Is the accounting profession at fault?

Should Sarbanes-Oxley and other accounting standard have prevented the current financial crisis?

Dear Bob ...

As usual –- a good read ("Lehman and mean," Keep the Joint Running, 9/22/2008. I liked the piece you did not too long ago where you pointed out that the role of government is basically a level playing field -- a referee who does not pick the winners or losers, but simply enforces the rules of the game uniformly.

It almost seems like the more rules are created, the more creative people get at papering around them. I thought Sarbanes-Oxley and some other more recent regulations would make publicly traded businesses more accountable. Somehow, that does not seem to be working.

I sometimes get frustrated with the "accounting" field. Maybe they should be called "manipulators."

  • I spent a lot of time putting together a budget that balances maintenance with new projects that support the business objectives of the organization -- we want 10 to 15% cut regardless.
  • Accounts Payable screwed up and paid 3 months worth of phone bills at the same time because the bills finally are correct -- we want an explanation, this messed up our cash flow projections.
  • Why is your department so overspent in the "expense" budget -- cutting maintenance contracts was a good cost saver!
I could continue regurgitating examples.

What happened to the "accountants" accounting the business -- actually recording as best as possible the business of the company instead of playing shell games and moving money around in different accounts so that the numbers look better?

In my mind, this financial mess is money people going crazy. Get back to GAAP principles and use them as intended.


Dear Outraged ...

As I understand The Way Things Work, the accounting department wouldn't have been involved in this fiasco, at least not very much. The investment arms of the companies in question were/are responsible for buying and selling the paper and packaging it into securities. They report the value based on what the securities sell for in the financial marketplace.

Accounting makes sure the debits go on the left and the credits go on

the right.

These weren't Enron-style disasters where accounting deliberately

cooked the books. This really was a bubble -- a period in which commodities became over-valued because demand exceeded supply, not because of any intrinsic worth ... and the demand was created by demand, which also led to the underestimation of risk -- especially in mortgages, but also throughout other credit markets.

The other big factor here (which I cover next week -- see "Krell-o-nomics," Keep the Joint Running, 9/29/2008) is that those

selling the product had no skin in the game. Mortgage originators knew they were going to sell the paper, so they had a financial incentive to underestimate the risk. Had they been obligated to hold the paper for a few years, or to hold a randomly selected 5% of the paper until maturity, this never would have happened.

- Bob