Jonathan Weil has a tough Bloomberg View column about accounting regulators covering up wrongdoing by companies and their auditors.
Back in 2006, KPMG let Motorola book a sale in the third quarter. That helped Motorola because without it, the company would have missed earnings estimates and sent its shares tumbling. But the sale happened on the first day of the fourth quarter, and the Public Company Accounting Oversight Board, which regulates auditors, said KPMG had no justification for fudging the numbers. Apparently, neither KPMG nor Motorola paid no a penalty and Motorola didn’t even have to restate its earnings. Weil reports there’s no evidence the SEC bothered to investigate, either. And the PCAOB covered the chicanery up by not telling the public.
Worse, not telling the public about wrongdoers is standard operating procedure for the regulator:
All of this is business as usual for America’s numbers cops. Since the board’s creation by the Sarbanes-Oxley Act in 2002, its inspectors have found audit failures by large accounting firms at hundreds of U.S.-listed companies. Yet its policy is to keep the identities of those clients secret.
The only reason Weil found out who the earnings-smoothing, book-cooking client was is that he’s attuned to this issue and found out about it from a class-action shareholder lawsuit:
This is the third column I’ve written revealing the name of a client whose accounting practices were a subject of a major auditing firm’s inspection report. Motorola is the biggest yet. I hope a whistleblower comes forward someday to leak many more. This is information investors need to know.
Bloomberg should have linked to the previous two columns here. Here they are.
That’s just a quibble, of course. This is good work. Weil has ferreted out information that the accounting industry and its regulators don’t want us to know while at the same time showing why this information shouldn’t be secret.
In this case, investors were lied to by executives of the company they own, as well as the auditors they hired to keep them honest. Not making these violations public keeps the pressure off the SEC to probe what’s going on in these companies. If you’ll fudge your books like that, what else will you do?
This is basic public’s-right-to-know stuff. When the government finds wrongdoing in the public markets, we ought to know about it.
Not to be nitpicky but should
"...neither KPMG nor Motorola paid no penalty..."
be
"...neither KPMG nor Motorola paida penalty..."
or
"...both KPMG and Motorola paid no penalty..."
or
"...KPMG nor Motorola were not penalized..."
or
"...no penalty was assessed upon either KPMG or Motorola..."
or
"...both KPMG and Motorola got away scot-free and paid no price for this egregious duplicity, as is typical of the incestual relationship between corrupt government regulators and their corporate masters..."
or something?
#1 Posted by James, CJR on Sat 11 Jun 2011 at 02:34 AM
Another case of government regulators asleep at the switch.
How can anyone believe that increasing government regulation will accomplish anything but this kind of crap?
#2 Posted by padikiller, CJR on Sat 11 Jun 2011 at 10:08 PM
James--thanks for the catch. Fixed.
"...neither KPMG nor Motorola paida penalty..." it is.
#3 Posted by Ryan Chittum, CJR on Mon 13 Jun 2011 at 02:29 PM
pad
Your concern is partially misplaced.
The biggest reason regulations are not enforced is money and power. Everyone wants it and will do whatever it takes to get it. Corporations pay off government in numerous ways. And threaten politicians.
That is the problem. Let govt do its job unimpeded and things have to get better.
Your bias reeks.
#4 Posted by Atypical, CJR on Mon 13 Jun 2011 at 03:20 PM
Atypical wrote: Let govt do its job unimpeded and things have to get better.
padikiller responds: Q. Who "impeded" the government regulators here? A. Nobody
Q. Who directed the Public Company Accounting Oversight Board to keep this transaction under wraps? A. Nobody
Q. Who kept the SEC from investigating this matter? A. Nobody
Let's keep going with the questions...
Q. Who got a direct and detailed complaint about Bernie Madoff's ponzi scheme during the Clinton administration? A. The SEC.
Q. What did the SEC do about the complaint? A. Nothing.
Q. Who kept the SEC from investigating Madoff? A. Nobody
Go through the list.... Goldman Sachs... Fannie Mae... Lehman Brothers... Etc...
And each step of the way you will find clear violations of existing regulations that were ignored, tolerated or actually encouraged by government regulators.
#5 Posted by padikiller, CJR on Mon 13 Jun 2011 at 04:48 PM
"And each step of the way you will find clear violations of existing regulations that were ignored, tolerated or actually encouraged by government regulators."
And why was that? Because they were acting in accordance to conservative "the market is always right" doctrine.
