Sunday, March 22, 2009

Solving the CPA Crisis

"There has been a great deal of justified criticism of the credit-rating agencies that gave triple-A and double-A ratings to billions of dollars of debt securities that did not deserve these high ratings. Everyone agrees that something needs to be done to prevent inflated ratings. But what? ... Similarly, [SEC] head Mary Schapiro recently called for an examination of 'how the rating agencies are compensated, how they manage conflicts of interest, and what role they should play in our markets.' The insurance industry and its regulators can lead the way by implementing the only effective proposal: self-funded, independent buy-side ratings. Ratings, that is, that are paid for by the investors who use them. ... Those who issue securities also pay for their ratings. This structure has created powerful incentives to keep debt securities' sellers satisfied and the ratings fees flowing", Eric Dinallo at the WSJ, 3 March 2009.

ED is NY State's insurance commissioner. In September he let AIG's insurance subsidiaries upstream $20 billion to the parent, my 5 October 2008 post: http://skepticaltexascpa.blogspot.com/2008/10/aig-and-first-amendment.html. ED should apply his proposal to the CPA profession. For 33 years now the way to fix the CPA profession has been obvious. Why wasn't it implemented? I have no more faith in Mary Schapiro's fixing the rating agencies than the CPA business, see for example my 19 December 2008 post: http://skepticaltexascpa.blogspot.com/2008/12/31-more-years-4.html.

3 comments:

Anonymous said...

Uhmmm IA... you've raised this issue before... and the solution you see are government entities to do rating and auditing work?

I just can't go there... it feels like central planning... and would quickly become prey to political pressures...

Independent Accountant said...

Anonymous:
You misunderstand me. I have long said government auditors would be worse than the Big 87654. Look at the OCC, OTS, SEC, DOJ, etc.. Each is controlled the industry it supposedly regulates. My answer is: more lawsuits and less regulation. I have a post coming up about the recent "Barney Frank" hearings on bank accounting which illustrates your point.

Anonymous said...

More lawsuits...

That seems like a cumbersome way to have efficient regulation and oversight...

But maybe it's the most powerful tool... I'll think about that...

I'm anti-lawyerist generally...

"Blarney Frank" what a big target... I used to think he had balanced many competing interests well... now I think he is a tool of the banks... he is the "bank's hammer"... and he has been getting burned for his nonsense... right on...