It’s Christmas and whether you celebrate this time as a Christian to honor the birth of Jesus Christ or you practice Islam, Judaism, Hindu, Buddhism or you’re secular, this is a time to let peace reign.
Look to the sky, meditate on a bright radiant star or light a candle and bask in the energy of its light or flame. Then, know that the calm gold shimmering light, the warm feeling it brings you and the peaceful calmness that relaxes you are special. These converge upon you from the radiant smile, open arms, congenial demeanor and kind acceptance of a Ghaznavid princess. The power of her profoundly peaceful energy once released from her heart to her spirit can propagate across the globe to reach you. It can only be invested by God. On this Christmas day by the will of God and by the light and energy he brings to you from across the greatest oceans, over mountaintops and over the great continents to reach you from the smile of this precious princess also arrives the genesis of a cure for racial divide, contributing to our world’s peace.
In 326BC Alexander the Great met Raja Porus in battle in the Punjab. King Rai Por, said to be an early ancestor of the Janjua emperors, must have seemed intimidating to young Alexander as he and his armies arrived on elephant back to face Alexander. However, Alexander the Great, the philosopher king educated by Aristotle, perhaps the world’s greatest philosopher, was able to defeat King Rai Por. Breaking the traditions of the time, and in rare form even among today’s victorious armies, Alexander asked King Rai Por how he’d like to be treated. King Rai Por’s answer to Alexander the Great was, “As a Raja king.” Perhaps from divine wisdom instilled in such a young and most powerful king as the world had seen, Alexander restored King Rai Por to his throne establishing a vassal kingdom.
By 1001AD Sultan Mahmud, the king of Ghaznavid, had extended his empire from the Punjab Alexander the Great once conquered northerly out of India, across what is today Pakistan and covering modern Afghanistan and part of modern Iran. Sultan Mahmud was expanding his empire through multiple campaigns to convert the Hindus to Islam. His first campaign in India was against the Janjua King Jaipal. Mahmud routed Jaipal’s army with a cavalry of about half in number. When all was done, nearly 20,000 of Jaipal’s soldiers had lain dead. With the same benevolent hand as Alexander the Great, the Ghaznavid Sultan released the Janua king to rule a vassal kingdom. King Jaipal ultimately immolated himself ritualistically out of embarrassment to his people.
The world seems to be plagued more than ever with racism, ethnic violence, political divide and religious wars. The blood of our greatest philosopher kings pulses through the veins of some of the precious and beautiful people living in the very lands those kings once conquered. Still, there is unrest across great divides in those lands, in America across Africa and the world over. Racism and ethnic divide drives a great deal of violence and injustice,even today, after significant efforts of modern day philosophers and teachers like Martin Luther King, Jr. But, emanating from the brilliant, radiant and bright smile of a Ghaznavid Princess and from her kind act of acceptance and congeniality on Christmas day and facilitated by the will of God, the cure for racism, ethnic divide and a giant step toward world peace is given to us.
There is no virtue in the universe more powerful to heal than the virtue of love itself. Socrates and Plato pondered this virtue among others before Plato played the role of the educator of Aristotle whom was the educator of our philosopher king Alexander the Great. No government, captor, king, president, sultan, ruler or jailor can take control over who we love. Love is the one virtue which is a liberty that we control solely. Government can not mandate us to love anyone. However, we can use overwhelming love worldwide to heal the universe for past atrocities and incivilities which we did not personally commit but from which we often suffer the consequences.
Here is the simple cure for racism which can and will bring us at this very moment around the world closer to peace than ever.
You must find someone of another race, ethnicity, sect or religion and fall in love with that person!
I am not suggesting ending marriages and relationships that already exist. You can fall in love with someone of the same gender in the way you love your brothers and sisters, your mom and dad, aunts and uncles, etc. It is important to let down defenses, reduce the ego and become proactive by not being reactive. We can not hold ourselves back from loving someone of another skin color or religious sect because either we have been hurt or our ancestors had been hurt by people of that color or sect in the past. Once you strive toward true and unselfish love for that person, good things will happen and this love will grow beyond any conscious level of love in the world’s history. You will admire the accomplishments of this person from another race. You will feel happy by seeing their smile. You will respect them for their skills and/or try to emulate their successes. You will feel emotional about their plight and you will open doors and give them opportunities that no government or legislation can give. You will love their brothers and sisters, their mother and father and their children. You will fall to your knees, weep and pray for the success of their family and their children. And before you know it, you will start to behave like the philosopher kings that had spared the lives of those kings they conquered. It seems almost magical or mystical that God driven healing examples of benevolence and kind generosity from the early philosopher kings would set an example for a beautiful radiant Princess whose kindness and congenial nature would be shared across the globe and bring us closer to world peace.
Thank you your Majesty
Copyright The Regulator from Rogues Harbor
Friday, December 25, 2009
Tuesday, December 15, 2009
Following an Unconstitutional P.C.A.O.B. Makes our Acts Illegal
For my friends that like to glamorize socialism as the fashionable means to save the world, I would like to remind you of a few things. Please be aware that regardless of promises of a better life for all, the rosy outlook you gain from fiery speeches of change and the overwhelming exuberance that spreads across the population like wildfire. Communism always meets with the same tyrannical result. Ultimately, history has shown us that every communist regime has murdered millions of its own people.
