April 10, 2009 Where were the giant accounting firms, the CPAs, and the rest of the accounting profession while the Wall Street towers of fraud, deception and cover-ups were fracturing our economy, looting and draining trillions of dollars of other peoples' money? This is the licensed profession that is paid to exercise independent judgment with independent standards to give investors, pension funds, mutual funds, and the rest of the financial world accurate descriptions of corporate financial realities. It is now obvious that the accountants collapsed their own skill, integrity and self-respect faster and earlier than the collapse of Wall Street and the corporate barons. The accountants-both external and internal-could have blown the whistle on what Teddy Roosevelt called the "malefactors of great wealth." The Big Four auditors knew what was going on with these complex, abstractly structured finance instruments, these collateralized debt obligations (CDOs) and other financial products too abstruse to label. They were on high alert after early warning scandals involving Long Term Capital Management, Enron, and others a decade or so ago.
These corporate casino capitalists used the latest tricks to cook the books with many of the on-balance sheet or off-balance sheet structured investment vehicles that metastasized big time in the first decade of this new century. These big firms can't excuse themselves for relying on conflicted rating companies, like Moody's or Standard & Poor, that gave triple-A ratings to CDO tranches in return for big fees. Imagine the conflict. After all, "prestigious" outside auditors were supposed to be on the inside incisively examining the books and their footnotes, on which the rating firms excessively relied.
Let's be specific with names. Carl Olson, chairman of the Fund for Stockowners Rights wrote in the letters column of The New York Times Magazine (January 28, 2009) that "PricewaterhouseCoopers O.K.'d AIG and FreddieMac. Deloitte & Touche certified Merrill Lynch and Bear Stearns. Ernst & Young vouched for Lehman Brothers and IndyMac Bank. KPMG assured over Countrywide and Wachovia. These 'Big Four' C.P.A. firms apparently felt they could act with impunity."
"Undoubtedly they knew that the state boards of accountancy," continued Mr. Olson,"which granted them their licenses to audit, would not consider these transgressions seriously. And they were right...Not one of them has taken up any serious investigation of the misbehaving auditors of the recent debacle companies."
"Misbehaving" is too kind a word. The "Big Four" destroyed their very reason for being by their involvement in these and other boondoggles that have made headlines and dragooned our federal government into bailing them out with disbursements, oans and guarantees totaling trillions of dollars. "Criminally negligent" is a better phrase for what these big accounting firms got rich doing-which is to look the other way.
Holding accounting firms like these accountable is very difficult. It got more difficult in 1995 when Congress passed a bill shielding them from investor lawsuits charging that they "aided and abetted" fraudulent or deceptive schemes by their corporate clients. Clinton vetoed the legislation, but Senator Chris Dodd (D-CT) led the fight to over-ride the veto.
Moreover, the under-funded and understaffed state boards of accountancy are dominated by accountants and are beyond inaction. What can you expect?
As for the Securities and Exchange Commission (SEC), "asleep at the switch for years" would be a charitable description of that now embarrassed agency whose mission is to supposedly protect savers and shareholders. This agency even missed the massive Madoff Ponzi scheme.
The question of accounting probity will not go away. In the past couple of weeks, the non-profit Financial Accounting Standards Board (FASB)-assigned to be the professional conscience of accountancy-buckled under overt pressure from Congress and the banks. It loosened the mark-to-market requirement to value assets at fair market value or what buyers are willing to pay.
This decision by the FASB is enforceable by the SEC and immediately "cheered Wall Street" and pushed big bank stocks upward. Robert Willens, an accounting analyst, estimated this change could boost earnings at some banks by up to twenty percent. Voilà, just like that. Magic!
Overpricing depressed assets may make bank bosses happy, but not investors or a former SEC Chairman, Arthur Levitt, who was "very disappointed" and called the FASB decision "a step toward the kind of opaqueness that created the economic problems that we're enduring today."
To show the deterioration in standards, banks tried to get the FASB and the SEC in the 1980s to water down fair-value accounting during the savings and loan failures. Then-SEC Chairman Richard Breeden refused outright. Not today.
Former SEC chief accountant, Lynn Turner, presently a reformer of his own profession, supports mark-to-market or fair value accounting as part of bringing all assets and liabilities, including credit derivatives, back on the balance sheets of the financial firms. He wants regulation of the credit rating agencies, mortgage originators and the perverse incentives that lead to making bad loans. He even wants the SEC to review these new financial products before they come to market, eliminating "hidden financing."
Now comes the life insurance industry, buying up some small banks to qualify for their own large federal bailouts for making bad, risky speculations.
The brilliant Joseph M. Belth, writing in his astute newsletter, the Insurance Forum (May 2009), noted that life insurers are lobbying state insurance departments to weaken statutory accounting rules so as to "increase assets and/or decrease liabilities." Some states have already caved. Again, voilà, suddenly there is an increase in capital. Magic. Here we go again.
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