“What is relevant is what solves the problem. If we had thought through real relevancies, we would be on Sirius by now.” ~Sir Peter Medawar
By Catherine Austin Fitts
The news informs us this morning that Angola has delayed the launch of their stock market until 2017 so that the companies in Angola have more time to get their accounting in order. This is a reminder that the world is still building out its equity market infrastructure and we have a long way to go in doing so.
I remember in the early 1990’s when the SEC set up an emerging markets task force and asked me to participate. Teams from the SEC were traveling around the world to help people set up their stock markets. In 1997, I was in Shanghai as the new Shanghai exchange was getting off the ground. To say it was basic is an understatement. Yet, the interest and learning speeds were astonishing. So it is not surprising where Shanghai is today and where it is expected to be in decades to come.
One of the challenges that the emerging and frontier markets face is building the intellectual capital necessary to maintain public equity markets – this includes a trustworthy accounting profession.
One of the strengths of the Anglo-American world has been our investment in the legal and financial tools that make markets go – including accounting. However, increasingly the question is not whether the developed world’s accounting is more trustworthy – but whether it is just better at keeping rigged accounts rigged and floating along.
I worked closely with three of the world’s top accounting firms when I ran the Federal Housing Administration and then ran the company that served as their lead financial advisor. I don’t believe a word that comes out of the mouth of two of them – now merged. Their signature on a piece of paper is entirely worthless, other than testifying that any lies involved carry official weight. The third was Arthur Anderson and we know what happened there.
What gives me comfort when I review the financial statements of companies is not the auditor name – it is the quality of the board of directors, the management and the lead investors. Nothing supports the successful management of a company like the integrity of financial communication and reporting. So in businesses that operate in the general economy, there are strong incentives for keeping things accurate. Timely feedback is a force multiplier that keeps success grounded in the marketplace serving real customers.
Businesses that derive the majority of their revenues from serving the federal government as contractors are another matter. The National Security Council can give waivers that allow companies to report accounts and financial statements that are not in compliance with SEC rules.
The US government has refused for 20 years to comply with the laws requiring audited financial statements. The official reality of the US governments operations and finances has become so different than the reality that it is impossible for the US government to comply with the law or pass an audit. And even if it did, the accounting profession’s audit statement is not to be trusted.
For an audit to have meaning the auditor has to have the ability to say “no” without having his or her life threatened, or for that matter, the lives of their family and children.
I appreciate the challenge that Angola is facing. Prosperity depends on financial liquidity, which depends on integrity in accounting. From the time that the Franciscan friar Luca Pacioli blessed us with double-entry bookkeeping, achieving that integrity has been an inter-generational journey that is far from over.
When you look at the financial statements for a company or organization, first look at the pictures and resumes of the people who govern, manage and own or fund it and ask yourselves, “Do I believe these people to have integrity and be competent at what they are doing?” If the answer is “no,” don’t bother to read the financial statements. As a practical matter, they are probably meaningless.