Michael:

Thanks again for sending me that link to Robert Locke’s essay on “American Corporatism” (which can be read here.) The essay lays out the ideology-bending reality of the interaction between powerful economic interests and the government:

What is corporatism? In a (somewhat inaccurate) phrase, socialism for the bourgeois. It has the outward form of capitalism in that it preserves private ownership and private management, but with a crucial difference: as under socialism, government guarantees the flow of material goods, which under true capitalism it does not. In classical capitalism, what has been called the "night-watchman" state, government's role in the economy is simply to prevent force or fraud from disrupting the autonomous operation of the free market. The market is trusted to provide. Under corporatism, it is not, instead being systematically manipulated to deliver goods to political constituencies. This now includes basically everyone from the economic elite to ordinary consumers.

As Mr. Locke points out, powerful established economic interests have a great deal of common interest with the government:

What makes corporatism so politically irresistible is that it is attractive not just to the mass electorate, but to the economic elite as well. Big business, whatever its casuists at the Wall Street Journal editorial page may pretend, likes big government, except when big government gets greedy and tries to renegotiate the division of spoils. Although big business was an historic adversary of the introduction of the corporatist state, it eventually found common ground with it. The first thing big business has in common with big government is managerialism. The technocratic manager, who deals in impersonal mass aggregates, organizes through bureaucracy, and rules through expertise without assuming personal responsibility, is common to both. The second thing big business likes about big government is that it has a competitive advantage over small business in doing business with it and negotiating favors. Big government, in turn, likes big business because it is manageable; it does what it is told. It is much easier to impose affirmative action or racial sensitivity training on AT&T than on 50,000 corner stores. This is why big business has become a key enforcer of political correctness. The final thing big business likes about big government is that, unlike small government, [big government] is powerful enough to socialize costs in exchange for a share of the profits.

Although Mr. Locke’s analysis, and even his term for the phenomenon, focuses on large corporations, he is being too narrow. Other powerful economic interests function in much the same cozy way with government, often through the guise of being ‘regulated industries’ or as ‘professions.’

The professions have certainly been in the news lately. The most egregious news, I guess, has been regarding the accounting profession. I refer, of course, to the $74.4. billion ‘restatement’ of MCI’s books that was recently announced after a complete overhaul of the corporate books since 1993. As a news account (which you can read here) notes:

The process took more than a year and a half. "This filing culminates the largest and most complex financial restatement ever undertaken," said chief financial officer Bob Blakely. "It is one of the last remaining milestones on our path to emerge from Chapter 11 protection."

Gee, Mr. Blakely sounds kinda proud of his work, doesn’t he? Well, no doubt he’s an accountant, a member of a tribe that apparently cannot be embarrassed by little things like overstating the value of a firm by a mere $75 billion.

Such a restatement (not a rarity these days, alas) leaves me asking what is the value of a valuation that could be so colossally far off? Wouldn’t you think it would begin to make people scratch their head and wonder, what is the purpose of this whole accounting thing? It surely doesn’t provide unbiased financial information to passive investors. By giving the appearance of being financial watchdogs (while in reality being financial statement manipulators par excellence) one might even begin to suspect that the accounting profession exists largely to enable large-scale corporate misinformation to be foisted on the suckers—er, I mean, the public.

So, naturally, there is a vigorous move afoot to abolish the accounting profession, right? Nah. There has been a small amount of rejiggering of how accountants are regulated to make it look like our political overlords aren’t entirely asleep at the switch (or bought and paid-for by the accountants.) No one has uttered the word abolition. After all, accounting is a…a…profession! It’s a fact of life, like death and taxes. We can’t get rid of accounting, even if it doesn’t really do what it is supposed to do, and even if its practitioners are hugely enriched by their very betrayal of any meaningful public role. Nope, the government (via the SEC) insists on audited financial statements by public companies, and by golly that’s what we’re going to get…forever. And we'll get them no matter how laughable such statements are in terms of accurate reflecting reality (especially in the era of derivatives, although that’s another posting.)

And are things all that much better in the legal or medical ‘professions’? In the tort law system, which is often touted as a form of social insurance in which injured Americans are compensated for their damages, for every $1.00 in overall costs (damages paid, litigation fees, administrative costs of running courts, etc.) the amount paid out to the injured is $.30. That means 70% of the overall costs of the system are eaten up by the system. Would you buy insurance like that? (Although you can see why the numbers of lawyers continues to grow.)

As for medicine, well, I’ve noticed that as health care costs have escalated over the past 40 years (from 5% of GNP in 1965 to 15+% of GNP in 2004) the share of the overall health care dollar going to doctors has stayed remarkably steady at 20%. That is, as overall healthcare costs escalate, so do doctors’ incomes…in lockstep. Now, do you think that gives them a strong incentive to reduce healthcare costs? To practice cost-efficient medicine? I think not.