You may try to rationalize that free markets and capitalism are the problem and that communism lite or humanitarian socialism is the solution. Worse yet, you may either deny outright that policies are socialistic when they actually are or you may be unable to identify socialistic or communistic policies when you see them. I'm often criticized as an alarmist, insightful or radical for my views on capitalism, free markets, free enterprise and individual liberty and freedom. Just remember, an unconstitutional board with tremendous, broad and far reaching regulatory and enforcement power over accounting rules could ultimately influence every market in the country and beyond in some cases. It could control food sources, capital flow, fuel, heat, clothing, farming, manufacturing, water sources, healthcare, university education, banking, lending, firearm and ammo sales and drug manufacturing and distribution for treating diseases. It's very similar to the national socialists that usurped the power in Germany during the Second World War. They implemented their policies under the rule of law. Once they had total power, they changed the laws. Then, within the confines of the rule of law, the national socialists were able to get the people to carry out their tyranny of committing atrocities.
Have you ever been caught in a situation where someone was getting treated unjustly and the low level bureaucrat in charge of the situation would state, "We have to do this, it's the law?" Imagine. The P.C.A.O.B. may be doing that as I'm writing currently. And, when we hear that statement that, "The law is the law," we tend to believe it or act accordingly as if it's true or as if the law makes committing an atrocity against someone ok. Well, if the S.C.O.T.U.S. ultimately rules that the P.C.A.O.B. is unconstitutional, it was acting as if, and we were believing that, "The law was the law and we needed to act accordingly." But, what we thought was the law, was not the law and it was all a rouse under these conditions because the board would have been an unconstitutional and illegal agency. Lastly, if you unwittingly or unscrupulously act as an agent of an unconstitutional board, or act upon a law that it makes under the pretense that you’re operating within the confines of the rule of law, you are acting illegally and unconstitutionally. Thus, just as the national socialists that were held accountable and tried after World War II, you too should be held accountable.
We have a responsibility to act constitutionally. We cannot just carry out duties and simply state, "Well it's the law." You must refuse to act upon unconstitutional laws given to you by legislatures, agencies or executive authorities. This breaks the cycle of tyranny. The lawmakers, agencies and executives may pronounce that there is a crisis involved, and therefore, the constitution is unimportant and you needn't follow it. Once again, in this circumstance, if you follow the law and ultimately it is an unconstitutional law, you are acting illegally and you are thus as dangerous and harmful as the German national socialists from World War II.
Act constitutionally. Refuse to carry out or follow the edicts of the illegal P.C.A.O.B. and stop the following from occurring (http://bit.ly/76cven):
You may try to rationalize that free markets and capitalism are the problem and that communism lite or humanitarian socialism is the solution. Worse yet, you may either deny outright that policies are socialistic when they actually are or you may be unable to identify socialistic or communistic policies when you see them. I'm often criticized as an alarmist, insightful or radical for my views on capitalism, free markets, free enterprise and individual liberty and freedom. Just remember, an unconstitutional board with tremendous, broad and far reaching regulatory and enforcement power over accounting rules could ultimately influence every market in the country and beyond in some cases. It could control food sources, capital flow, fuel, heat, clothing, farming, manufacturing, water sources, healthcare, university education, banking, lending, firearm and ammo sales and drug manufacturing and distribution for treating diseases. It's very similar to the national socialists that usurped the power in Germany during the Second World War. They implemented their policies under the rule of law. Once they had total power, they changed the laws. Then, within the confines of the rule of law, the national socialists were able to get the people to carry out their tyranny of committing atrocities.
Have you ever been caught in a situation where someone was getting treated unjustly and the low level bureaucrat in charge of the situation would state, "We have to do this, it's the law?" Imagine. The P.C.A.O.B. may be doing that as I'm writing currently. And, when we hear that statement that, "The law is the law," we tend to believe it or act accordingly as if it's true or as if the law makes committing an atrocity against someone ok. Well, if the S.C.O.T.U.S. ultimately rules that the P.C.A.O.B. is unconstitutional, it was acting as if, and we were believing that, "The law was the law and we needed to act accordingly." But, what we thought was the law, was not the law and it was all a rouse under these conditions because the board would have been an unconstitutional and illegal agency. Lastly, if you unwittingly or unscrupulously act as an agent of an unconstitutional board, or act upon a law that it makes under the pretense that you’re operating within the confines of the rule of law, you are acting illegally and unconstitutionally. Thus, just as the national socialists that were held accountable and tried after World War II, you too should be held accountable.
We have a responsibility to act constitutionally. We cannot just carry out duties and simply state, "Well it's the law." You must refuse to act upon unconstitutional laws given to you by legislatures, agencies or executive authorities. This breaks the cycle of tyranny. The lawmakers, agencies and executives may pronounce that there is a crisis involved, and therefore, the constitution is unimportant and you needn't follow it. Once again, in this circumstance, if you follow the law and ultimately it is an unconstitutional law, you are acting illegally and you are thus as dangerous and harmful as the German national socialists from World War II.
Act constitutionally. Refuse to carry out or follow the edicts of the illegal P.C.A.O.B. and stop the following from occurring (http://bit.ly/76cven):
Monday, December 14, 2009
On Auditor Independence
On Auditor Independence
For more than a decade auditor independence has come under scrutiny by the public. Professor Yin Xu of Old Dominion University, which is my alma mater by the way, published a very eloquent article on the website of The Free Library entitled, “Whither the public accounting as a profession: historical lessons of auditor independence in the U.S.,” which chronicles the history of auditing and auditor independence in America, (http://bit.ly/5YVQrD). Professor Xu’s paper is very thorough and takes us step-by-step from the genesis of the auditing profession and the birth of the concept of independence through our latest round of accounting failures with the Enron/Anderson disaster. Through Dr. Xu’s paper, I’ve identified perception weaknesses among some practitioners and academicians within the accounting discipline if not the overall accounting profession itself as well as some structural problems that plague the profession likewise.
