Re:Balance -- Jim Peterson

Book Review: Tony Judt Has a Few Last Words

Ill Fares the Land, by Tony Judt, Penguin Press, 237 pages

“Ill fares the land, to hastening ills a prey,

Where wealth accumulates, and men decay."

-- Oliver Goldsmith, The Deserted Village, 1770

Although I had devoured Tony Judt’s sweeping prize-winner, “Postwar: A History of Europe Since 1945” (2006), I had missed the April release of “Ill Fares the Land,” for which I am obliged to a regular reader.

If there is reason to celebrate Judt’s ability to bring forth his extended essay under the terrible burden of his terminal battle with ALS – and there is – it is no less lamentable that his premature death in August removed him as promoter and advocate on its behalf.

Even if some months late to the task, I am impelled by the strong suspicion, much as I would love otherwise, that this space shares few enough readers with Judt’s regular platform, “The New York Review of Books.” 

Judt paints with eloquence the debased world of “conspicuous consumption of redundant consumer goods” – enabled by the retreat from the postwar achievements of interventionist governments in areas of security, prosperity and social services. Instead are the unprecedented wealth disparities of the last thirty years, especially in the United States and the United Kingdom but throughout advanced economies globally, with all the attendant costs and consequences falling disproportionately on the increasingly disadvantaged: social alienation and depression, failed education and mental and physical dysfunction.

Judt points to the confusion sown by self-interest pursued and based only on maximized individual economic advantage, with “minimal reference to extraneous criteria such as altruism, self-denial, taste, cultural habit or collective purpose” – even while the advocates of unregulated free markets drove into the abyss of the credit crisis of the last three years under the “false precision” that because “they didn’t know everything, as a result it turns out that they didn’t really know anything.” 

As Judt sees it, the reduction in trust and cooperation on which the social cohesion of the modern state critically depends, has given way to policies driven by fear, selfishness and bigotry – manifest in communities segregated and gated-off both physically and culturally. The ominously frightening consequence, when government cannot function on trust, is that it will move to do so by intrusion and repression, and ultimately by violence.

In the way of polemicists since Jeremiah, Judt in his outcry for a new form of social discourse does stop short – or so it could be charged, by those for whom words of inspiration only come alive in action. For his rhetoric flags, both on the particulars of a process for a new form of engagement across the spectrum of political principles, and even more on the blueprint by which the headline topics of a just and caring society might be realized.

Which takes nothing away. Voices on Judt’s behalf need to be raised, post mortem. His legacy is one of those small works that emerges from time to time, well ahead of the readiness of even sympathetic audiences to grasp its ultimate impact.

To punch its weight, however, would not have meant stints on the Oprah show or Comedy Central. Even writing for an American audience, Judt has a style, exemplified by his use of both diacritical marks in the word “dèbâcle,” that must have prepared him for an underwhelming reception in the popular audiences.

Which is fine. “Ill Fares the Land” was never destined for wide readership. The population of conservatives genuinely qualified and inspired to engage a substantive conversation with its content could probably convene in a closet; other pretenders on the Right would fall among Judt’s targets as having prospered personally – he would say, selfishly – from the subsidies and support of the active operations of government through the course of “the American century.”

Meanwhile, know-nothings at both ends of the political spectrum will not appreciate a work demanding more cerebral engagement than Fox or MSNBC, nor will they stick with the task of reading to chapter two without their lips getting tired.

For myself, I happily leave to the professional ideologues the debates over the relative analytic purity of Judt’s vision for a renascent substantive form of civic engagement.

Here’s the thought: take an evening off from the cacophony of the electronic media, and invest the time and mental effort to wrestle with these messages. When a sufficiently receptive audience has done that, the process will be well begun of extending the foundations for a sustainably re-envisioned global society of both compassion and decency.

 

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The EC's Green Paper, "Audit Policy: Lessons from the Crisis": The Bureaucrats Blow Another Chance

  

  "We've gotta do something, They"re serious this time.

    "You know what we gotta do. Toga party.

    "We're on double secret probation, whatever that is. We can't afford to have a toga party.

    "You guys up for a toga party?"

            -- "Animal House" -- 1978

  As the October 13 release of the European Commission’s Green Paper, “Audit Policy: Lessons from the Crisis” – here -- by rookie Internal Market and Services Commissioner Michel Barnier, illustrates:

Any newly-arrived bureaucrat, tempted to launch the machinery of inquiry, should first demonstrate the need for further admiration of an already tediously-explored agenda, and the vision and will to do more than re-plow the same sterile ground.

The naïve tone in which the Green Paper articulates the role of auditors, and the clueless innocence of its “questions,” make evident another major exercise in resource-wasting.

The vacuity of leadership vision and reasoning on the grave issue of the viability of global-scale audit has been on view for years -- here -- and continues in Brussels:

The Green Paper starts with the customarily limp and tedious observations – e.g., that audit “provides assurance on the veracity of the financial health of all companies,” and that “continuity in the provision of audit services to large companies is critical to financial stability.”

But this exercise in self-congratulatory amour-propre is empty. Its adherents have never known a world in which public company financial statements have not borne the commodity appliqué of the one-page standard auditor’s report. The alternative proposition, of life without the legal requirement of an audit – an obligation that survives only by force of law, not by market choice – has never been tested.

No less, the last of the weak and aging dinosaurs on their terminal descent into the tar pits no doubt had themselves persuaded of the vital centrality of their role and influence in their ecosystem -- just as the tidal wave of unstoppable evolution was gathering to wash them to oblivion.

Consider a few examples of the Green Paper’s tiresome re-cycling of old material (question numbers are kept; some wordings are streamlined):

Can smaller firms emerge to become viable participants in the large-company market segment (# 27):

Would someone please do the arithmetic? Assume the impossible – that all the small firms doing any public company audits were merged into a single practice. That unmanageable monstrosity would still be smaller than the smallest of the Big Four.

Just as the case has never been made that smaller firms can deliver competitively superior quality of service, their limitations of geographic scope, breadth of expertise and capacity for risk tolerance are disabling to the notion that a Big Fifth can be either grown or built. And their leaders willing to be candid will admit it.

