Re:Balance -- Jim Peterson

Of Crimes and Punishments -- And Where Shall Justice Be Found?

 A quiet summer holiday in a mountain village – time to ponder last month’s note from an always-thoughtful reader, on the news that Msgr. William Lynn, then secretary for clergy in the Catholic archdiocese of Philadelphia, had been convicted of child endangerment for allowing priests accused of child molestation to be moved from parish to parish. He asked:

“How is it that the Catholic Church and its senior hierarchy have not also been indicted?”

The question resonated for two reasons. The first was poignant, because the questioner is a retired partner of the Arthur Andersen accounting firm[1] – perhaps the single global institution in the last decade to have paid with its own life for individual wrongdoing at its senior levels. 

The second is the still-unfolding question of sanctions for the global banks, starting with the multi-year conspiracy to rig the London interbank offered rate, which so far has include the defenestration of Barclay’s chairman Marcus Agius, CEO Robert Diamond and COO Jerry del Missier.

The three departed took hidings from the British Parliament’s Treasury Select Committee on July 4^th, 10^th  and 16^th, after the bank in late June had agreed to pay fines totaling some $450 million to the British Financial Services Authority and the US CFTC.

By settling, the bank avoided criminal charges – eliciting speculation as to whether the Libor-fixing scandal will lead to actual indictments of other banks, and querulous criticism from James Stewart of the New York Times – who is also upset about the serial mis-behavior of UBS (here).

Unlikely. With the singular exception of Andersen, the prosecutorial pattern is to allow the institutions to settle:

• Goldman Sachs threw its trader Fabrice Tourre under the government bus in 2010, over its design of a tradable hedging product designed with the input of a favored customer, escaping itself with the fine of an inconsequential $ 550 million (here).   

• The fine of $ 456 million paid by KPMG in 2005, to settle criminal charges by the IRS over its long-running tax-shelter activities, was said by those knowledgeable to have approached the firm’s survival tolerance – but an outside monitor’s supervision and a deferred prosecution agreement allowed the firm to survive and carry on. 

• The revelation of Jerry Sandusky’s decades-long abuse of young boys, under the knowingly tolerant eyes of the authorities at Penn State, cost the jobs of the president and athletic director, plus that of the theretofore sanctifiable coach Joe Paterno – as detailed in the damning report of ex-FBI director Louis Freeh – and now removal of JoePa’s on-campus statue and agreement to accept NCAA sanctions including a fine equal to a year’s football revenue, four years of post-season suspension and the bizarre “vacating” of its football victories since 1998. Thus briefly hobbled by a national sports administration arguably more influential than official law enforcement, the Penn State football program survives, and there is not a whisper of existential threat to the school itself.   

So what does it say about the societal enforcement of the responsibilities of large institutions, that they are normally spared from the ultimate penalty?

Whatever one’s belief about the proper scope of government, my reader presents a profound challenge: how can and should agencies of government act for the public good, with appropriate recognition of the limitations on their competence?

Societies decide on their behavioral norms, their tolerable limits for deviation, and their enforcement expectations from agencies of regulation and governance.

The Andersen experience may prove a rule, that the powers of law enforcement are fundamentally reluctant to threaten the life of an enterprise or institution, no matter how egregious the behavior of its principals.

The weight of anecdotal evidence would appear so.[2] And society has and uses other tools:

• As one effective sanction, the rules of the private marketplace are inexorable. Fallen leaders have taken down entire institutions, from Bear Stearns and Lehman Brothers to Merrill Lynch and MF Global. But the history is uneven: doubtful actors also survive, sometimes with government assistance but also due to the vagaries of bankruptcy and reorganization – recent examples being GM, AIG and Fannie Mae.

• Further, the lottery of civil litigation – with all its flaws, costs and uneven application – provides some reimbursement to some of the wronged – although with the slow grinding of the wheels of the courts, these will impose mainly not on the wrong-doers but on current and generations – Barclay’s current shareholders, and future Penn State students seeing larger tuitions and smaller course selections.

• Thirdly, the fragility of reputation takes its toll: Penn State will fail to attract some future students, and the Church will lose some members. Companies will change auditors, and bank clients will shift their loyalties. 

The conflicts and ambiguities in the punishment of institutions mean that “justice” is not easy to define in practice and even harder to locate and apply case-by-case. 

