Hedge Fund Lobby: Breaching Ethics

In a rule adopted by the SEC on October 26, 2011, hedge funds over a certain size must report information—the amounts required depending on the fund’s size. The devil, as it were, is in the details. In this case, they reflect the intense lobbying of hedge funds and their advocates. As a result of the lobbying, according to The New York Times, the “changes call for only the largest funds to report the most detailed information, eliminate any penalty of perjury for misleading reports and delay for six months the initial reports for all but the largest funds.”[1] Whereas the matter of the amount (and type) of information required involves or potentially puts at risk the funds’ secret strategic competitive advantages and the matter of a start date involves technical points such as how much effort is needed to cull the required information, the elimination of any penalty for perjury does not correspond to any legitimate business concern. Indeed, it makes on sense to require information if it can be misleading with impunity. It is as if the SEC regulators had told the hedge funds, You will have to submit information to us but it can be misleading. The fund managers would be apt to reply, Oh, ok.


The full essay is in Cases of Unethical Business, available in print and as an ebook at Amazon.com.  

1. Edward Wyatt, “Rule Allows Regulators a Look at Hedge Funds,” The New York Times, October 27, 2011.

Deloitte: A Culture of Least Resistance

On October 17, 2011, the Public Company Accounting Oversight Board issued a statement saying audits should protect investors. “The board therefore takes very seriously the importance of firms making sufficient progress on quality control issues identified in an inspection report in the 12 months following the report,” the statement said. Not having seen such progress at Deloitte, the board made its 2008 report on the firm public. The report “cited problems in 27 of the 61 Deloitte audits it reviewed, including three where the issuing company was forced to restate its financial statements.” This was “an unprecedented rebuke to a major accounting firm. In too many instances,” the report stated, inspectors from the board “observed that the engagements team’s support for significant areas of the audit consisted of management’s views or the results of inquiries of management.” In some cases, “Deloitte auditors did not bother to even consider whether accounting decisions made by companies were consistent with accounting rules. Instead, auditors accepted management assertions that the accounting was proper, the board’s report said.”[1] As a very young auditor at that firm, I was told to do just that.  

The full essay is at "Deloitte: A Culture of Least Resistance" in Institutional Conflicts of Interest, which is available at Amazon.

1. I took the quotes for this paragraph from: Floyd Norris, “Accounting Board Criticizes Deloitte’s AuditingSystem,” The New York Times, October 17, 2011;  and Floyd Norris, “Audit Flaws Revealed, AtLong Last,” The New York Times, October 21, 2011

Limited Tenure For CPA Firms?

Arthur Levitt, who headed the Securities and Exchange Commission from 1993 to 2001, “sought to root out conflicts of interest at audit firms in 2000, and urged Congress to adopt auditor term limits in 2002 after the Enron and WorldCom scandals.”[1]  Levitt did not buy the argument made by companies that it would cost them a lot of money to change audit firms. To be sure, he acknowledged that some added cost would be entailed in a system of mandatory auditor “term limits,” but a long auditor relationship “raises the perception,” he maintained, “that the auditor is very much beholden to the company and not totally independent. An environment of skepticism should trump the fraternal environment that tends to occur after a relationship has developed over a period of years.”[2] Indeed, Arthur Andersen’s people were well ensconced at Enron by the time the energy giant went bust. In fact, the auditors even approved the questionable “partnership” accounting (used to hide debt).  Nor did the auditors communicate any misgivings to the audit committee of the company’s board of directors. The auditors were “in” with a rancid management. 


The full essay has been incorporated into "A Proposal: Limited Tenures for CPA Firms"  at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.  

1. Emily Chasan, “Keeping Auditors on Their Toes,” The Wall Street Journal, October 19, 2011.
2. Ibid.

Conflicts of Interest at the Federal Reserve

In 2011, “(m)ore than a dozen members of the regional Federal Reserve boards have had ties to banks or companies that received emergency funds during the [2008 financial] crisis, according to [a GAO report]. The report highlights a close relationship between the Fed's regional banks and many of the institutions they were lending to, adding credence to concerns that the financial sector enjoyed a largely consequence-free rescue in the wake of the crisis, thanks to its connections with the federal government.”[1] Meanwhile, mortgage borrowers with houses “under water” got hammered. From the crisis to the release of the GAO report in October 2011, there were millions foreclosures in the United States, with very little in the way of mortgage modifications or refinancing for those homeowners who needed relief. In other words, the bankers had connections in the banking regulatory agency while Congress left the troubled homeowners—constituents—at the mercy of the bankers. Their agency having their backs, the bankers could afford to take a hard line on the mortgages. The playing field, in other words, is not at all level. 


Material from this essay has been incorporated into "The Federal Reserve" in  Institutional Conflicts of Interest, which is available in print and as an ebook at Amazon.  

1. Alexander Eichler, “Conflicts of Interest Abound at the Federal Reserve, Report Finds,” The Huffington Post, October 19, 2011.