Who stopped Brooksley Born from regulating derivatives?
http://www.pbs.org/wgbh/pages/frontline/warning/interviews/born.html
"We're all Friedmanites now" Larry Summers and "I
#6 Posted by Thimbles, CJR on Mon 13 Jun 2011 at 06:24 PM
All the regulations in the world don't mean a damned thing if the government regulators don't do their jobs.
The regulations were in place to stop Madoff, the Lehman Brothers, and this Motorola/Qualcomm accounting gimmick. The regulators in question simply did what most government employees do when they are given discretion... Which is... Nothing.
Who got fired at the SEC over ignoring Madoff, or Lehman Brothers? Nobody. I'd be willing to bet that the majority of the incompetent boobs have since been promoted.
Liberals somehow think the solution to fixing governmental incompetence is expanding the role of government - clearly a plain absurdity.
#7 Posted by padikiller, CJR on Mon 13 Jun 2011 at 07:24 PM
And conservatives think that more of the same will lead to something different.
The government is incompetent when it is guided by incompetent ideas.
http://neweconomicperspectives.blogspot.com/2011/06/financial-road-to-serfdom-how-bankers.html
In which case you don't scrap the institutions, you scrap the idiots who think putting industry lobbyists and bought politicos in positions of public trust is a good idea.
Again, when you're police force is corrupt, you don't scrap the institution of the police force. You scrap the corrupting influences within the police system. We need the bloody police. That's REALITY.
#8 Posted by Thimbles, CJR on Mon 13 Jun 2011 at 08:20 PM
Thimbles wrote: Again, when you're police force is corrupt, you don't scrap the institution of the police force. You scrap the corrupting influences within the police system
padikiller responds: Thanks for stating the obvious, Thimbles...
But HOW do you "scrap the corrupting influences" within the SEC and other federal regulatory agencies? How do you regulate the regulators?
Another regulatory authority? A new commission? A task force? Twenty or thirty new "czars"? Twice as many bureaucrats?
You make a false comparison.
Regulatory agencies are fundamentally different from law enforcement agencies. They are charged not only with punishing "bad" conduct, but also, ostensibly at least, with fostering "good" conduct, and even more importantly, they are inherently political animals - staffed at the executive level with political appointees and in the trenches with unaccountable bureaucrats. Unlike police agencies, which operate under a central executive command, they answer to boards or commissions. Thus, regulatory agencies become part of the regulated system, and the regulations (and their associated inevitable loopholes) become the ground rules.
It isn't possible for regulatory authorities to operate as police departments do. The difference between regulations and laws is fundamental. Laws are designed to preserve order in society, while regulations are designed to protect or restrain an industry or a particular environment. This sectors have specialized needs and managing these needs requires specialized knowledge and experience. To effectively regulate, it is necessary for the lawmakers to delegate decision-making to specialists within the system. Thus the "commissions" and "boards" are indispensable regulatory components.
Clearly, any notion of isolating regulators from either political influence or industry "insiders" is nothing more than a crack dream.
#9 Posted by padikiller, CJR on Mon 13 Jun 2011 at 09:45 PM
Purging corruption 100% from the police force is a crack dream. Taking steps to limit it requires leadership, transparency, oversight, and consequences for loss of job integrity.
Regulators are no different. There are steps you can take to limit corruption and incompetence. You need strong leadership, transparency, congressional and public oversight, and consequences for failure.
And that last one? It works. It even appeared to work for Libya.
http://www.rollingstone.com/politics/blogs/taibblog/taibbi-on-spitzer-goldman-worried-about-beheading-20110603
Imagining the market will self organize to the benefit of the public, imagining that it would be better to eliminate regulatory authority and regulations because sometimes the regulatory system breaks down, those are the crack dreams.
This is the R-E-A-L-I-T-Y.
http://www.rollingstone.com/politics/blogs/taibblog/the-continual-screwing-of-jefferson-county-alabama-20110531
"In Jefferson County, the Alabamans were massively overcharged by Chase and other banks in large part because interest rate swaps, unlike, say, stocks, are not traded on open exchanges, so nobody knows how much they really cost. "
The finance sector of the economy is tilting the entire society towards corruption because of its excessively high compensation for risk combined with excessively low consequences for fault dynamic. Whenever you have a high reward / low punishment (Yay! I used high leverage to book paper profits this year that will blow up next year! I'm going to get a bonus!) - low reward / high punishment (I invested in a project with safe returns and offered reasonable rates, which is why I am fired) system you get corruption.
