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OpEdNews Op Eds    H2'ed 7/31/08

Keeping it Simple - Stupid

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Stephen Pizzo
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Ah, but you wonder, even if federal regulators have been politically neutered, companies must still hire "outside" accounting firms to provide federally-required "independent" audits.  Wouldn't they catch any wrong-doing?

The "quotes" are no accident. because the "outside" accounting firms are hand-selected by, and then paid by the very same companies they are supposed to tattle on if they discoverer wrong doing during an audit.

When it comes the relationship between auditor and auditee it's a "what a bear does in the woods" relationship, really. I mean what do we expect of a for-profit accounting firm when their own very fat-paycheck client asks that they "look the other way on that particular deal," or to give them cover by valuing a particularly worthless asset on their books with an interpretation of accounting rules that stretch credulity -- and mathematics -- beyond all known cosmic dimensions. You know what they do. They do what bears do in the woods.. only they do it on shareholders and taxpayers.

Current accounting rules have failed shareholders and taxpayers so many times I've stopped counting. It's a moral hazard, built atop a mountain of moral hazards. Accounting firms take care of those who feed them first, shareholders next and taxpayers last -- if  at all. (Need I mention Freddie and Fannie? They had a small army of outside accountants and their own federal regulator, OFHEO.)

So, how do we fix this accident waiting to happen before another one happens? Again, the solution is so simple it boggles the mind why it has not been adopted.

1) Change the rules so that publicly traded companies and federally-insured financial institutions (including Feddie and Fannie) so they are no longer required to hire outside accounting firms.

2) Instead such firms would be required to purchase "audit insurance." Such policies would be priced based on the amount of risk the insurance company determines it is assuming.  The lower a company's risk profile, the lower their audit insurance premiums. (That's called "market forces" you Republicans out there.)

3) Audit insurance would insure the company/institution against claims by shareholders or government regulators if they've cooked their books or otherwise broke accounting/SEC rules regulating their particular industry's financial dealings.

4) There would still be plenty of work for accountants under this plan. But rather than companies hiring their own auditors, the insurance companies would hire and pay them. After all, the insurace company  would be on the hook for any legitimate claims, so they would want auditors who had the insurance company's best interests at heart. As a side benefit of no small import, that self interest on the part of the insurance companies would also serve to protect shareholders and taxpayers as well.


Such a change would not only create an entirely new business opportunity for insurance companies, but would remove the inherent conflicts of interest under current rules which have repeatedly -- and expensively -- failed shareholders and taxpayers. 

Rather than companies and banks hiring accountants to check their books, the insurance company would do so. And, since the accountants would be working for the insurance company that's on the hook financially for any "mistakes" you can bet your sweet bippy audits would be complete and accurate. Because if insurance companies hate anything it's paying on claims.

You see, that's how "free markets" are supposed to work, at least that's what all those free-market Republicans keep telling us -- you know, how free-markets can regulate themselves when risk and incentives are in balance.

So let's balance those risks and incentives where it really counts -- at the audit level. And then next time something goes sideways in the financial markets we won't have to ask, "where were the accountants," but rather, "what's the phone number for the audit insurance claims department?"

The "War on Terror"

This one's really easy. People who purposely crash cars into other people and/or buildings are arrested and put in jail. Why? Because they're criminals, and that's how society reacts to such anti-social behavior. If they violently resist arrest they get shot, and maybe killed.

Something like 40,000 Americans are killed each year in auto accidents, but we don't have a "War on Automobilies," do we? No. We try our best to manage the carnage by putting cops on the highway to catch reckless and drunken drivers. Is it a 100% effective? Obviously not. But we still don't dispatch the National Guard to patrol our highways and streets. We don't bomb Chrysler or occupy Toyota plants in Japan.

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Stephen Pizzo has been published everywhere from The New York Times to Mother Jones magazine. His book, Inside Job: The Looting of America's Savings and Loans, was nominated for a Pulitzer.

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