The accounting profession exists within a broader economic spectrum and within a broader political environment. The independent audit of the financial statements of a publicly traded company serves that broader world existing outside the accounting profession. Plain and simply, the audit is supposed to say to the end user that the financial information reflected within the statements is reliable. Therefore, it’s important to focus on the end purpose of the financial statements themselves. Audited financial statements have multiple uses; however, they are traditionally used for current or potential investors to evaluate the company being audited, bankers to make lending decisions, management to make capital structure decisions and in the case of banks for potential customers to make depositing decisions. Thus, largely the financial statements are relied upon for companies to raise capital and for investors to make prudent decisions. Therefore, the auditor has a significant role in maintaining the integrity of the market place; the accounting profession is a part of the capitalistic market place and a part of free market capitalism.
If the information in the financial statements is reliable and there are no hidden surprises, lenders stand ready to lend with shareholders standing ready to invest, and the capital markets continue to flow smoothly. This allows liquidity in the market and as you can see, the independent auditor is an important part of ensuring this liquidity necessary in capitalistic markets. Another important aspect of liquidity is an open market with few barriers to entry. This includes having few barriers to exit also. Thus, the independent auditor’s report is equally important to reveal to potential or current lenders and investors weaknesses in the financial structure of the audited company. Therefore, capital can be shifted away from failing companies allowing it to be absorbed by those companies that are profitable. Once again, the independent auditor has served as the steward of capitalism.
It must be noted here that the accounting principles underlying the audit must be relevant and reliable and developed and implemented to reflect the true overall financial structure of the company. Otherwise, a company may be given an unqualified opinion on an audit by an independent auditor yet have worthless financial statements for decision making purposes if the underlying principles don’t reflect the truth. The end user could unknowingly invest in a company with an overall unhealthy financial structure if off-balance sheet financing is used. The balance sheet may appear healthy yet the non-transparent off-balance sheet items are threatening to the company because week or flawed underlying accounting principles were developed and applied. This is where a financial statement user gets hit with on of those above mentioned hidden surprises; however, this requires scrutiny and research to determine the efficacy of the standards being set and quite possibly the standard setting body.
Dr. Charles W. Calomiris, American Enterprise Institute visiting scholar and Columbia University Professor of Financial Institutions points out in his study, “Banking Crises and the Rules of the Game,” that historically government imposed rules set in motion the conditions for banking distress and failures (http://bit.ly/3bRbrh). His paper states that risk-inviting rules causing structural constraints restraining competition, preventing diversification of risk and limiting the ability to deal with shocks caused bank failures. Dr. Calomiris is a proponent of and points out the need for a properly structured centralized bank to reduce liquidity risk without perpetuating moral hazard. Often, banking and financial market failures insight critics to pronounce capitalism, free-enterprise and free markets to blame. But, we must not forget that in America exists a unique blend between business and politics, regulators and regulated and government and industry. Therefore, it’s important to analyze all the variables involving all the parties and entities involved in a dynamic industry like banking before making decisions. It would be foolish to look to government as the solution while ignoring and refusing to at least analyze it as part of the problem.
In the United States, accounting failures arguably arose from conditions set in motion by regulatory bodies in the same way Federal Government agency rules set in motion the propensity for banks to fail. Remember, in essence, the independent auditor is the steward of the free market. Provided he is independent both in fact and appearance and the underlying accounting principles applied by the auditee reflect truthfully the financial status of the company in the financial statements, the independent auditor’s opinion signals to investors and lenders whether or not the company’s financial statements are in fact reliable. In turn, investors and lenders are able to make decisions to steer resources into or out of that company. In free market capitalism it is paramount that those companies approaching failure be dissolved whereby the resources of those companies can be steered to those that are profitable. More current accounting rules favored by other Federal Agencies like the F.D.I.C. using off balance sheet financing and in essence Government approval and support to lie to investors and shareholders contributed to America’s economic crisis and financial market meltdown in 2008, (http://bit.ly/5ycgmW), (http://bit.ly/4nRhWj), (http://bit.ly/7rQ472). Fortunately, it seems that the Financial Accounting Standards Board, thanks to the efforts of Chairman Robert Herz, was able to subvert the efforts of regulators within the F.D.I.C. to impede the free flow of financial markets solely to shore-up the banks run by their cronies that should have been left to fail, under the guise of protecting the American public. Unfortunately, all too often when there is a Government induced failure by tampering with the free flowing and natural physical principles of the market, free market capitalism and free enterprise is to blame. In 1934, the Securities and Exchange Act of 1934 required publicly traded companies to file audited financial statements with the S.E.C (http://bit.ly/8Rb7vo). In my opinion, this was the end of independence in auditing for reasons I will later describe, and in essence the beginning of the government takeover of what are supposed to be free markets of trade in America. This opened the door for later events causing accounting failures to occur.
I’ve established the independent auditor’s place in free market capitalism already. Briefly, let’s relate the independent auditor’s role as the steward of industry to professionalism within the realm of the accounting profession. Now will be a good time to actually define free market capitalism as well.
First, what is free market capitalism or free enterprise? Webster’s dictionary most simply defines capitalism as an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market (http://bit.ly/4pymwB). Dictionary.com defines capitalism as an economic system in which investment in and ownership of the means of production, distribution, and exchange of wealth is made and maintained chiefly by private individuals or corporations, esp. as contrasted to cooperatively or state-owned means of wealth (http://bit.ly/6J9L6p). Investorwords.com defines free market as Business governed by the laws of supply and demand, not restrained by government interference, regulation or subsidy, (http://bit.ly/7nBckn ). Thus, we can conclude that free market capitalism involves private ownership of and decision making over the capital or goods involved in production of goods and offering of services in a market place unencumbered or hindered by government and dictated by the laws of supply and demand.
