There’s no taste for accounting

The Washington Post reported a couple days ago on the dwindling and precarious situation among the big accounting firms. As the opening paragraph asks, “With only four major firms left in the business, are there too few to let any fail?” The article goes on to list numerous troubling and legally challenged activities by PricewaterhouseCoopers, Deloitte & Touche, KPMG, and Ernst & Young in recent years, all in the shadow of Arthur Anderson’s undoing as an enabler of Enron’s mishigas.

So here we have a situation where it seems that the big accounting firms just can’t help themselves from screwing with financial reality in an attempt to gain a short-term profit boost. In the process, they directly rip off their own customers or colaborate with their corporate customers’ rip-offs of investors and customers. Not that there’s anything truly sensible about investment in our current capitalist-market economy, but sham shelters and fuzzy accounting only exacerbate the absurdities of investing, whereby great gobs of cash are steered into wholly worthless projects, doomed to disappear in a puff of “market correction.” When a company like Enron is made to look like a fabulous place to put your money, then there are two losses–you lose your money when the fraud-bubble bursts, and some other possible investment that could have been actually useful missed out on the chance to have the use of your money.

Anyway, that’s not really what I’m after at the moment. I’m thinking about the fact that our economy is largely structured around big corporations, and that these big corporations can’t function well over time without proper and thorough accounting, and the scale of the accounting work that is needed for large corporations is so big that the accounting firms needed to do the work must be huge operations themselves, and meanwhile these huge accounting firms are evidently untrustworthy. But separate from the question of trust, the situation looks to me like one of a “natural monopoly” (or more precisely here a natural oligopoly). The scale of organized expertise needed to provide the accounting that the Fortune 500 require is so large, that only a very few firms can possibly hope to provide it. And yet here we are, with those very few firms providing it–but they turn out to do so in a criminal fashion. But because they are so big and their service so necessary, the government may not be able to effectively police the accountants for fear of throwing a nasty wrench into the whole of the economy. “The firms and their Washington allies warn that the companies are vulnerable to big verdicts that could steer them out of business, leaving clients with few choices, driving up costs, and throwing investors and markets into disarray.”

If private firms are functioning as more-or-less natural monopolies, yet can’t be regulated through normal means (for example:

SEC officials are meeting with outside experts to consider ways to create safe harbors that would shield auditors from legal liability. Regulators also continue to assess whether to give their blessing to a strategy that would compel companies to bring disputes with auditors to an arbitration panel rather than a jury, according to sources briefed on the issue.)

then the regulation regime must be strengthened, not weakened as the SEC is apparently considering. And if no outside regulation will work, then the only thing left to do is nationalize the suckers. Put that on the table and I think you’d see some cleaning house right quick.