives, while deregulation, desupervison, and regulatory "black holes" create the opportunity.

Accounting is the CEO's "weapon of choice" that transforms the perverse incentive into what economists, regulators, and criminologists...