And don’t even get me started on lesser boondoggles like the debt rating agencies.

Let's face it, government regulation of the professions, which is supposed to ensure some sort of quality control, really just confers massive financial privileges on such professionals while largely insulating them from any real accountability. It seems to me that the new millenium is a dandy time to start thinking through a new politics. Mr. Locke accurately points out that the reality of public-sector / private sector interaction doesn’t correspond to either right- or left-wing ideology. Well, the governmental enshrinement of the ‘professions’ is not exactly in the public interest, either.

And, by golly, it’s time we do something about it. Who's with me?

Cheers,

Friedrich

Great, thought-provoking post. Thank you.

I work in finance and I've been doubting the whole value of the GAAP accounting system for a while now. Certainly, financial professionals attribute limited significance to it.

Posted by: JT on March 16, 2004 2:26 PM

Right on, brother!! Power to the people! Or...something.

While I concur about the red-faced shame that the accounting profession should be wallowing in, I noticed something else in your posting: "emerging from bankruptcy." (Drum roll...). Chapter 11 bankruptcy---the ultimate beauracracy without accountability. So we need to jigger the books just one more time, before we totally stiff the original equity holders and debt providers, and...EMERGE. Like Venus rising from the sea.

Posted by: annette on March 16, 2004 3:31 PM

If only one could seriously compare a resurgent MCI to Venus...

Posted by: Friedrich von Blowhard on March 16, 2004 3:37 PM

Wow, that's a great post. However, it does make me think that the "machine" is just to big to stop. What can we do? The military industrial complex has been widely talked about for decades, and it shows no sign of stopping. Of all the waste out of the Pentagon, you'd think that someone would help to clean a little of it up.

Posted by: sean on March 16, 2004 3:38 PM

Also, it's worth to point out that people have forgotten that this type of behavior by accounting firms is what helped ordinary citizens lose retirement savings.

Posted by: sean on March 16, 2004 3:40 PM

Are you serious? Abolish accounting?
How would you do that?
I agree that there are abuses but the idea of abolishing accounting as a solution seems a little over-the-top. Or am I simply not getting the joke?

Posted by: David Sucher on March 16, 2004 4:40 PM

Dave Sucher: I wasn't too specific but the general idea is that instead of refining GAAP or adding regulations, we could abandon the idea of Net Income and start emphasizing the Cash Flow Statement and making it more specific and detailled. The job of accountants wouldn't go away, but it would change and make it less burdensome.

Posted by: JT on March 16, 2004 5:12 PM

Mr. Sucher:

I meant abolish in the sense of being willing to radically look at what accounting is and isn't and what role accountants can (or can't play) in society and deciding on their role accordingly. This would be a change so sweeping that abolition isn't so far off base.

But mostly, I was trying to make a point: are you better off with a valuation (blessed by many high-priced accountants) of the value of MCI/Worldcom that is $75 billion too high, or with no valuation at all? Is it better to have numbers which are (or are routinely) seriously manipulated by management (and their trained-seal 'auditors') or no numbers at all? For example, I remember someone saying that in the old days, the point of paying dividends wasn't so much to return value to shareholders, as to prove (far beyond the power that anything like a balance sheet is capable of)that you actually had the cash--and were thus as profitable as you claimed to be.

This may seem like primitive logic until you realize that, at the time when Dynegy was going to buy Enron, the deal was queered by the fact that Enron's cash position kept deteriorating much faster than could explained by its CFO. Dynegy intelligently chose to believe the cash and not the accounting--and hence is still a going concern.

Posted by: Friedrich von Blowhard on March 16, 2004 5:14 PM

Rather like going into combat against a hundred-armed giant octupus with a toothpick in inky-black waters, isn't it?

Reminds me of the steps of civilization:

from bondage to spiritual faith;
from spiritual faith to great courage;
from courage to liberty;
from liberty to abundance;
from abundance to selfishness;
from selfishness to complacency;
from complacency to apathy;
from apathy to dependency;
from dependency back again to bondage.

"Undoubtedly there were Babylonians, Romans, Incas who warned against overindulgence and weakness, who warned that each citizen is responsible for his nation, and that that responsibility cannot be shrugged off on officials. But to those who warned of impending trouble there was then as now the smug sneer, 'It can't happen here.'

But it did."

Posted by: Cowtown Pattie on March 16, 2004 5:31 PM

Mr. Blowhard.
But I simply don't understand how one would do it.
"...no numbers at all."
The concept astonishes me.
Do you mean that a business would not be allowed to have a set of books? Could not keep track of its expenditures? Or its income? Or its inventory? I assume that you are joking.