With that, I can only hope to hear whether this meditation nourishes the reader whose note, with my appreciation, set it in motion.   

 

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[1] Where, by way of reminder/disclosure of a chapter long closed but not forgotten, I also spent a considerable time, although ended before the firm’s death spiral that was Enron.

[2] Not least, because Andersen’s fatal indictment and disintegration can be explained, with the simplicity of Occam’s Razor, as owing to its leadership’s arrogant refusal to face its record as an unrepentant recidivist.     

 

GAAP / IFRS Convergence -- Has the SEC Finally Shut It Down At Last?

With the news on July 10 that the SEC staff’s now-published report on International Financial Reporting Standards would not include a recommendation on whether, when or how the US should get on board, I observed that the whole benighted exercise of “convergence” between IFRS and US GAAP was now, finally and deservedly, dead and buried. 

A knowledgeable reporter pushed back, writing that, “it ain’t over till it’s over.”

Let’s take a look, because it’s hard to be any more “over” than this.

My own view on the desirability of accounting standards convergence fits nowhere on the spectrum of advocacy, from David Albrecht’s “buy American” to Tom Selling’s pleas for intellectual integrity to Yale professor Shyam Sunder’s support for competing systems – much less the profession’s own hand-clapping for the endless process of inching IFRS and US GAAP together.

Rather, without a dog in the fight, I’ve long been convinced that the complexities and judgments within any of the competing sets of standards present ample opportunity for issuers’ self-service and manipulation, beyond the capability and competence of regulators and gate-keepers to achieve transparency or comparability, thus rendering the convergence debate mainly a serious distraction and waste of time and energy.

As I’ve been saying for years (e.g., May 2008), the politicized nature of the process -- including the endless maneuvering and circular finger-pointing among the Financial Accounting Standards Board, the International Accounting Standards Board, and regulators in Washington, London and Brussels -- far outstrips either the case for convergence or the vision and competence of the players to achieve it, even if they wanted to, which they don’t. There is simply neither leadership nor authority to overcome the mutually antagonistic forces – as summarized here in March 2010.

Which only becomes more pronounced with the departure of the SEC’s chief accountant, James Kroeker. As I wrote in May 2010, Chairman Mary Schapiro has shown little energy for the issue – whether from disinterest or under an agenda of more pressing concerns.

As I put it in April 2011:

“Why no-one has called the question on this endless charade reflects the two-level fantasy in the dialog: the IASB and the FASB both pretend to believe in the desirability of fully-converged accounting standards, and the community of financial statement issuers and users pretend to believe them.”  

So why the persistence of this endless exercise – so stalemated that if Saul’s trip to Damascus had depended on an SEC-like “roadmap,” his conversion would never have happened and Christianity would have remained a minor Galilean sect? 

It’s because at bottom, the situation is not so distressed as to call forth real change.

Across great arcs of history, systems degrade toward collapse – Ptolemaic astronomy, the Weimar Republic, American health care. But they only reach the point of fundamental change on two conditions:

• First, the case for change is not only recognized by its advocates, but endorsed by (or more likely, forced upon) the entrenched interests of the status quo.

• And second, that an alternative paradigm is available – as evolution does not occur in a vacuum.[1]    

No less than the examples cited, there is deep and wide dissatisfaction with the current state of financial accounting, reporting and assurance. But it is also true that broad sectors remain committed, like the ancient stargazers, to structures as creaky and obsolete as geocentric models for planetary motion. Namely: 

• Financial statement issuers prefer accounting principles flexible enough to yield their preferred results.

• The first instinct of regulators is to protect and expand their limited turf.

• And the gate-keepers survive on a model unevolved since Victorian times.  

Commentators may continue to assert that there are real mileposts down a possible road to GAAP/IFRS convergence.

But from here, there is no other end: the road for this dead horse is a short haul to the knacker’s yard.

 

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[1] See, e.g., Thomas Kuhn’s far-reaching 1962 essay, “The Structure of Scientific Revolutions”.

The Affordable Care Act is Constitutional -- So What About the Broccoli?

The US Supreme Court’s 5-4 decision of June 28, 2012, upholding what is known for short as the Affordable Care Act and derisively as Obamacare, opened wide the floodgates of commentary. 