Should alternative structures be explored to allow audit firms to raise capital from external sources (# 23):

A better question: did anyone with business literacy vet the Green Paper? The Big Four capital structures, with their modest partner investments and operations financed by their client receivables, do not need and could not deploy major outside capital if handed over on a platter (here). Rather, such funds would only be a honey pot to attract the further attention of potential litigants.

Would contingency plans, including “living wills,” address the systemic risk of a large-firm failure (# 31):

First advanced in 2008 as part of the cringe-worthy output of Treasury Secretary Paulson’s Advisory Committee on the Audit Profession, this trial balloon deflated without lift-off (here) – for the obvious reason as shown by Arthur Andersen’s rapid disintegration in 2002, that the death spiral of client and personnel flight, once started, is irreversible.

Should audit mandates be limited in time (# 18), or should rotation be mandatory (#29):

To this, the complete one-word answer has always been, “Italy.” The only country of any significance with mandatory auditor rotation – a land capable of producing neither enough children to sustain its population nor enough honest politicians to sustain functional government – did manage to produce the scandal of Parmalat – world-class malfeasance enabled by the rotation-inflicted division of audit responsibility between two firms. Enough said.

Are there benefits to joint audits or consortia including smaller firms (# 28):

The French structure of joint audits is argued for, but is profoundly unsatisfactory as a persuasive example – perpetrated as it is by the lobbying of the small firms’ nationalistic appeals to preserve a miniscule local slice of the world market.

The fanciful notion that minor rump-end participation in an otherwise global-scale audit engagement could give a small firm the muscle to supplant a failed Big Four firm is belied by the record: at present, every audit of the CAC 40 is led by a Big Four firm. If small-firm consortia were credible, there would already be at least one example in practice.  

Finally, should audit appointments and remuneration be managed by government (## 16-17):

Consider this long step down the short road to nationalized audit agencies. Nowhere else are markets for commodity products, other than audit reports, subject to such artificial constraints – whether auto manufacturers, retail bankers or espresso vendors.

Yet if viewed as a legitimate target for government take-over, audits performed by low-grade civil servants -- the only ones to find appeal in such a career post -- would descend in value and repute even further to the level of nationally-administered postal delivery, rail service and health care.

It’s all too depressing, to belabor these points yet again. But since Commissioner Barnier looks as green as his paper, the only hope is to administer sunlight and fertilizer and pray he ripens quickly.

 

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In the News: Crain's Chicago Business on the Funk Pervading the Accounting Industry -- And My Five-Word Quote

 

Steve Strahler reports in yesterday’s edition of Crain’s – here – that “revenues are down, margins are squeezed and many employees are unhappy” – especially at the Big Four, where the combination of recession and exposure makes for a zeitgeist of uncertainty and dissatisfaction.

For which, a tip of the hat.

And another for compressing one of my central themes into a quote of record-setting brevity, on one of the fundamental but underexplored issues threatening the viability of the large firms: “They’re not capitalized to survive.”

 

And those who persevere will see a modification of the cliché: Five words is worth a picture. 



Hailing a Driver: Not Just a Ride to the Airport

 

Reminders of the petty scale of our daily problems come often as a subtle tap on the shoulder – but sometimes as a blow to the head, or the heart.

The only attractive reason to anticipate my pre-dawn business trip this week was the chance to spend an hour with Adam, our family’s friend and driver for the last dozen years.

It was much more than his immaculate town car, with the daily papers and the ready stash of chilled drinks and its soft and capacious seating – all in contrast to our city’s rattle-box taxis with their cramp-inducing lack of legroom and pervasive odors mixed of dirty laundry and spicy roast goat.

It was the spirit of Adam himself -- always turned out in tie and cap, with his broadly-smiling reminder on the outbound legs to count the luggage and confirm the tickets, and his cheery “Welcome home” at the arrivals terminal on the other end.

He was a Coptic Egyptian. He had lived in the minority all over the world, acquiring along the way a quiet and pacific tolerance that was always calming as we would sit in traffic and review the world’s issues from one trip to the next.

I never met his wife, but I learned through his affection the model of two well-differentiated personalities, who bring complementary skills and strengths to the sustaining of a long, caring and devoted partnership.

And we shared the joys and challenges of older fatherhood. We supported each other on the evolving problems of “little kids” and “big kids.” As he drove us to family holidays and college visits, he always asked about our daughter’s well being.

Adam moved into semi-retirement, but loyally kept us in his client book. As ever, he was always ten minutes early rather than five minutes late. So when he was not at our door at 6:30 am, just before the morning rush hour would begin to build, I called his number on the speed dial, out of concern that I had given him a wrong date or time.

What I was not prepared for was the stranger’s voice: “This is Adam’s son. Adam passed away suddenly, last Thursday. The funeral was yesterday.”

The world is changed. It’s no more a matter of his help in finding the passports and loading the ski bags and making the adjustments of cancelled flights and re-arranged pick-ups. It’s that a wise and gentle man will no longer be there to bring tolerance and perspective to the nuisance and disruptions of a traveler’s life.

Our family loved you, Adam Bisher, and we will miss you. You drove us faithfully in comfort and safety. Flights of angels now drive thee to thy rest.    

 

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A PCAOB "Reminder" on Significant Unusual Transactions: Is the World of Audit Guidance Now a Better Place?

Rumack: “Can you fly this plane and land it?”

Striker: “Surely you can’t be serious.”

Rumack: “I am serious … and don’t call me Shirley.”

-       “Airplane” (1980)

 There was at least one bit of good news implicit in the otherwise-dispiriting April 7 alert from the Public Company Accounting Oversight Board, “Auditor Considerations of Significant Unusual Transactions” (here). 

Which is that, although the large accounting firms may well not survive the wounds of their own exposures (see Francine McKenna’s March 23 compilation), they are in no present danger from their American regulator.

It is not clear, because neither auditors nor their overseers are recognized for their humor or their irony, whether it is cause for laughter, or perhaps tears, that the functionaries in Washington have so little respect for the profession, as to believe it useful to “remind auditors of public companies about …the risk …posed by significant unusual transactions.” 