There are a few things, fundamentally, you must understand about liberty, individual rights, freedom and property before you’re ready to start learning anything about business in the United States, period! You must understand the idea of a constitutional government, the rule of law and that these are fundamental to business, government and politics in America. And, you must understand John Locke and his influence on the founding fathers of America (http://bit.ly/6Fvfqe).
If there is one document that influenced America’s founding fathers more than any other when they were drafting the U.S. constitution, it is Magna Carta (http://bit.ly/4K92kK). Winston Churchill said in 1956, “…here is a law which is above the King and which even he must not break. This reaffirmation of a supreme law and its expression in a general charter is the great work of Magna Carta; and this alone justifies the respect in which men have held it,” (http://bit.ly/4K92kK). Although Magna Carta gave us the foundation of constitutional government, there are fundamental differences extant between Magna Carta and the U.S. Constitution. “In 1957 the American Bar Association acknowledged the debt American law and constitutionalism had to Magna Carta and English common law by erecting a monument at Runnymede. Yet, as close as Magna Carta and American concepts of liberty are, they remain distinct. Magna Carta is a charter of ancient liberties guaranteed by a king to his subjects; the Constitution of the United States is the establishment of a government by and for "We the People,"” (http://bit.ly/4K92kK).
I will briefly connect the dots and therefore correlate the concept of auditor independence with the aforementioned reference to Magna Carta, constitutionalism, liberty freedom and property rights. Then, I’ll move on to John Locke, which hopefully will help pull all this together.
Magna Carta evoked thought about constitutionalism in our founding fathers. With this came a way of thinking that was taken to heart by founding fathers like Thomas Jefferson given to them by John Locke about life, liberty and property (http://bit.ly/6Fvfqe). The Second Treatise along with his other works, very much impressed Thomas Jefferson. So, Locke's ideas very likely played a role in the writing of the Declaration of Independence and the Constitution of the United States (http://bit.ly/6L3JMF). There is contemporary thought that Jefferson changed Locke’s words while writing the Declaration of Independents because of the issue of slavery. I’ve not found any source information on this as of yet, and if I do at a later date, I will explore it. However, in contemporary times it could be and often is argued that the founders believed in slaves as property and therefore, their ideals are flawed and any reliance upon them should be disregarded and it is time for new ideals and a new form of thought. Those arguments can be rebuffed by the fact that John Locke was against the institution of slavery and never owned them personally. Yes, Locke did profit from investments in the world’s largest companies involved in slave trading; however, he no more actively condoned or participated in the slave trade than you or I participate in child labor when purchasing a pair of shoes made in China from Wal-Mart. Thus, even if Jefferson had issues with including property in the Declaration of Independence, a document along with the U.S. Constitution guaranteeing individuals liberty, freedom and rights because he considered slaves as property, Locke didn’t see them as such. Therefore, you may conclude that within the mindset of Lokean thought, which permeated the basis of thinking among American founders, even though the words aren’t scripted, that life, liberty and the pursuit of happiness includes property. The Fifth Amendment to the U.S. Constitution guarantees us certain property rights, which the U.S. Supreme Court limited in the same era that the Securities and Exchange Act of 1934 unscrupulously usurped property rights from individuals through regulation (http://bit.ly/6Fvfqe). I’ll explore these shifts in American thought on property shortly.
Professor Xu’s article states, “The exact origin of audits of financial reports is not clear, but it is known that as early as the fifteenth century auditors were called upon to ensure the absence of fraud in the record kept by stewards of wealthy household estates in England,” (http://bit.ly/5YVQrD). Thus, from the genesis of the independent audit, the independent auditor was called upon as a protector of property. This was decidedly Lokean in nature.
Now, I must reflect back to the beginning of this paper and address the concept of perception weaknesses among accounting professionals, accounting professors and teachers, the broader business community served by the accounting profession, lawmakers and the accounting profession itself. Once these are addressed, there will be a better understanding where the accounting profession and the independent auditor fit into the universe. Then, I can address the aforementioned structural problems which have grown by the lack of understanding of those in government and/or responsible for oversight and governance of the overall philosophy of the accounting profession, how auditing fits within the profession and free capitalistic markets and how both are a part of the broader political and capitalistic universe.
Sometimes, the accounting profession views itself through a very limited scope. Professors, decision makers within the standard setting bodies, regulators and individual CPAs often see themselves as separate or unique from the broader business world. The term “professionalism” or “professional” it seems conjures an image in the minds of some within the profession that they are the privileged few that have achieved the required education, demonstrated proficiency through testing and possess special insight and understanding of all things important within the profession. Therefore, a sort of elitist attitude becomes prevalent. And soon, you have a group of elitists in an ivory tower making decisions and implementing rules over the profession that impact the broader business world or community, yet, they may have little understanding of that broader realm.
Yes, it is important for the accounting profession to have standards. Minimal educational levels and demonstration of proficiency through thorough examination are paramount to professionalism. Practitioners within the accounting and auditing profession in contact with clients on a daily basis actually have the greatest insight and understanding of their role within the broader business community. It’s when centralized standard setting or regulatory bodies begin to lay down principles, rules or guidelines as some sort of an edict for those within the profession to follow without rule makers possessing broader understanding of the world in which the accounting profession is a microcosm or, worse yet, whereby the rule makers ignore the natural principles of that broader world motivated by political influence that problems arise. Therefore, it is paramount for the accounting profession to perceive it’s self as a part of the business community. It serves an important role in capitalism and enterprise within our broader economy. Professional accountants and auditors are more than buttoned down bureaucrats following edicts generated by politics and handed down by government agencies. The independent auditor has an obligation to end users of the financial statements and not to the government or the accounting profession. In the same light, the accounting profession and the accounting principles the standard setting bodies adopt must be developed with the same purpose in mind.