The public needs to step in and change the compensation schemes in finance which reward recklessness and pillage (simple tax policy). It needs to revoke licenses to practice professionally to those who engage in corruption, be they regulators or the regulated.
You don't achieve any of this by removing oversight and punishment. You don't fix a corruption problem by pretending the solution will exist within a mythical "perfect market".
If you believe this then you're a sentimental dreamer who hasn't paid attention over the last 15 years.
#10 Posted by Thimbles, CJR on Mon 13 Jun 2011 at 11:19 PM
Thimbles wrote: The public needs to step in and change the compensation schemes in finance which reward recklessness and pillage (simple tax policy).
padikiller: You are moving the goalposts.
You state the ends, but come up short in describing the means.
We're talking about regulations, not tax policy. We all know that you want to tax the "rich"...
But what regulations do we need that we don't have? And, given the fact that the feds don't enforce their own current regulations, how are you going to get them to enforce any more stringent regulations?
The regulations are in place already to revoke licenses... They just aren't being used.
HOW can you make the government regulators do their jobs?
It's not possible. Every new regulatory scheme brings a whole set of loopholes and exceptions that will be exploited. Getting fired from the federal government is just about impossible. There is no incentive for any bureaucrat to stick his neck out.
The system is inherently incompetent.
The only way to fix the regulatory system is to depoliticize it, and it will be snowy day in Hell before you see any liberals suggesting such heresy.
#11 Posted by padikiller, CJR on Tue 14 Jun 2011 at 12:23 AM
"The only way to fix the regulatory system is to depoliticize it, and it will be snowy day in Hell before you see any liberals suggesting such heresy."
Yeah, the liberals politicized the government agencies. Suuuure. You Have Not Been Paying Attention.
Meanwhile:
http://www.youtube.com/watch?v=rrkrvAUbU9Y
You don't want corruption? Put people in charge who don't respond to corrupting influences, people who see value in the work of protecting the public, people who believe in regulation.
Not industry lobbyists.
Problem is, due to a@@hole conservatives, we can't get those kind of people in:
http://www.nytimes.com/2011/06/06/opinion/06diamond.html
#12 Posted by Thimbles, CJR on Tue 14 Jun 2011 at 03:27 AM
Yeah, Thimbles...
It's all the conservatives fault.
When the Dems refused to seat Randy Kroszner (Bush's nominee) on the Fed in order to save his appointment for Obama... That was fine... Didn't hear a peep out of you guys then.
But when it's payback time and the GOP blocks an Obama nominee - then there is no end of crying and gnashing of teeth.
Like I said... The only way to get regulators to actually do work is to depoliticize the process and it will be a snowy day in Hell before the whiny liberals demand such a thing.
#13 Posted by padikiller, CJR on Tue 14 Jun 2011 at 06:49 AM
During Bush, you got Sam Alito and John Roberts appointed to the supreme court, you got Micheal Brown appointed head of FEMA, you got Christopher Cox appointed to the SEC, you got hundreds of lobbyists and industry friendly hacks installed throughout federal agencies.
http://www.antidepressantsfacts.com/2004-05-24-DenverPost-advocates-regulators.htm
http://governmentisgood.com/articles.php?aid=15
Hell, you got John Bolton to the UN during a recess appointment, something the republicans have not allowed Obama to do.
Very little was said about all these because democrats wanted to "keep their powder dry".
Hell, Randy Kroszner was appointed to the fed and worked there during the Greenspan / Bernanke meltdown. Shelby is bitching about a lack of reappointment which, considering his membership with the Council of Economic Advisers during the disastrous years from 2001 to 2003 and his participation in the fed during the disastrous years from 2006 to 2009, doesn't surprise me. I was surprised when Obama kept Ben Bernanke in his appointed place and promoted Tim Geithner. He kept many of the corrupt hirings in the justice department from back in the day when Bradley Schlozman was giving GOP loyalty tests to the staff.
Republicans, and you, are full of crap. You guys politicize everything, just ask Lurita Doan, and then cry about how the other side is playing with politics. You cry about this as your side holds up appointments, bills, unemployment benefits over arbitrary slights that boil down to one real thing, conservatives want to act like a-holes to their democratic president. They're bad losers.
When they are in charge, they appoint awful people to positions of power and it often goes unchallenged.
When they aren't, they block whatever they can and claim Obama has failed to be bi-partisan.
You are never going to get good people appointed as long as childish, assh*le conservatives can't bring themselves to stop strutting about the room, being rude to applicants, before they slap a hold on them because their fee fees are hurt.