Behind the text of the alert – which offers not a single example or illustration to suggest that the PCAOB itself has a clue – is another “reminder,” for anyone still thinking that government-provided audit guidance might supplant private assurance, in the event of Big Four disintegration and collapse: The PCAOB shows itself ill equipped to lead from Point A to Point B. 

It was never credible, that the very government that imposes on its citizens the Postal Service, Fannie Mae and the IRS should be capable of delivering assurance of any value on the complexity of global-scale corporate financial statements.

The PCAOB’s insult to intelligence now makes that crystal clear. The best advice on offer – eight years after the Sarbanes/Oxley law begat the PCAOB and a regulatory regime for which the world was not holding its breath – is the stunningly obvious proclamation (page 2) that “although the economic conditions have changed since December 2008, the risk factors, including the risks of unusual transactions, that existed in December 2008 continue to exist today….”

Whew – thanks for that insight, for sure.

Justification for an alert is said to be the highlighting of “new, emerging, or otherwise noteworthy circumstances.” By its own terms the alert fails on the first two, so the question is what might be “noteworthy” (page 2) about “compiling selected, relevant requirements from existing PCAOB standards … into one document.”

Does the PCAOB believe that audit professionals cannot read their basic literature, without their attention failing or their lips getting tired? 

With expectations that low, where do they expect the professional wisdom and judgment be found, in an audit engagement team out on the job, to comprehend the subtleties of whether “the form of transactions is overly complex” (page 5) or if “management is placing more emphasis on the need for a particular accounting treatment than on the underlying economics of the transaction”? (page 6, emphasis added) 

If so, the next expected step in the dumbing-down of regulation will be “GAAS for Twitter” – auditing such tough subjects as related parties and special-purpose-entities and complex derivatives, 140 characters at a time. Not, we should fear, a recipe for enhancing the value of the audit process.

Further, one seriously nasty hostage to politics in the PCAOB release is the admonition to engagement teams to “consult with individuals having appropriate levels of knowledge, competence, and judgment regarding significant unusual transactions.”

Not only does that finger-waving come with the warning that “the engagement quality reviewer cannot provide concurring approval of issuance if he or she is aware of a significant engagement deficiency, including those regarding significant unusual transactions.”

More importantly, as noted here, the PCAOB’s minders at the SEC in December besmirched an entire senior consultation hierarchy at Ernst & Young, announcing enforcement sanctions against the firm and six of its partners over the quality and risk review process followed for Bally Total Fitness – a shot across the bow of professional quality consultation that cannot be encouraging to the kind of consultative practices now urged by the PCAOB.

Regulatory “reminders” at the PCAOB’s elementary level may be an inevitable nuisance in a nanny-state environment of excessive bureaucratic intrusion, but their real impact will be a further degrading of the agency’s own stature and credibility. 

At this rate, the PCAOB’s next release will be a “reminder” that debits must still equal credits.      

 

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"Supplements" for the Baby Boomers -- A Generation for Whom Enough is Never Enough

A diversion from the usual -- motivated by a recent conversation about the Baby Boomers: that displaced bulge in the population who have distorted society since they overran the nurseries of the Eisenhower years.

For this group, “joint” and “hip” once invoked a sub-culture of beads and bell-bottoms -- now associated more with “replacement” and “physical therapy.” Drugs of choice are no longer recreational, but regulate their HDL and systolic blood pressure. The numbers now threaten to swamp the delivery of elderly care, health insurance and retirement security.

The context was a nightmarish encounter with the bungled processing by an over-burdened bureaucracy of an application for Medicare – the triply oxymoronic American “health insurance program” that provides the age-advanced with no less than four inter-locking forms of coverage – for hospitals, doctors and drugs, along with an opaque and effectively non-optional layer of “supplemental coverage” that fills in the gaps in the other three.

On reflection, the concept of “supplements” seemed thematic. Unsatisfied with historically normative levels of entitlement, the Baby Boomers have invented, demanded and consumed whole categories of newly-identified goods and services – an influence evidently to continue until the long-denied arrival of their generational demise.

Consider their pervasive impact across the culture:

As noted, individual enrolment in long-term and other in-fill health insurance overage is a strategically vital supplement, because available health plans are insufficient to protect against the devastation of a catastrophic illness.

With the erosion of social security and the depleting of their under-funded savings and pension plans, the Boomers are staying at work post-retirement – consulting or teaching or hosting at Wal-Marts – to supplement income levels no longer deemed adequate to underwrite the mega-house or the bass boat behind the truck.

In the schools, the Boomers’ privileged offspring – each already classified on demand as gifted and above-average – subscribe to supplemental tutoring, test preparation and counseling as they strive to game the systems of university admission.

More youthful populist hostility to the diversion of taxpayer bail-out funds be damned, whole business sectors depend on the availability of salary supplements – bonuses being deemed vital to the compensation plans of banks and investment funds.

In the pharmacies, what were once the accepted signals of advancing maturity are now attacked by supplements ranging from age-targeted vitamins and synthetic hormones to Rogaine and Viagra.

While in front of the bathroom mirror, the previously unexceptional effects of time and gravity are defied by supplements delivered by tube and jar, scalpel and needle. Contours and visages are re-sculpted by augmentation or reduction, and the percentage of authentic body parts becomes inverse to the seniority revealed by the calendar.

Profound conclusions from these symptoms may be elusive, but strategies do emerge:

• ·      Clearly, any politician who gets in the way of the Baby Boomers’ voracious appetites for supplements of all sorts will be trampled and left for road kill under the government-provided walkers and wheel chairs.
• ·      On the other hand, lobbyists will prosper who line up in favor of legislative proposals for the extension of benefits of all varieties.
• ·      And investors might expect to be smartly rewarded for adding to their portfolios the makers of titanium knee joints, D-cup gel inserts and implants for hairlines, lips and cheekbones. 
  

While “rock on” no longer refers to Woodstock or the summer of love, but to the nap-inducing motion of a chair on the porch.