Related to the topic of professionalism, it is important to examine a statement in Professor Xu’s paper (http://bit.ly/5YVQrD). While describing changes that took place within the accounting profession throughout the 1980s and 90s, Professor Xu writes, “While concern about a potential lack of independence in auditors existed, the profession had been going through a tremendous change by adopting a more capitalistic fashion of market strategy. It had been common that auditors utilized advertising, personal selling, and other advanced marketing techniques to capture as much of the market as they possible could. As a result, the public accounting firms had aggressively expanded into more and more diverse areas of consulting and other non-audit services. It was all perfectly legal and legitimate business activity at the time, but somehow it did not seem professional,” (http://bit.ly/5YVQrD). This is disconcerting to me, and this statement cuts right to the heart of the matter that governmental elitists and academic elitists definitely foster ideals that are adverse to American thinking, American values and American freedom necessary for a robust economy of free enterprise in America.
Dr. Xu points out firms in the accounting profession had begun more aggressively pursuing market share and profits. She describes this as tremendous change and more capitalistic as if to allude to the profession as something other than capitalistic in the past. As far as I’m aware, firms and professionals within the accounting profession have always seen themselves as capitalists. She then describes the diverse services offered as legal at the time (http://bit.ly/5YVQrD). The tone of this statement makes it seem that perhaps expanding your line of services, aggressively pursuing market share and increasing your profits should be illegal! Lastly, Dr. Xu tells us that even though free market enterprise for accounting firms was legal, it seemed unprofessional.
This is where we have to be particularly careful to safeguard ourselves against the subtle creep of idealism into policies, rules and conventional thought within professions, business, laws and our minds. Dr. Xu has a fundamental primary education in China. Nothing against her, I’ve never met her personally, but, we must understand that her frame of reference is steeped in communism! She’s demonstrated that she’s studied the history of the accounting profession well by sighting many resources within her paper that she’s obviously read. Yet it’s obvious by her statement on capitalistic approaches to business and professionalism, she has a fundamental flaw in her perception of business, free market enterprise and where the accounting profession fits into it all. It would be unfair to fault Dr. Xu alone for this. We have a broader more systemic problem that if allowed to go unfettered and unchecked will only grow worse. Just simply conduct a search of the universities in the United States with PhD accounting programs. Then, search through the university’s site to find the page with the PhD candidates’ profiles. Also, the university will provide statistics related to the candidates’ undergraduate grade point averages and entrance exam scores as well as the background of these students. You’ll find that an extraordinary amount of these students are foreign. This does not appropriately reflect the makeup of the American population, by the way. Let’s not forget that these PhD students will soon be accepted with full weight and backing of the name of an elitist institution as the renown expert on their field of study. Many of these students come to our institutions with a fine fundamental education in communism and economic systems contrary to what belongs in America.
Some will argue that these students belong in the PhD programs simply because they have the highest scores on entrance exams and their grade point averages are the highest. So, we don’t get well rounded leaders under these conditions. Nor do we necessarily get the smartest candidates. What we get are candidates that have spent a lifetime sitting at a desk 16 hours a day solving calculus problems, being taught to the test that may never have thrown a football, played a violin or guitar, gone surfing or hit a baseball. All of which are part of a sound American experience. Also, many of these candidates may be lacking in common sense just as Dr. Xu is lacking in common sense in her understanding of free market capitalism, professionalism and the accounting profession!
I sit peering out the second story window over the Albemarle Sound as I write this paper. I’ve spent most of my life here, in what my friends just north of me in Virginia would have referred to snobbishly as Rogue’s Harbor in 1653 (http://bit.ly/4ZTV4q). This area as well as the Tidewater area of Virginia, home of my Alma matter, Old Dominion University, is steeped in American history. I would suggest to anyone in want of gaining a significant understanding of what American freedom and liberty is all about coming here, unplugging from all media sources for a time and reading the words of those who formed this great nation. John Locke, the seventeenth century philosopher that provided the framework of thought for our Declaration of Independence and our right to life, liberty and property wrote the Fundamental Constitutions of Carolina (http://bit.ly/5Uca8g). Thomas Jefferson used Locke’s words in our founding documents. Jefferson was educated at the College of William and Mary. It was the second college in America. I attended Old Dominion University where I received my degree in accounting. Old Dominion University was started in the 1930 as the Norfolk Division of The College of William and Mary (http://bit.ly/7LjlMF). In 1962 Old Dominion was converted to a state school and became its own entity. Thus, I like to facetiously say I got my accounting degree from the Norfolk Division of Thomas Jefferson’s school, William and Mary. I know, it’s a stretch, but it’s fun. And, even though I’ve lived down in Atlanta, Georgia and Virginia, I’ve never enjoyed as much solace from the surrounding waters, freedom and understanding of the liberty promised by the great thinkers like Locke and Jefferson as I feel here watching the sunset over the sound in Rogue’s Harbor. You can read Locke, you can debate Locke you can fight your best friend, professor or spouse over Locke, but, coming down here and erasing prevalent indoctrinations from your mind while meditating on a full moon over the sound is the only way to feel Locke. And, you must feel Locke to have any inclination about business, property, rights, the independent audit, freedom and liberty in America.
