Do Conflicts of Interest Hinder Professional Judgment?
This earnings game has led to a crisis within the accounting profession that could set a course for a more serious crisis of confidence for investors and ultimately the financial markets. The accountants are the scorekeepers of the financial numbers. Until recently, they have been above suspicion and shrouded by a veil of creditability and confidence. For decades, they have convinced investors, analysts and the government that the numbers they blessed were free from sin. Yet over the years, what began as small venial sins have now led to mortal sins. Today, what accountants sign off on can no longer be read with confidence. This situation is most visible with Enron and its auditors, Arthur Andersen. Arthur Andersen was also Waste Management and Sunbeam’s auditor. The Enron case is once again raising the long-standing debate of the decade of whether accountants are capable of policing themselves. Arthur Levitt, the former SEC Chairman, didn’t think so. He felt that consulting fees conflicted with an accounting firm’s ability to remain independent and objective. He wanted to separate the auditing side of the business from the consulting side of the practice. The accounting profession argued and lobbied against it. Now a new SEC Chairman, Harvey Pitt, must face the same problem. Pitt was an attorney before becoming Chairman of the SEC. In private practice, he spent much of his time defending large accounting firms. So, even here, there are questions of his objectivity.
There are many individuals outside the industry, including Lynn Turner, a former chief accountant with the SEC, that feel the time is right for a new independent body, similar to the securities industry's National Association of Securities Dealers which works with the industry and the government in self-policing the securities industry. There is nothing like that within the accounting profession that has the teeth to enforce discipline. The accounting profession is against it, but many feel the profession is incapable of self-control. Concerns are mounting that accounting firms are no longer independent. Like Wall Street firms that depend on investment banking fees, accounting firms have come to rely more on consulting fees, which have surpassed audits for their revenues. When revenues depend on large consulting fees, the temptation to look the other way when improper bookkeeping is suspected becomes more difficult.
A Crisis in Confidence
All of this degredation of professional integrity is leading to a crisis in confidence for the financial markets. Investors have come to the realization that they can’t believe in anything that management tells them. They have also come to disbelieve in the numbers reported and signed off on by accountants in the financial reports. Confidence in analyst’s recommendations is also waning. Do you ever hear analysts recommend selling a stock? On Wall Street, everything is a buy because it is in its own self-interest to keep investors fully invested. The system is breaking down and in danger of imploding. It is not just an issue of complexity. The larger issue is a moral one. How do you stop the lying, cheating and stealing? The government has never been good at legislating morality. When it comes to character and integrity, these are spiritual issues that rest in the hearts of men. To the financial world, spiritual issues are best left in the hands of priests, pastors, rabbis and clerics.
On the other hand, how do you make a complex world understandable? Financial transactions have become increasingly intricate as a result of globalization and floating exchange rates between currencies. Fiat money systems have always been unstable. The ability to print unlimited amounts of money out of nothing has always been a temptation of government. It has resulted in irreparable harm to the financial system. It is one of the mistakes of history that seems to repeat itself in every century. It is one of the larger immoralities of our current system and one I believe that is also breaking down. Just as there are concerns over who is policing the accountants, there is also concern over who is watching the government. Up to the present, that has been the role of the markets. In the end, it may be the markets that provide the final solution. But all of that is for the future. At the moment, we must deal with the present. We must learn to understand how complex and broken down the system has really become.
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