 

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On the Midwestern Calendar for March: Two Events Addressing the Audit Profession

An alert for those in the Midwest looking to warm up the chill of late winter: I am looking forward with enthusiasm to joining Duane Kullberg, retired managing partner of Arthur Andersen, who will be the Chapman Executive-in-Residence at Carthage College in Kenosha, Wisconsin, on March 2 and 3.

 On Tuesday evening the 2^nd, Duane and I will be on a panel on the “Future of the Audit Profession,” joined by Bill Goodman, CPA and president of Schenck Business Solutions and chaired by Dennis Tomorsky, CEO of the Wisconsin Institute of CPAs. At the college’s Todd Wehr Center, 7.30 pm.

 On Wednesday the 3^rd, the Kenosha/Racine area Business and Professional Coalition’s regular luncheon will feature Duane’s presentation and our taking questions on the “Rise and Fall of Arthur Andersen.”  Noon, also at the Todd Wehr Center.

 Any further details will be forthcoming, so drop me a line to be advised, or are available through David Brunn, Carthage’s Rogers Palmer Professor of Business Administration (tel: 847-256-2287 or e-mail: dbrunn@Carthage.edu).

A Summer Lull for the Accountants? Sez Who?

We ought by rights to be in the summer doldrums – those still doing real jobs are taking a break in the country or at the beach, and the rest are hunkered down till the headhunters come back to town in the fall. But there’s a sudden flurry of attention and activity around the world of the large accounting firms.

And while human societies are good at generating coincidental events that don’t really add up to a pattern, a little reflection indicates some possible common threads:

Item: Joining the expanding list of observers giving scrutiny to the business models and exposures of the large audit firms, comes the launch of Breaking Media’s new blog, “Going Concern” – dedicated, says its introduction, to “making accounting sexy.”

Well, maybe. Many of the large firms’ wounds are indeed self-inflicted. Still, snarky tabloid gossip that trades on the displays of venality and shortness of leadership vision will not advance the search for solutions to the profession’s lessening relevance and doubtful survivability. The issues are too nuanced and multi-faceted for that.      

But if it is facile to deliver easy jabs, even the kings of lore and legend engaged their court fools, so that hard truths could be wrapped in the wisdom of a laugh or two.

So welcome to Caleb Newquist’s new effort. Godspeed, and let the dialog expand. 

Item: The incongruous conjoining of “sexy” and “auditor” in the same sentence does seem like an effort for the scriptwriters of Monty Python -- proved again by the publicity last week around the presentation by Audit Analytics, “Accounting Professional Liability: Scorecards and Commentary.”

Variously describing the large firms’ litigation exposures as “a serious and growing problem,” or more gravely as “a breathtaking number,” the data for the Big Four firms should be a splash of cold water to awaken on the gravity of their exposure threat -- but in fact have yet to reach the level of public consciousness sufficient to kick-start a serious debate on the threatened viability of the large firms’ basic assurance franchise.   

Not that life is any more pleasant beneath the Big Four level:

Item: Up in the normally understated Scandinavian territory of Minneapolis, the McGladrey Pullen firm’s attempt to extricate itself from its entangled business venture with H&R Block and the RSM network was promptly met with a retaliatory lawsuit (here).

Among the more subtle lessons learnable from the break-up of the Andersen organization and the departure of its consulting practice to become Accenture was the potential for the distraction of management time, focus and strategy.

In that case the cleavage between practices made for at least reasonable clarity in the allocation of personnel, systems, methodology and real estate. Whereas in the McGladrey/RSM context, by contrast, reverse-engineering their constituent practices into separate and discrete post-divorce portions will be a little like manufacturing tomato juice by starting with V-8.    

Item: On the BDO front, where the Seidman firm in the United States faces the survival challenge of the adverse jury verdict of $521 million in the Bankest matter in Miami (here), the network’s UK form, Stoy Hayward, announced last week its process for making redundant a full 10% of its partners (here).

Even in good times the strategy is fraught with peril of “shrinking to success.” And here, a decimation of the crowd whistling past the litigation graveyard might be thought to leave the survivors even a little more lonely and anxious. Although BDO’s international firm has been relieved of legal exposure to the Bankest verdict, it is hard to see how an organization in down-sizing mode is thereby made more robust against the business challenge of a devastating financial shock to its US firm.

Item: And back at the biggest firms, the announcements of shortened work weeks, employee furloughs and deferred job offers continue apace – hardly the brightest news for anyone concerned for the gold content of the litigation eggs sought for gathering by investor plaintiffs from the Big Four geese.

Much ink is being spilled in the search for trends and indicators in the profession’s lawsuit case count – noted above – but the exercise in fruitless and misleading. The profession itself has consistently mis-analyzed its fundamental risks, by taking the approach of “we dodged that bullet, and we still do lots of good work.”

The inductive flaw is basic: it’s not the average settlement amounts or the successful engagements that are deadly, or the close calls that are survived. So long as worst-case auditor exposures are measured in the billions of dollars, by legal and regulatory systems that pit unachievable standards against the firms’ inevitable lapses in performance quality, the Big Four and their smaller brethren as well will be hostage to the one last explosion that will start the final destructive chain reaction.

So let the media commentaries roll on. But let at least some of it treat serious issues with the gravity deserved. 

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What To Read (Two): How To Know Today, "That's the Way It Is"

In a time when channels for the distribution of news and commentary are mutating faster than can be tracked, may I offer this suggestion:

The news feed of the Securities Litigation and Enforcement Group -- here -- gathers thirty sources giving concentrated attention to issues involving securities law, regulation, enforcement and litigation in the United States. It was developed and launched as an extension of the group's base on LinkedIn by Bruce Carton, who goes from strength to strength with his blog, Securities Docket, and his series of always-informative webcasts (latest, here).

The feed is a knowledge tool that would have been unknowable in the world of the old media. I am pleased to be included as a contributor -- and even more enthusiastic to recommend its breadth and depth as a vital resource.

(Note for non-US readers: the on-going deterioration in mainstream ex-US media coverage of these matters in that country makes this compilation all the more valuable for your benefit.) 

Being obliged this weekend to say a sad farewell to Walter Cronkite, those of us presumptuous enough to issue our thoughts for public consumption owe his memory the respect of a pause to consider the standards he set and against which we strive.