George M. Stephens describes Lokean theory on property on the website of the John Locke Foundation (http://bit.ly/6Fvfqe). By now, I’ve been over this several times and it should be impressed upon the reader how important individual property rights are to the foundation of America. However, Stephens goes on in the website to chronicle several Supreme Court decisions that in essence eroded individual’s property rights. Without getting bogged down in the minutia of these cases, it’s merely important to note that this shift away from protecting individual’s property rights began with the Supreme Court’s decision in Euclid Village v. Ambler Realty in 1926 (http://bit.ly/6Fvfqe). The court’s ruling established that there need only be a rational relation to a public purpose of land being taken in order to escape judicial scrutiny (http://bit.ly/6Fvfqe). Simplistically, The Court relegated the Fifth Amendment rights related to takings of property less important than the rights of speech in the First and against illegal search and seizure in the Fourth (http://bit.ly/6PMNY8). Thus, in one fell swoop The Court had stripped the basic property rights America was founded upon and individuals had been guaranteed dating back to Magna Carta in 1215. Take notice that shortly after this landmark case the door was opened for many sweeping changes in government like the Securities and Exchange Act of 1934 takeover of private markets and in essence the truly independent audit.
The following statement will garner vast criticism; however, it’s true, it must be understood and it must be accepted in the heart almost religiously by anyone desiring success in business in the United States. The government, on any level, has no business involving itself in business in America! Our political system, which guarantees liberty, freedom, individual rights and the right to private property, including business property was given to us by our founding fathers. Thomas Jefferson wrote in the Declaration of Independence, "Prudence, indeed, will dictate that governments long established, should not be changed for light and transient causes; and, accordingly, all experience [has] shown that mankind are more disposed to suffer while evils are sufferable than to right themselves by abolishing the forms to which they are accustomed. But, when a long train of abuses and usurpations, pursuing invariably the same object, evinces a design to reduce [the people] under absolute despotism, it is their right, it is their duty, to throw off such government, and to provide new guards for their future security," (http://bit.ly/4U65ho ). The Securities Exchange Act of 1934, (http://bit.ly/8Rb7vo), was the beginning of the Federal Government takeover of capital markets and thus free enterprise in America. This was the first step in the Jefferson described long train of usurpations obliging us to throw off government chains over markets and implement revolutionary free market changes.
The tide of socialism and communism around the world was rising in 1926 during the Euclid decision and in 1934 when congress passed the Securities Exchange Act of 1934. The ideal of public interest or collective interest stems from the socialistic school of thought. This was the era that spawned the beginning of the end of big government guaranteeing the protection of individuals’ rights. The Act is permeated with language using words like, “In the interest of the public, or “As the Commission deems necessary,” (http://bit.ly/8Rb7vo). I would ask any business owner or corporate board chairman or stockholder for that matter whether he wants the S.E.C. to deem what’s necessary for his business. The Act presented the Commission as seemingly benign and for a benevolent purpose initially, leaving the accounting profession to remain self regulated; however, the Act is riddled with language like this, “Each audit required pursuant to this title of the financial statements of an issuer by a registered public accounting firm shall include, in accordance with generally accepted auditing standards, as may be modified or supplemented from time to time by the Commission,” which leaves the Commission legal authority to make arbitrary decisions (http://bit.ly/8Rb7vo). Thus, the Commission may have left the accounting profession to be semi-self regulating initially, but, it’s been increasingly usurping more and more power over the markets since its inception. Yet, it hasn’t prevented one accounting, banking or stock market failure. In fact, the S.E.C. has opened the door for these failures by duping the public into thinking the Commission has individuals’ investment interests at heart. With statements like, “As the Commission deems necessary, “and, “In the interest of the public,” how could the S.E.C. foster individuals’ or businesses’ property rights? Professor Xu tells us about the S.E.C.s greatest failure in her paper, “One year after the SEC issued the final independence rule, one of the largest accounting scandals in history--the Enron/Anderson scandal occurred, followed by the demise of Anderson,” (http://bit.ly/5YVQrD). This was in 2001, seemingly after the S.E.C. had issued it’s independence rule fixing all the problems related to the independent auditor. This prompted the S.E.C. to develop a whole new set of rules with the help of congress under the Sarbanes-Oxley Act that once again are destined for failure and are under judicial scrutiny relative to their constitutionality as this paper is being written.
I tend to rely on the founding documents of America and the portion of American History that evokes patriotism and strong emotions to build my argument that we Americans were promised something special and big government regulatory agencies like the S.E.C. take these things away. Also, I rely on common sense that the hindrance and costs resulting from the rules and edicts of these agencies are bad for business. From these, I build my argument that the S.E.C. is unconstitutional. These arguments are credible and may evoke interest and/or empathy from many. But, in America, it takes strong legal persuasion and judicial acumen from legal scholars to forge legal changes in the judiciary. Some of our greatest contemporary legal scholars argued or heard arguments on the constitutionality of the Public Company Accounting Oversight Board, or P.C.A.O.B., before the Supreme Court of the United States, or S.C.O.T.U.S., on December 7, 2009 (http://bit.ly/8zuJcX). The P.C.A.O.B. is a board appointed by the S.E.C. and given authority by the Sarbanes Oxley Act. At issue is whether or not the structure of the P.C.A.O.B. is constitutional under the separation of powers provision and considering what contemporary legal scholars call the unitary executive theory. Thus, even tough I consider the entire S.E.C. an unconstitutional body, and there are constitutional scholars that have made this argument much more intelligibly than I’m capable of making it under the unitary executive theory (http://bit.ly/8d9Fkb), Chief Justice John Roberts, Justice Samuel Alito and Justice Antonin Scalia among them(http://bit.ly/830fcK), the issues pertaining to this case only consider the constitutionality of the P.C.A.O.B. to regulate the accounting profession and not the S.E.C. itself. Next, I’ll discuss the issues involved in this case and how it involves the accounting profession and the independent auditor.
