April 04, 2013
Self-policing Markets

Lynn Parramore at Alternet:

LP: One look at your Yale syllabus shows that fraud has been rife through business history. Yet for the last 20 years, many people have insisted with near-religious conviction that markets are efficient and therefore resistant to fraud. Where is this belief coming from, and why is it a problem?

JC: It rests upon an assumption that is deeply flawed, and that is that the people who are stewarding your capital in the marketplace — the boards of directors and the people that the boards hire — management — are acting not only in your best interest, but are playing by the rules all the time, so that, for example, the accounts that the company puts together for the accountants (and keep in mind, management prepares financial statement, not accountants, not the auditors) are accurate. The auditors simply review them, and that’s an important point I always stress to my class. If there are games being played, and if you read the boilerplate of any auditor’s opinion, it says “we rely on the statements of management” — and so if, again, the people in the corporate suite have ethical flaws, we have a system based on truth-telling that may not be exactly always accurate.

I point out to my class that in 1998 there was a survey — Business Week (which is owned by McGraw-Hill) and McGraw-Hill (which also owns Standard and Poor’s) had a conference for the S&P’s 500 chief financial officers. They asked these chief financial officers if they’ve ever been asked to falsify their financial statements by their superior. Now, the chief financial officer’s superior is the chief executive officer, or the chief operating officer — basically the boss. It was a stunning — of course anonymous — survey. 55 percent of the CFOs indicated they’d been asked, but did not do so. 12 percent admitted that they’d been asked and did so. And then 33 percent said they’d never been pressured to do that. In effect, only one third of the companies in the S&P’s 500 at that time did not have a CEO or COO try to pressure their financial officer to falsify financial results.


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Posted by Jerome Doolittle at April 04, 2013 12:40 PM
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Now that would be an interesting class to take, lots of new insights and new knowledge.

Posted by: JoyfulA on April 4, 2013 10:18 PM
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