The gravitas of early broadcast journalism as led by Fred Friendly and Ed Murrow has given way to the bombastic posturing of Lou Dobbs and the politicized ranting of Rush Limbaugh and the sarcastic smirks of Rachel Madow. Just try to picture Walter Cronkite tracking the count of his Facebook friends, or Eric Sevareid reduced to Twitter. Imagination fails.

So -- that's the way it isn't. And we are the poorer.    

   

What To Read: Catch 22 -- The Ultimate Management Manual

Always stimulating, Francine McKenna last week posted at Re:The Auditors her advice to young professionals, "Recommendations: Great Books to Read at Any Stage of Your Career."
Her list being of recent vintage, my own preferences tend to sources that have withstood tests of time -- Niccolo Macchiavelli's "The Prince," published in 1532, for example, or perhaps Sun Tzu's "The Art of War" (c.400 BCE) -- and for pedagogic purposes, I also favor the wisdom available from sources outside the field under scrutiny.
So -- slightly updated from the original as it ran in the International Herald Tribune for January 24, 2004 -- if you had only one guide on corporate behavior and management strategy:

“It's a Catch-22 situation.” Those words, spoken by a French banker at a conference for European business leaders and received with understanding all around, reminded me how deeply Joseph Heller's 1961 novel has penetrated the global business environment.

I have long relied on Heller, and his vision of a military comprising equal parts corrupt self-interest and naïve idealism, as an extended guide to life in any complex system, including business. Periodic re-readings have had more value for me than any of the so-called team-building exercises and mission statements that pass for motivational management these days.

For those unfamiliar with the story of Yossarian the bombardier and his World War II comrades on the Italian island of Pianosa, Catch-22 goes like this: Only a crazy man would fly the murderous late-war missions demanded of the pilots, and flight surgeons had to ground anyone who was crazy. But asking to be grounded showed proof of sanity, which required denial of the request and continued flying.

Caught in an endless loop of twisted logic and bloated bureaucracy, Heller's characters cope as best they can. A testimony to the universality of their experience is that to this day, the same characters can be found at business enterprises, university faculties and professional partnerships the world over:

•    Major Major, the persistent but hopelessly mediocre administrator, promoted by those eager to be rid of him. Once made squadron commander, he loses access to his mess hall and basketball buddies, and then makes his isolation complete by ruling that visitors wait outside his office while he is in and be allowed in only when he is out.

•    Doc Daneeka, the flight surgeon who refuses to ground anyone who is sane enough to ask for it and who keeps up his combat pay by forging entries in flight logs. After being listed erroneously as a casualty of a plane crash, he lurks unacknowledged outside his own medical tent, losing his pay, his PX privileges and his wife, whose grief at his untimely loss is tempered by full collection of his GI death benefits.

•    Colonel Cathcart, pumped with aggressive insecurity and conceited ambition. He indulges his taste for power by continually raising the number of missions that must be flown - often just before a pilot has attained them.

•    General Peckem, the noncombatant expert at turf expansion, whose successful ambition to bring bombing operations within his purview at Special Services turns to ashes when command changes to the sycophantic General Scheisskopf, who was promoted from lieutenant on the sole strength of his meaningless memos announcing the postponement of Sunday parades.

Even more than Heller's personalities, the bizarre interactions replay endlessly in corporate corridors and boardrooms - and find eerie echoes in recent events:

The questionable Cayman bank balances of Parmalat or the non-existent securities of a Madoff or the kerfuffle of "mark-to-market" would have been child's play to Milo Minderbinder, the entrepreneurial mess officer who could make a profit on fresh eggs bought in Malta for 7 cents each and sold to the mess halls for 5 cents. (Message to Bob Herz at the Financial Accounting Standards Board: the lowdown on how he did it can be found in Chapter 22.)

The debacles at AIG or Bear Stearns or Long-Term Credit Management could easily have been Milo's operations. The demise of the latter was a hedge fund set up by its Nobel Prize-winning managers, running their highly touted models into the ground with a wrong-way bet on Russian debt. That tracks the universal acclaim the military heaps on Milo's business acumen - until he corners the market in Egyptian cotton that nobody wants, bringing his black-market syndicate to the brink of ruin.

The antics of the equities analysts through the bubble years of the 1990's or the sub-prime mortgage originators of this decade are echoed in the treatment of Chief White Halfoat and his Oklahoma tribe, who have such an affinity for petroleum products that everywhere they seek to settle, the oil companies hit oil, requiring the forced relocation of the tribe. At some point geologists and engineers begin to guess where they will settle next and drill before they arrive, kicking them off the land before they can unroll their blankets.

Heller's characters, at least some of them, survive the insanity by finding ways to stay alive until the end of the war. Corporate managers seeking to cope with a dysfunctional organization may not be so fortunate. But they can at least save the huge fees inflicted by outside gurus and facilitators just by going away for a weekend, each having read "Catch-22" as a homework assignment, and recasting the novel's plot and characters out of the people and events well known to all.

I've done it. It works. As a way of placing the absurdity of the workplace in perspective - and as a starting point for finding solutions - "Catch-22" is an indispensable tool. Or, in the words of Doc Daneeka, "It's the best there is."

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OK -- It's Agreed: There's a Crisis in Audit. So When Do We Get Down To It?

The city-bred sportsman hires a local fishing guide, who promises great results as they anchor in a remote spot. From the tackle locker, the guide pulls out a stick of dynamite, lights it, and throws it over the side. A huge explosion, and dozens of stunned fish float to the surface. As the guide nets the fish, the tourist begins to rant about poor sportsmanship and illegality.

The guide calmly lights another stick of dynamite and hands it over. “Are you going to keep running your mouth?” he asks as the fuse sputters. “Or do some fishing?”

Readers here are well advised to invest an hour catching up with last Thursday’s webcast, “2009 Mid-Year Review – Securities Litigation and Enforcement” (archived and available here).

This edition of Bruce Carton’s valuable extensions of his vital news source, Securities Docket, assembled four of the bloggers on my must-read list – Lyle Roberts (10b-5 Daily), Tom Gorman (SEC Actions), Francine McKenna (Re:The Auditors) and Kevin LaCroix (D&O Diary).

