Originally published at: https://boingboing.net/2018/05/17/son-of-andersen.html
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There could have been no Enron without Arthur Andersen’s complicity; no subprime crisis without AIG selling out. There could have been no Carillion without the Big Four accounting firms.
There also could have been no 2007-2008 banking crisis without the bond rating agencies (paid by the sellers, natch) giving absolute garbage securities AAA ratings.
While breaking these companies up (esp. separating the consulting units from the accounting ones) would be a good start, there’s a deep problem here.
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We need to look at ‘too big to fail’ as a sign to break it apart. Every time a monopoly pops up, take it apart again.
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7 Billion Carillion pounds? That’s like, what, a million trillion dollars?
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corruption scales up faster than economies
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Think Carillion was bad? Just wait til Capita goes tits up.
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think ring fence instead of running fence
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Do you think credit rating agencies take companies’ accounts and audited statements into account when deciding on their credit ratings?
If the accounts can’t be relied on, everything falls apart.
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I have some bad news for you.
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I’m sure they make a show of it, but keep in mind that the rating agencies are paid by the sellers of the securities and getting their information from those same sellers. The agencies aren’t inclined to look deeply into things.
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The point is they do still have to have some basic level of figleaf.
If Carillion’s auditors had said, “This company is in the shit financially and hasn’t got a pot to piss in”, it would make it very difficult for even the most venal credit rating agency to claim that they had a AAA+ credit rating.
If however, the accountants say “This company is doing A-OK!!!” then when it defaults, credit rating agencies get to say, “We relied on the accounts”.
Total Inability To Sustain Usual Performance.
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I was talking specifically about the U.S. credit rating agencies, but yes, the accounting firms do provide fig leafs as well (Enron and Arthur Anderson being the notorious example). With mortgage-backed securities it looks like in many cases the rating agencies didn’t have the fig leafs and just took the issuers of the securities at their word based on the way the tranches were structured.
In the U.S. the rating agencies need to be non-profit entities funded by the buyers of the securities, but nothing has changed and the perverse incentives remain in place.
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