FOR A DECADE now, Americans have sniffed at Japan's inability to fix its banking mess, which prevents capital from flowing to the firms that could revive economic growth. American observers have proposed remedy after remedy, but Japan's political system is captive to vested interests that frustrate reformist hopes. Well, it is now time for Americans to look in the mirror. Right here at home, we have a financial system that allocates capital to the wrong companies. We have reformers who have proposed a remedy, and even gotten it enacted. And yet our political system is captive to anti-reform lobbyists who are intent on gutting the remedial legislation passed in July.

The American version of Japan's banking crisis centers on auditors. Because our financial system is dominated not by banks but by the stock market, wise capital allocation depends on companies' publishing accurate financial statements -- and the accuracy depends on having tough, independent auditors verify the numbers. Yesterday a new report from the General Accounting Office reiterated that this system has rotted. Between 1997 and 2001, fully one in 10 public companies were forced to restate their accounts after publishing false ones. These errors triggered average declines in the firms' stock prices of 18 percent, costing investors billions of dollars. And the frequency of these restatements is rising year by year.

The response that was signed into law last summer hinges on a new audit oversight board. In the past, auditors have allowed companies to publish erroneous numbers because they faced little prospect of punishment for doing so. The understaffed Securities and Exchange Commission lacked the resources to go after them. The Public Oversight Board, which was set up in 1977 in response to a public outcry over audit failures, was under the thumb of the audit lobby. Last summer's reform law therefore called for a new overseer, to be led by somebody with a demonstrated commitment to the public interest as well as a knowledge of auditing. The deadline for appointing this leader is Monday. The way things are going, the selection may end up being dominated by the audit lobby -- and the experience of the useless Public Oversight Board may be tragically replayed.

The outlook was brighter a month ago. Harvey L. Pitt, the SEC chairman, had invited John H. Biggs, the head of a large retirement system, to make himself available to lead the new oversight board. This was an excellent choice, and it would have been endorsed by all SEC commissioners, both Republican and Democratic. But then the audit lobby squeezed the House Republicans, who in turn squeezed Mr. Pitt, who in turn backed down. Now Mr. Pitt is backing William H. Webster, the former head of the FBI and the CIA. This is a bad choice. Mr. Webster, despite his many distinctions, knows little about the technicalities of accounting. As head of an audit oversight board, he would be too easily captured by the accounting-firm representatives who would surround him. And the mere fact that he had gotten the job after lobbyists squashed a better candidate would undermine the credibility of the new oversight board.

There are two ways forward. Mr. Webster may decide to refuse the job, rightly calculating that acceptance might tarnish a fine career. Or, if Mr. Webster indicates his willingness, he may be voted down by the SEC commissioners. Right now the two Democrats on the SEC say they will vote against him; it takes just one Republican to side with them to defeat Mr. Webster's candidacy and elect Mr. Biggs. President Bush, who signed the reform law in July saying that "the era of low standards and false profits is over," should pick up the phone and urge those Republican commissioners to back Mr. Biggs's candidacy. Otherwise he will be siding with the vested interests that aim to prolong the sickness in our system of capital allocation. Does he really want this country to emulate Japan?