It was barren times for the subject indeed, back in 2002 when the Paris newspaper launched my financial and accountancy column. But since then the family of commentators continues to grow, who contribute substantially to the consensus of crisis in the entangled relationships among issuers of financial statements, their auditors, and the hyena herd of regulators, politicians and hostile lawyers.

Along with those noted above: Edith Orenstein (FEI Blog), Dennis Howlett (AccManPro), Tom Selling (The Accounting Onion), and Broc Romanek (CorporateCounsel.net) – and, with apologies, some I’ve surely missed.

The webcast is useful, on a variety of relevant fact-gathering and predictions; so too all the other increased attention. But concerning the on-going threats to the survivability of the large-company audit function, the discussion has yet to go past voyeurism, scape-goating and finger-pointing.

Here it is, seven years since the collapse of Arthur Andersen and the infliction of the ill-considered Sarbanes/Oxley law and its malign effects -- and two years and counting into a financial markets crisis of epic proportions. And not a constructive word is heard on the shape of the future.

Calling the dis-honor roll of those accountable:

The large firms’ leaders are handcuffed to a business model that they are powerless to change, under the combined constraints of the securities compliance regimes and their own partners’ appetites for the status quo of short-term profits. 

Their most vocal critics, among the commentariat, bay the cry of the profession’s self-serving venality, without taking even a first step down the path to re-design an assurance system now presumed (but not proved) to be important or worth working to save. 

The noisiest and most enthusiastic reader comments, meanwhile, range unconstructively from the punitive (“let them fail” and “jail them all”) to the self-destructive (“break up the Big Four” and “up with the little firms”) to the wildly impractical (“mandatory rotation” and “let the government do audits”).

Traditional debate platforms are empty. Former Treasury Secretary Henry Paulson’s Advisory Committee dissolved into insignificance without a trace, a year ago, behind a thin veil of posturing and animosity. The PCAOB, successful at least in perpetuating its own existence, is dribbling on the conflagration with an eye-dropper. Business lobbyists and academics alike are pre-occupied elsewhere.

And with no sign of a politician or a regulator in Washington or London or Brussels having either the vision, the interest or the initiative to take a lead, neither are there any other jurisdictions having the maturity or the salience to provide any influence.

The requirements for a useful forum ought to be within the grasp of the expanding collective of New Media mavens.

Ground rules and administrative questions should be modest enough: on-site or virtually distributed – freely accessed or modestly moderated to minimize the bickering and partisanship – live and real-time or via postings and dialog threads – open only to the credentialized or anonymous – sponsored or subscription or wide open.

Here’s the challenge: If this dynamite stick explodes, it will sink the boat and all in it. So it’s time to fish.

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Independence Day: On The Freedoms to Choose, Use and Abuse Great Personal Wealth

The national celebration this weekend in the United States, and the coming Bastille Day celebration in France, serve as platforms for scrutiny of issues of public policy and private conduct.

Two recent personal experiences provide the context for this question: As a society how should we judge, concerning the balance between private wealth accumulation for personal consumption and its deployment for the public good?

The issues are emotion-laden and politically divisive, not least around the regulation of executive compensation. There, a pigs’ breakfast of policy choices includes salary limitations, bonus caps, use of bail-out funds, and director and shareholder responsibility – and the loftier themes of norm setting and coercive codes of conduct.

(For helpful background on the current state of play in Washington, the always-informative Edith Orenstein had this post last week on her FEI blog.)

Last Saturday I was curbside in search of a taxi when accosted by a waif-like beggar. The dollar I peeled off generated a persistent plea from the wrinkled crone, that she needed eight dollars for a bed in the shelter that night.

Influenced by reasons shortly to be told, I handed over a fistful of small bills – and was rewarded by a rainbow smile and effusive thanks when she realized that her daily quota was made. For the price of a stop at the nearest Starbucks, I had enabled a poor woman to spend a night in the safety and security that her life otherwise lacked.

The stimulus to my altruism was the party we had just left: the conclusion of what had been the most elaborate and costly family ritual ever to cross my vision. We had declined and not attended the main events -- a week of feasting and partying in a far distant venue -- said by guests to have set back the patriarch on the order of $ 8 to $ 10 million.

Recalling all the weddings and bar mitzvahs and sweet sixteen parties that at the time seemed over the top -- on the scale of this extended festival, they reduce in comparison to tea at the Ritz.

To transport the guests, private jets had filled the trans-oceanic skies. Public buildings had been closed – private castles had been opened – platoons of hostelers and caterers and entertainers had exceeded their annual revenue goals. Couturiers and florists and photographers and heavy-weight security guards had all worked overtime. Even on the pale evidence of the slideshow and videos, the maligned notion of “trickle-down” had been a frothy and multi-colored cascade. 

Thinking of the number of homeless shelters that could be supported by the cost of this extravaganza, it would be tempting to point the bony finger of self-righteous indignation – to turn up a censorious bluenose at the questionable morality of such an ostentatious display of personal consumption. 

All the more, since the paterfamilias ranks in the low digits on the Forbes scale of his country’s self-made wealthy. Only exceptional naïveté could believe that he had moved in one generation from pushcart and sweatshop to chateau and polo grounds, unless with the considerable application of both grease and muscle.

And yet: he is a reverent and devout practitioner of his religious faith, generous and philanthropic at a level beyond common contemplation. His annual benefactions are many multiples of the one-time cost of this family celebration, even at its lavish scale. As a percentage of his wealth, the outlay for this week-long party was several orders smaller than the impositions willingly incurred for a typical middle-class wedding or baby shower or graduation ceremony.

And in the end, the entrepreneurship by which he achieved the status to stage such a display of largesse would be untouchable by the debatable constraints of “say-on-pay” or narrow bonus limits – exercises in small-bore legislative vision that are of doubtful effectiveness but only stimulate hypocrisy, evasion and misdirected incentives.

The evidence of society’s broad range of behavior is far too complex and ambiguous to support facile condemnations – that the ownership classes are unexceptionally venal and corrupt, or that every bonus payment is an incentive to greed and over-reaching. Neither, symmetrically, is there any necessary correlation of virtue or magnanimity with the poverty of the ghetto or the favela.