There is an endless amount of material written by lawyers, legal scholars an constitutional experts on the P.C.A.O.B. case before the S.C.O.T.U.S., unitary executive theory, Supreme Court case law, precedents involving this issue and constitutionality in general. The S.C.O.T.U.S. will ultimately rule on this case in a few short months and lay out for us if the P.C.A.O.B. is constitutional and why. Thus, I’ll leave the link to the transcripts for the reader to investigate in order to develop his own opinion of the arguments made before the court (http://bit.ly/8d9Fkb). I’ll avoid getting into the he said, she said issues of the case. Instead, I’ll introduce the issues involved which make the constitutionality of the P.C.A.O.B. questionable in the first place, and relate them to our founding documents and history. Ultimately, I’ll try to use more of a common sense presentation as to why the current structure of standard setting and oversight governmental bodies regulating the accounting profession are unconstitutional and illegitimate. I’ll briefly follow this up with solutions we within the accounting profession should consider.
At the heart of the matter in the P.C.A.O.B. case is executive or presidential power over officers appointed by the President of the United States. So, we have to consider Article 2 of The Constitution of the United States of America as this is the document that gives the President his authority (http://bit.ly/7Lxskl). In section 2 of Article 2, the president is given the authority to appoint officers with the consent of the senate (http://bit.ly/4D1oa6). It must be noted that the constitution within Article 2 gives congress discretion to decide who appoints inferior officers. This clause, assuming that a particular board or ancillary agency would be filled with inferior officers, allows for heads of departments to appoint the said would be inferior officers. This is where there is a difference of opinion between those within the government defending the P.C.A.O.B. as constitutional and the plaintiffs in the case. Under the Sarbanes Oxley Act, the four commissioners of the S.E.C. are given authority to appoint the five board members of the P.C.A.O.B. Thus, the presidential administration is not involved in appointing P.C.A.O.B. board members in any way. Likewise, arguably since the board members are able to wield such extraordinary power, both regulatory and enforcement power, it appears P.C.A.O.B. board members are more than mere inferior officers.
Michael Carvin, the lawyer for the plaintiffs in the case, reminds us of the history leading to the Revolutionary War (http://bit.ly/830fcK). King George placed officers here in the colonies combining the authority both to make laws and to enforce them. According to Cravin this is not only unconstitutional, but it’s the ultimate definition of tyranny (http://bit.ly/830fcK). In fact, one of the complaints against the United States Government argued before the S.C.O.T.U.S. parallels one of the chief complaints against King George prior to the American Revolution which Thomas Jefferson wrote in the Declaration of Independence as follows:
“He has erected a multitude of New Offices, and sent hither swarms of Officers to harrass our People, and eat out their substance,” (http://bit.ly/6zOIpc).
In an article in freemarket.org, Hans Bader wrote, “The General Accounting Office describes the PCAOB as “an independent board with sweeping powers and authority;” its rules and red tape cost the economy billions of dollars every year (with an long-term cost of perhaps $1 trillion),” (http://bit.ly/5KzFzC). If $1 trillion doesn’t equate to Jefferson’s description of King George’s officers eating out the substance of the people, I don’t know what would!
Let’s take a quick inventory of what has happened to the accounting profession and in essence to publicly traded companies under government regulation. In 1934 the S.E.C. was formed and began requiring publicly traded companies to register with the S.E.C. and to file its annual independent audit with the S.E.C. as well. The S.E.C. left the accounting profession relatively self regulating; however, congress through it’s language in the Securities Exchange Act of 1934 left the Commission the authority to become more interventional as it deemed necessary for the sake of public interest. The accounting profession shifted its focus increasingly toward consulting and other services than auditing. Thus, one year before the Enron meltdown, with heavy lobbying from the largest firms in the accounting profession, the S.E.C. updated and thus changed the rules for independence in an audit. All during the history of the S.E.C. scholars have argued that it’s an unconstitutional regulatory body. The Enron meltdown occurs. Congress reacted and in 2002 passed the Sarbanes Oxley Act giving the S.E.C. that authority to appoint primary officers to the P.C.A.O.B. arguably unconstitutionally.
Thus, throughout its history, the S.E.C. has never stopped one accounting or one financial market meltdown or failure. In fact, its regulations and interventions into the self regulating nature of the accounting profession has created the meltdowns. Each time there’s a market or accounting failure, we go back to the agency that failed to begin with and ask them to implement more bureaucratic layers and solutions. Until ultimately, we have them to set up an entirely unconstitutional body to oversee the rules that represent and allow free market capitalism and thus freedom and liberty in our country. This is insanity. I can only ask, when are we going to make it stop?
Often, the reasons by the regulators, scholars and so called experts on the topic of regulation of the accounting profession, banking and capital markets is pure nonsense. In one NPR interview former S.E.C. Chairman Hills goes to the length to say that if the S.E.C. and other New Deal created agencies were rendered unconstitutional, alluding to a scenario that they would be eliminated, it would be too dangerous to our capital markets doing far too much damage to our system (http://bit.ly/830fcK). Analyzing this logic, we can see that openly and honestly those of the elite status, like Chairman Hills, privileged to hold such great regulatory power that few in the world will ever hold, arrogantly discount constitutionality and threaten us that if their system is changed we will encounter a meltdown. Well, we’ve already encountered many under their direction! And, this viewpoint is not a very scientific or educated viewpoint on Chairman Hill’s behalf. He actually made the fundamental error of rejecting the null hypothesis that a capital market without S.E.C. regulation will fail without conducting an experiment or gathering data. Until you set up an experiment where capital market fails without the profound wisdom and guidance of the S.E.C., Chairman Hill’s statement is just nonsense.
