Wednesday, September 16, 2009

The SEC as Passover's Fourth Son

"The [SEC] has 'historically been slow to act' in regulating the nation's credit rating agencies, the agency's inspector general said in a report released Friday that called for a broad range of improvements in oversight. ... The audit report found that the commission delayed adopting rules on the rating agencies and sometimes failed to follow the rules that existed. ... The report recommended that the SEC impose further restrictions on the consulting and advisory services that rating agencies provide to issuers of rated debt, to avoid conflicts of interest. It advised a rotation requirement for credit ratings analysts to 'reduce the risk of undue pressure' on analysts to sign off on questionable products to maintain relationships with issuers. It also called for a review of the effect of what is called a revolving door syndrome, in which analysts leave to work for an issuer whose debt they were rating", my emphasis, Cyrus Santi at the NYT, 29 August 2009, link:

"The [SEC's] internal watchdog criticized the SEC's handling of credit-rating firms, saying some won federal approval despite slipshod applications and, in one case, suspicious financial data. ... In a report released Friday, the SEC's inspector general, David Kotz, cited serious concerns about one firm, including 'suspicions regarding the accuracy of the financial information provided in its application and concerns about the authenticity of a number of certifications.' ... The big three credit-ratings firms have been blamed by some critics for exacerbating the financial crisis after giving overly positive ratings to certain kinds of debt, including some backed by subprime mortgages. However, the problems identified in Mr. Kotz's report appear to involve primarily smaller firms", Sarah Lynch at the WSJ, 29 August 2009, link:

"When everyone else is blaming you for creating the credit crisis, it helps to have a friend at the [SEC]. Especially when the SEC has the power to prevent new competitors from entering your market. ... Yet David Kotz, the SEC's inspector general, has apparently concluded that the real problem is not this government-anointed oligopoly, but the upstarts that have lately been approved to compete with them. ... Kotz has also issued recommendations certain to make competing with the Big Three more difficult, time-consuming and expensive. ... Of course, the greatest reform of all would be to get the government out of the business of approving credit raters. The SEC should enact its 2008 proposal to remove all references to NRSROs from the agency's rules and let markets decide how to judge default risk. ... Among the most costly of Mr. Kotz's ill-advised recommendations is the suggestion that all rating agencies should be audited by a firm regulated by the [PCAOB], the bureaucratic monster created by Sarbanes-Oxley", Editorial at the WSJ, 1 September 2009, link:

This is worthless. Kotz advocates the same "solutions" that did not improve Big 87654 audits for 33 years. He must be "Passover's fourth son", the one who cannot ask a question. Why is Kotz worried about the rating agencies "revolving door syndrome"? Kotz, first look at the SEC and DOJ. Did not the Master say, "Why do you look at the speck of sawdust in your brother's eye and pay not attention to the plank in your own eye? How can you say to your brother, 'Let me take the speck out of your eye,' when all the time there is a plank in your own eye? You hypocrite, first take the plank out of your own eye, and then you will see clearly to remove the speck from your brother's eye", Matthew 7:3-5 (NIV).

Kotz's report could have been written by the PCAOB. It's worthless. The problems appear to be clerical.

I knew Kotz would use his report to further a PCAOB power grab. Aren't the Big Three already audited by large CPA firms?

I anticipated Kotz's PCAOB idea, but meant it sarcastically. Kotz took me seriously. See my 27 September 2007 and 28 April 2008 posts:

Added links 7:40 PM:


Francine McKenna said...

The Big Three ratings agencies are already audited by one of the Big 4, sometimes more than one of them.

Independent Accountant said...


Thanks. I'll provide links to your posts.

Anonymous said...

Seems like Kotz just skimmed over the surface of the problems for raters. One small firm had problems with their financials? Do a books and records looky see and boot em if they fibbed.

Revolving door? Yes.... please... address all the revolving doors... like SEC attorneys heading to NY BigLaw... representing the class of people they recently were making cases against.

A Chinese wall between the regulators and the regulated which remained in place for a while would be good.