More importantly in the quest for guidance, skepticism is certainly indicated about the potential for leadership from the politicians. In the degraded atmosphere that extends from the tawdry antics of a Berlusconi or the soap opera of a Palin to the expense fiddles of the British parliamentarians and the parade of Republican “affairs of state,” restraint is indicated in expectations for legislated morality.

Does a tithe for the poor excuse the gaudy display of the other ninety percent? Must the owner of two coats yield one to the unclothed? And is it the business of the state to compel the answers? Or if not, then whose?

Those wrapped in the luxury of this extraordinary celebration enjoyed hospitality at an unmatched level. How well they’d have slept in their silks and linens, if mindful of the beggar scratching out the price of a bare cot, is more ambiguous.

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Michael Jackson: Please Get Off the Stage

A diversion from the usual topics -- because Saturday we had the privilege again to hear the exquisite Diana Krall in live performance – maturing and better with each tour.

Unannounced, in the middle of the set, came a sonorous and dirge-like instrumental of “I’ll Be There” – a touching tribute to the late Michael Jackson, and a rare example of taste and restraint in this post-death period of media-driven frenzy.  

It may be churlish to suggest – in a time when the world’s adult challenges include on-going violence and epochal turmoil in the Middle East, financial dislocation around the globe, and political opportunities not seen for a generation in America – that the editors and producers of the channels of news should get over and beyond their voyeuristic fixation with Jackson, and get back to serious business.

All this is for what? The Neverland comparison does a disservice to Peter Pan – who exercised leadership and earned loyalty from his band of boys without drugs, inducements or molestation charges – and who faced pirates as adversaries rather than hiring them as a squad of goons and hangers-on.

The better comparison is with Benjamin Button, the eponymous, reverse-aging hero in Scott Fitzgerald’s story: Brad Pitt in the movie – manifest by Jackson in life, first as the boychild performing grown-up choreography and adult lyrics, who then did not mature but aged instead into adolescent behavior and infantile judgments.

And if there were virtue or ennobling in the pitiable story's end, wrought by physical and emotional family violence and indulgently enabled substance abuse, it would be no more for a talented escapee from the underclass shacks of Gary, Indiana, than for the less fortunate multitudes who suffer and die of the same causes without escaping those oppressive venues.

As for the career. Somewhere at least, there was surely business genius in securing control over the Beatles’ songbook. Less clear is the weight of all that against decades of profligacy and waste.

I plead a generational gap that impedes my “getting it” on Jackson’s music. Under the blazing arc at the end of the ‘60’s that extended from the Beatles and the Rolling Stones across the Atlantic to the post-Woodstock generation, the Jackson Five looked to be a bubble-gum machine, engineered to prop up Berry Gordy’s Motown after the best years of Smokey Robinson, Diana Ross, Stevie Wonder and Marvin Gaye.

In that context, even “Thriller” had its weirder side, foreshadowing – but who knew – the Wacko Jacko to come.

Members of a news-deprived minority who would plead “enough” will have their own candidates for the moments of gag-me excess in this week’s saturation coverage. My own -- so far -- is the self-promoting sycophancy of Larry King’s photo op with Jackson – reminiscent of Richard Nixon’s nausea-inducing drape over the slight but accommodating shoulders of Sammy Davis, Jr.

Relief, for God’s sake! There are serious and real subjects to address. This is, not least, the week we are to learn the sentence to be given to Bernie Madoff. Let’s keep things in perspective.

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Re-Post: The Supreme Court Targets the PCAOB: If Things Could Hardly Be Worse, Might They Perhaps Get Better?

For reasons known only to Mercury, the god of communications, this post from Thursday was not fed to most subscribers. So this re-posting, with apologies to anyone finding or receiving it a second time.

When I went to make breakfast on Tuesday, I found a tempest swirling in my teapot: the report that the United States Supreme Court is to resolve a constitutional challenge to the law establishing the Public Company Accounting Oversight Board – created by the post-Enron legislative spasm of the Sarbanes/Oxley law of 2002.

This is an abstruse squabble over the scope of the presidential authority to appoint government employees classified, without any apparent irony, as “inferior officials.”

Paying almost no attention, the mainstream American media have their priorities right, putting their focus instead on the Court’s agreement the same day to review the criminal conviction of corporate kleptocrat Conrad Black.

The news-consuming public, in other words, understandably has less interest in whether a bunch of rascals are to be thrown out, than if one should be thrown in.

I’m not generally one for wagering, for reasons I’ve spelled out – here – life already being sufficiently full of risks and hazards. But the easiest signal of the high court’s acceptance of the PCAOB’s legitimacy would have been to leave standing the lower courts’ orders. So it is a decent prediction that some time in next year’s term, the axe will fall.

And then?

And then will come the kind of grandstanding that Washington does so well. Led in the Senate by Chris Dodd (D-Conn.), chairman of the Banking Committee, and in the House by Barney Frank (D-Mass.), chairman of the Committee on Financial Services, the elected mob – of whom humorist Will Rogers sagely observed that “no man’s purse is safe while the legislature is in session” – will serve up a new kind of bail-out.

Which is, they will resuscitate the old agency in a new guise, only this time arrayed in bells and whistles reflecting their politicized reaction to the economic turmoil lately inflicted on us all.

And where will the vitally-interested accounting profession figure?

Historically, the high point of their influence lay in securing the franchise of privately supplied assurance, under the audit requirements of the securities laws of 1933 and 1934. In the following three-quarter century, sadly, the degree of attention and respect given to the auditors in the shaping of their regulatory fate has been like that in the research into shark feeding, as given to the food.

Because the Democrats control both houses of Congress and have their rock-star in the White House, the “appointment authority” issue will be repaired with the legislative equivalent of a piece of duct tape or a whack with a wrench. Making it a total non-event, the fix-up will include a wholesale re-adoption and ratification of everything wrought by the then-defunct PCAOB, so the transition will be seamless and invisible – turning the entire affair into little more than an ego exercise for those angling to get their names into the law case reports.