Of course I agree with you that there needs to be some reform of the accounting profession I don't know enough to even suggest what that would be but clearly, to have a Big Eight firm go kaput in a matter of months indicates that there may indeed be something wrong. But might forbidding a business from determining if it made a profit or a loss be just a bit harsh?

Posted by: David Sucher on March 16, 2004 6:47 PM

Mr. Sucher:

What makes you think such information requires the use of C.P.A.s or the full panoply of modern accounting? Keeping track of such information is, of course, valuable; but true accounting starts in with arcana (such a depreciation) where the tangible and obvious stop. Or, at least, that's how I would use the term.

Posted by: Friedrich von Blowhard on March 16, 2004 6:52 PM

Cash is King.

Posted by: David Mercer on March 16, 2004 9:37 PM

Maybe it's always been like this, but as someone who more than 2 years ago made a very bad investment in the market, based largely on the buy and strong buy recommendations of the overwhelming majority of analysts who followed the stock in question, I can tell you that no one and nothing is to be taken on trust when it comes to investing.
Off topic to the subject of accounting?
I follow a thread on finance.yahoo.com, that tracks the stock. Even those immersed in the industry, who follow this particular company closely, have a difficult time reading the byzantine quarterly financial statements, and are even deeper in the dark when it comes to forecasting what the company's financial situation will be six months down the pike.
When you add on to that the near complete unpredictability of what action this or that promiscuous state or federal regulatory agency will take, suddenly radically altering "the playing field" on which the company competes -- well, it's a crap shoot, nothing but a crap shoot.

Posted by: ricpic on March 16, 2004 9:59 PM

Well Friedrich, you may think that "depreciation" is arcane but if one actually operates a business with real things, then you know that objects do in fact depreciate. Entropy is very real and it is the tendency of things to disorganize; depreciation is the economic valuation of that process. For example, it is not at all intangible that a roof depreciates -- wears out; the rain on one's head is very real indeed. Sound business practice will recognize this depreciation and put aside money (one way or another) to make repairs.

Accounting is actually a fairly profound subject which starts by defining of things such as "income" and "expense." Anyone who cares about words would be fascinated by accounting as it is very much not about numbers but about definitions.

I won't be put in the role of defending a profession which has obvious problems, but if accountants didn't exist, we would have to invent them. Someone must keep track of these terms -- "income," "expense," etc etc -- and know how to use them.

Posted by: David Sucher on March 16, 2004 10:12 PM

Mr. Sucher:

I'm not the only person who questions the use of such fictions as depreciating capital investments over their "useful life" (as opposed to simply expensing such investments in the year they are made.) The purpose of such depreciation is to 'smooth out' earnings, but is also dependent on a series of, er, assumptions--like how long the useful life is, and whether the capital investment will actually yield revenue over the guestimate of the "useful life." Obviously, these assumptions are not, in fact, always realistic. Meanwhile, the cash put into the capital investment is gone, gone, gone...which makes it seem quite a bit like an expense to me. This type of depreciation seems typical to me of many aspects of accounting, which actually distort or suppress 'real-world' information. (This is, by the way, the exact issue that resulted in most of the MCI write-offs, the bulk of which occurred because the presumed value and useful life of investments turned out to be wildly optimistic, not realistic. I prefer cash as a measure of the success of a business...it, too, can be manipulated but it is harder to do. Also, if you want to get into a real intellectual pickle, look at the accounting for derivatives, which generally show up as nothing but footnotes, as they often represent 'contingent' liabilities. Yet it was derivatives (used to recapture risk that was ostensibly off-balance sheet) that really tanked Enron. I've said it before, and I'll say it again, in many regards advanced accounting obscures (and is designed to obscure) more real financial information than it reveals.

Posted by: Friedrich von Blowhard on March 17, 2004 12:52 AM

Accrual accounting was introduced precisely because cash accounting wasn't providing enough information to investors and users of accounts, but the more complicated it became, the more judgement was required, and users were put in the position of having to place some trust in the accountants (and auditors). This kind of 'doctor knows best' approach no longer fits a culture of empowered consumers, who are used to making autonomous decisions in the rest of their lives. Alternative medicine is a good example of an industry which has grown partly as a result of distrust of certified experts. Perhaps I'll set up a holistic accounting agency...

Posted by: Gabriel on March 17, 2004 2:57 AM

Gabriel,
What a great idea - holistic accounting! I look forward to seeing you on late night television. My mind is spinning with the possibilities!

Posted by: Cowtown Pattie on March 17, 2004 8:52 AM

Friedrich,
You have illustrated my point very well and I think we agree.

Posted by: David Sucher on March 17, 2004 10:39 AM

The thing that impresses me the most about America is the way parents obey their children.
-- King Edward VIII (1894 - 1972)

Posted by: Chris Martin on March 30, 2004 2:04 PM






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