With gun-jumping eagerness, news media including both CNN and Fox initially mis-reported the Court majority’s refusal to extend the Commerce Clause of the US Constitution to punish a personal decision not to purchase health insurance:

“Congress already enjoys vast power to regulate much of what we do.  Accepting the Government’s theory would give Congress the same license to regulate what we do not do, fundamentally changing the relation between the citizen and the Federal Government.”[1]

Confounding both handicappers and over-anxious pundits, the Court wrote on to legitimize such an amercement under the alternative rubric of a tax.

All conceivable perspectives have been scrutinized minutely – health care providers and insurers; patients including young, old and those with pre-conditions; and the Court itself and especially the surprising swing vote of Chief Justice John Roberts.

Except one: still unexamined in the flurry of analysis is the perspective of the broccoli. 

It’s an important omission, because this humble member of the cruciferae figured prominently on both sides of the divided Justices’ opposing views, and with important groundings in American history, culture and jurisprudence.

The Chief Justice, widely heralded for the long-term impact of his display of agility and acumen, reasoned as to a refusal to buy health insurance that, “Under the Government’s (rejected) theory, Congress could address the diet problem by ordering everyone to buy vegetables.”

Rather than engage in an exercise of naming, labeling and stereotyping poor broccoli, Roberts thereby took the sensitive and non-discriminatory course, framing his position generically and elevating the level of discourse to political correctness.

Justice Ginsburg in dissent was not nearly so sensitive or circumspect, singling out and specifically pointing her forensic finger at the “crown of broccoli.” 

Broccoli has long suffered a lack of respect. Justice Ginsburg’s chastisement of the Chief Justice for creating “the broccoli horrible” echoes the famous disregard of George Bush the elder: “I haven't liked it since I was a little kid and my mother made me eat it. I'm President of the United States and I'm not going to eat any more broccoli.”

By contrast, other non-human rights have figured with prominence in the national dialogue. PETA and the ASPCA are forceful advocates for the animals. The question, “Who speaks for the trees?” has inspired the environmental movements as well as the historic opinions of Justice Douglas on voting rights and legislative apportionment. Among the lobbyists of K Street, passion is for hire on behalf of constituencies as dubious as machine guns, tea parties and exotic financial derivatives.

Yet it must be asked, “Who speaks for broccoli?”

The Roberts opinion makes it the law of the land that broccoli consumption cannot be mandated as commerce. But combined with its ruling of the same week, salvaging the portion of Arizona’s otherwise excessive anti-immigration statute to permit law enforcement officers with cause to demand proof of legal residence, the Court’s two decisions together mean:

Nutrition police may not force a consumer to engage in commerce by adding broccoli to her supermarket basket. But the power to compel “papers, please” could now enable a sheriff’s shake-down -- “show us your florets” -- in the parking lot of the Food King.

Important issues of policy remain. Penalties for non-purchase of broccoli being barred, it should be comfort to Mitt Romney that his inaction in leaving the family dog confined in its car-top crate is probably not punishable as interstate commerce – however much the costs and expenses of the cross-border family vacation trip might seem so.

Children of libertarian orientation should also be encouraged. The Roberts opinion, forbidding criminal penalties for non-consumption of broccoli, inferentially forbids confinement as a sanction. So broccoli refusal at the dinner table presumably cannot be punished, at least at the federal level, by “go to your room,” or “you’re grounded for the weekend.” 

Although a parental tax would seem to meet with judicial approval, if charged against a youngster’s weekly allowance for uneaten broccoli left on a plate, much future litigation remains over such impositions as suspension of Facebook privileges or limited access to the car keys.

Which suggests an enticement to the liberals -- the potential for a vast bureaucracy to take up the regulatory challenges relating to non-consumption of broccoli.

Governmental agency engagement with non-action is familiar, and nothing new. But bringing together passivity authorities now spread from agriculture and food and drugs to truth-in-labeling and consumer rights, the new “broccoli perspective” would confer official status and recognition on that historic but heretofore informal institution of Washington government – the Kitchen Cabinet.

 

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[1] Footnote. The opinion of the Court made do with only 14 of them. Justice Ginsburg’s longer dissent consumed 27; the unsigned four-Justice dissent packed its text even longer by using only 15. Known for his silence during oral argument, Justice Thomas in his separate two-page dissent needed none at all.