It’s necessary to remember that the Supreme Court’s power runs only to the narrow questions offered. It will not do a qualitative assessment of all the mischief since Sarbox was enacted – not answering, for example, the question that could be reasonably asked by, say, the battered investors in Bear or Lehman or Merrill or Citi or AIG: “Over the last seven years, has the PCAOB made the world of financial reporting and assurance a better place?”

Which means there is nothing to be served by trying to pick a winning side in this punch-up: there isn’t one, in any way that matters.

If adult perspective prevails, the accounting profession will resist the lure of friend-of-court advocacy, saving itself both large legal fees and whatever amity it might salvage for the lawmakers’ debate to come.

For there is now a window, of perhaps six to nine months, in which a blueprint might be developed for the successor agency to be enabled when the Supremes pull the PCAOB’s plug.

Avoiding the post-Enron stampede that flattened all before it in the rush to Sarbox – footnote below -- the accountants along with whatever friends they can muster have the chance to organize in support of a coherent and achievable structure – here.

Namely: federal-level chartering of auditors of US public companies could be combined holistically with standard-setting, oversight, inspection and discipline -- along with investor protection including insurance that would be industry-funded but government-backed, to relieve the firms’ current “survivability” issue – namely, the deadly overhang of life-threatening litigation exposure.

Ambitious – yes, surely. But Dodd and Frank will have their law-drafting pencils sharpened anyway. The opportunity to write on a blank page is too good for the profession to waste.

Note: As I wrote back in July 2002 about the Senate’s passage of Sarbox, “any legislation receiving the bipartisan margin of 97-0 is bound to be fundamentally defective.” You’ll have to trust me, though; as the International Herald Tribune for whom I was then writing in Paris moves closer to full absorption by its parent, the New York Times, its archive has somehow disappeared from internet accessibility – here.

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The Supreme Court Targets the PCAOB: If Things Could Hardly Be Worse, Might They Perhaps Get Better?

When I went to make breakfast on Tuesday, I found a tempest swirling in my teapot: the report that the United States Supreme Court is to resolve a constitutional challenge to the law establishing the Public Company Accounting Oversight Board – created by the post-Enron legislative spasm of the Sarbanes/Oxley law of 2002.

This is an abstruse squabble over the scope of the presidential authority to appoint government employees classified, without any apparent irony, as “inferior officials.”

Paying almost no attention, the mainstream American media have their priorities right, putting their focus instead on the Court’s agreement the same day to review the criminal conviction of corporate kleptocrat Conrad Black.

The news-consuming public, in other words, understandably has less interest in whether a bunch of rascals are to be thrown out, than if one should be thrown in.

I’m not generally one for wagering, for reasons I’ve spelled out – here – life already being sufficiently full of risks and hazards. But the easiest signal of the high court’s acceptance of the PCAOB’s legitimacy would have been to leave standing the lower courts’ orders. So it is a decent prediction that some time in next year’s term, the axe will fall.

And then?

And then will come the kind of grandstanding that Washington does so well. Led in the Senate by Chris Dodd (D-Conn.), chairman of the Banking Committee, and in the House by Barney Frank (D-Mass.), chairman of the Committee on Financial Services, the elected mob – of whom humorist Will Rogers sagely observed that “no man’s purse is safe while the legislature is in session” – will serve up a new kind of bail-out.

Which is, they will resuscitate the old agency in a new guise, only this time arrayed in bells and whistles reflecting their politicized reaction to the economic turmoil lately inflicted on us all.

And where will the vitally-interested accounting profession figure?

Historically, the high point of their influence lay in securing the franchise of privately supplied assurance, under the audit requirements of the securities laws of 1933 and 1934. In the following three-quarter century, sadly, the degree of attention and respect given to the auditors in the shaping of their regulatory fate has been like that in the research into shark feeding, as given to the food.

Because the Democrats control both houses of Congress and have their rock-star in the White House, the “appointment authority” issue will be repaired with the legislative equivalent of a piece of duct tape or a whack with a wrench. Making it a total non-event, the fix-up will include a wholesale re-adoption and ratification of everything wrought by the then-defunct PCAOB, so the transition will be seamless and invisible – turning the entire affair into little more than an ego exercise for those angling to get their names into the law case reports.

It’s necessary to remember that the Supreme Court’s power runs only to the narrow questions offered. It will not do a qualitative assessment of all the mischief since Sarbox was enacted – not answering, for example, the question that could be reasonably asked by, say, the battered investors in Bear or Lehman or Merrill or Citi or AIG: “Over the last seven years, has the PCAOB made the world of financial reporting and assurance a better place?”

Which means there is nothing to be served by trying to pick a winning side in this punch-up: there isn’t one, in any way that matters.

If adult perspective prevails, the accounting profession will resist the lure of friend-of-court advocacy, saving itself both large legal fees and whatever amity it might salvage for the lawmakers’ debate to come.

For there is now a window, of perhaps six to nine months, in which a blueprint might be developed for the successor agency to be enabled when the Supremes pull the PCAOB’s plug.

Avoiding the post-Enron stampede that flattened all before it in the rush to Sarbox – footnote below -- the accountants along with whatever friends they can muster have the chance to organize in support of a coherent and achievable structure – here.

Namely: federal-level chartering of auditors of US public companies could be combined holistically with standard-setting, oversight, inspection and discipline -- along with investor protection including insurance that would be industry-funded but government-backed, to relieve the firms’ current “survivability” issue – namely, the deadly overhang of life-threatening litigation exposure.

Ambitious – yes, surely. But Dodd and Frank will have their law-drafting pencils sharpened anyway. The opportunity to write on a blank page is too good for the profession to waste.

Note: As I wrote back in July 2002 about the Senate’s passage of Sarbox, “any legislation receiving the bipartisan margin of 97-0 is bound to be fundamentally defective.” You’ll have to trust me, though; as the International Herald Tribune for whom I was then writing in Paris moves closer to full absorption by its parent, the New York Times, its archive has somehow disappeared from internet accessibility – here.

Thanks for joining this discussion. Please share with your friends and colleagues. And if not a subscriber, you are invited to join at the Main page – easy, free and non-commercial.