"Fee fees before country, Vote GOP. TEA PARTY!"
#14 Posted by Thimbles, CJR on Tue 14 Jun 2011 at 12:37 PM
Of course, these days, with the GOP being so knee jerk stupid in blocking what they supported pre-2008, you got to wonder whether they would accept Randall.
http://rortybomb.wordpress.com/2011/06/08/would-richard-shelby-block-randall-kroszner-today/
Given today's republicans,
http://www.chronicleonline.com/content/things-are-worse-you-may-think
I don't see how they would.
#15 Posted by Thimbles, CJR on Tue 14 Jun 2011 at 12:44 PM
Yeah, Thimbles...
Republicans politicize everything and Dems politicize nothing.
Whatever gets you through the night, dude.
Shine on, you crazy diamond.
The fact remains that you are conceding my point - namely that regulation is too politicized (solely at the hands of the nefarious Republicans, of course).
#16 Posted by padikiller, CJR on Tue 14 Jun 2011 at 10:25 PM
Um, yeah, that wasn't your point to begin with. Your point was 'The system is corrupt, the regulators don't do their jobs, why should we think the solution to fixing governmental incompetence is expanding the role of government?"
That was dumb analysis. If you have a corruption problem, you diagnose the corruption, remove the corrupting incentives and the people who respond to them.
Republicans don't analyze corruption. They pretend it doesn't exist.
http://www.stanfordalumni.org/news/magazine/2009/marapr/features/born.html
"“Well, Brooksley, I guess you and I will never agree about fraud,” Born, in a recent interview, remembers Greenspan saying.
“What is there not to agree on?” Born says she replied.
“Well, you probably will always believe there should be laws against fraud, and I don’t think there is any need for a law against fraud,” she recalls. Greenspan, Born says, believed the market would take care of itself."
Republicans appoint idiots who don't recognize fraud after they wrote papers in support of fraudsters before taking their appointments:
http://www.nytimes.com/1989/11/20/business/greenspan-s-lincoln-savings-regret.html
This is why we have trouble regulating. Republicans and many democrats are mostly bought because of the costs of political campaigns and the attractive offers available to them in post political life.
Republicans also canceled public financing of regulatory bodies such as the FDA so that these agencies have to compete for businesses to supervise since it's from the regulated that they secure funding.
These politicians have an ideology which soothes their conscience as they let "the market" determine societal outcomes and appoint like minds to oversee it. You say the regulatory process is politicized and you accuse liberals?
It wasn't Russ Feingold or Bernie Sanders or Alan Grayson etc.. who let the housing bubble inflate while turning a blind eye on the fraudulent. It wasn't Michael Moore and company who cluster screwed the economy of Iraq after the initial occupation losing billions of dollars of Iraqi money because:
""The system was too loose and unregulated in 2003 and 2004," said Mr Bowen, the Special Inspector General for Iraq Reconstruction."
It wasn't Gray Davis who put California's electricity market into the rapacious hands of Enron, it was dumb conservatives following dumb conservative ideas who ended up causing societal catastrophes over and over again that nobody ever seems to learn from. It was people - both republican and democrat (mostly republican) - who believe in stupid conservative economics
When you have strong regulation paired with strong regulators that are protected from political pressure, you create a stable market which produces societal good. When you have weak regulation and weak regulators who are under constant political pressure to compromise and overlook obvious wrong, you get boom and bust markets which require a steady flow of ever impoverished suckers (and when those run out, then the flow shifts to tax payers) in order to support the excesses of the ever shrinking circle of "winners".
Conservatives trash government functions and then point to the resulting failures as justification for further trashing. You are wrong. You don't improve society by continually trashing its protections. You make the problem worse.
There are people who profit from doing society damage. If those people are not being stopped because of government corruption, then solution is to attack the corruption, not the mandate of the government to prevent damage and protect the populace. Your solution is to attack the mandate. And that is just the dumb result of an simpl
#17 Posted by Thimbles, CJR on Wed 15 Jun 2011 at 12:08 AM
"and then point to the resulting failures"
as justification to further trash government functions. There are people who profit from societal harm. The government has a mandate to protect the public from harmful actors. It isn't doing an effective job because of government corruption.
The sane thing to do is to examine and attack the corruption. The insane, conservative thing to do is to attack the mandate. This is why your analysis is dumb.
#18 Posted by Thimbles, CJR on Wed 15 Jun 2011 at 12:52 AM