Silver Lining and Lesson Department
A compressed portrayal of US failures evident in the current crisis may arise from the following list of representations:
(A) firms: Countrywide, Fannie Mae, AIG, Citigroup, Moody’s, Lehman Brothers, General Motors;
(B) industries: mortgage origination, mortgage finance, insurance, commercial banking, rating agencies, investment banking, automobile manufacturing and finance;
(C) regulators: state mortgage, insurance and banking overseers; Federal Housing Finance Agency; Securities and Exchange Commission and Commodity Futures Trading Commission; Federal Reserve, Treasury, Office of Comptroller of the Currency; Federal Deposit Insurance Commission;
(D) lawmakers: Congress, Congress, Congress, Congress, Congress.
What representations do not appear on this list? Deloitte Touche et al, the auditing industry, and the Public Company Accounting Oversight Board. Three cheers.
True, every scandal needs an accounting or auditing problem to blame, and fair value accounting is named by some as a culprit. But there is wide debate about that, with many saying fair value accounting is a solution to the problem not remotely a cause. In any event, fair value accounting rules do not come from the firms, the industry or the PCAOB, but from the Financial Accounting Standards Board.
The reason? Just possibly, the Sarbanes-Oxley Act of 2002, which created PCAOB to oversee those large firms and generally created an atmosphere and procedures that strengthened their ability to discharge their professional obligations.
The lesson? As financial regulation reform discussions proceed, there may be some value in studying SOX, PCAOB and the auditing profession, to find out what worked and why.