In the past, there was precedent in the Supreme Court giving the president executive power over branch officials. For example, in the 1926 case of Myers v. United States, ‘The United States Supreme Court decided that the President has the exclusive power to remove executive branch officials, and does not need the approval of the Senate or any other legislative body. The Court also wrote:
The ordinary duties of officers prescribed by statute come under the general administrative control of the President by virtue of the general grant to him of the executive power, and he may properly supervise and guide their construction of the statutes under which they act in order to secure that unitary and uniform execution of the laws which article 2 of the Constitution evidently contemplated in vesting general executive power in the President alone,’ (http://bit.ly/8d9Fkb).
Thus, in the case of P.C.A.O.B., it seems its unconstitutionality is sure. It will be interesting to see how the S.C.O.T.U.S. rules.
I’ll next lay out for you why the independent auditor ceased being independent on the day of the Securities Exchange Act big government takeover of the free market capitalism and why independence in auditing can’t exist until the accounting profession is left to be truly self-regulating. There are two things that are of utmost importance to the end user of audited financial statements. First, in order for those statements to be reliable, the auditor must be independent in fact and appearance. Second, the underlying accounting principles of which the auditor is giving his opinion must truthfully represent the audited company’s financial picture. When the S.E.C. created the image to the public that it had a role in the audit by requiring the audit to be registered with the Commission, the end users of the audited financial statements stopped placing reliance upon the reputation of the independent auditor and whether or not he would actually be independent, and began relying whether or not the guidelines of the S.E.C. are being followed. Likewise, the independent auditor stopped worrying about his appearance of independence and began focusing on following the rules of the government agency. The agency left the appearance that the accounting profession was self regulating; however, it wields the stick, through the legislative language within the Act itself, to force its will and push its agenda upon rule makers in the accounting profession’s standard setting bodies.
The S.E.C. is a governmental agency. Therefore, it must be considered in light of the language within the Securities Exchange Act of 1934 leaving it discretion that every decision, rule or action by the Commission is politically motivated. With that being the case, it is ridiculous, nay, unfathomable that such a political body could ever decide what does and what doesn’t represent independence in fact and appearance. Dr. Xu once again presented quite keenly in her paper the vociferous lobbying efforts by the accounting profession to influence the S.E.C. rules just one year prior to the Enron/Anderson meltdown (http://bit.ly/5YVQrD). Again, there are those that will blame capitalism, free market enterprise and the relationship between big-business and the legislative process. None of those are to blame. We have only the lack of common sense of those left to make decisions and analyzing the situation to blame. Relying on a political agency to tell us what is independent when we already know that throughout history regulatory agencies favor but a few very large players in an industry with lobbying power and, therefore, political capital simply doesn’t make sense. Always and forever, regulatory agencies hinder or harm free markets. They change the rules to favor the few biggest players within the industry they regulate and they cause structural barriers which often result in market or industry failures.
Thus, when it comes to the independent auditor in business today, we don’t have an economic philosophy problem. We have a structural problem disrupting the relevance and the reliability of audited financial statements to end users which ultimately disrupts the free flow of capital in financial markets resulting from reliance upon government agencies. As this relates to the independent auditor, there is a simple solution. The independent auditor must be independent in fact and in appearance. A government agency can’t tell us whether they are or aren’t actually independent. The S.E.C. and all government agencies should cease having any say over the accounting profession. There is a good argument for the Commission giving up it’s authority over investment banking and the exchanges as well. The accounting profession would thus become truly self regulating. This being the case, standards for those entering and/or working within the profession would probably become more stringent. Just as in the days of old, prior to the Securities Exchange Act of 1934, one’s reputation in the accounting profession and more especially for the independent auditor would be of utmost importance. There would be a very similar structure to what we have today, only the accounting profession would be unencumbered and untainted by government agencies. The A.I.C.P.A. would be the primary professional organization to which all professional accountants and accounting firms must be a member.
The member firms within the accounting profession can be as aggressive and capitalistic as they want or need to be. Once structured properly, this will have no effect on independence for the auditor whatsoever. The member firm can do whatever services it desires for its clients.
Each member firm conducting audits will have to become a member of a private audit exchange. There are several ways to structure the audit exchanges. Initially, I thought one national exchange would be the best; however, competition is important, and regional audit exchanges can address regional differences and needs. The audit exchanges would be private businesses unencumbered by government regulation. Remember, the professional independent auditors as members of these exchanges must be highly reputable, maintain independence and are the true stewards of private property, capitalism, free enterprise and the free markets. They can’t have their independence compromised by the taint of some government agency. Each exchange would be a member of the A.I.C.P.A. or the private national professional accounting organization.
A member firm will contract with its client to be audited. That firm will negotiate all compensation for the audit. Here’s where it becomes prudent for the firm contracting with the client to have a clear understanding of the scope of the audit and the expenses involved in conducting that audit. Once the contract is completed, the member accounting firm will turn around and notify the audit exchange that an independent audit firm is needed for the engagement. Here’s where the exchanges will need to be prudent in helping the audit exchange member auditors and audit firms determine their capabilities to conduct audits of particular size and scope. Once the accounting firm hired by the client engages the audit firm from the audit exchange it’s simply a go or no go answer from the audit exchange member firm or auditor. The accounting firm has the contract, that firm presents the scope and magnitude of the audit to the auditor from the audit exchange, informs the auditor that this is the your subcontracted rate of what you get paid for conducting the audit, and the auditor simply accepts or rejects the engagement. The independent auditor is not a negotiator, and in order to maintain independence doesn’t get involved in such. The market will determine if the contracting accounting firm is charging enough to the client and in turn paying out enough to the auditor from the exchange. If the contracting accounting firm finds its offers for an audit being rejected by several auditors from an audit exchange, it will have to raise its rate to the auditor for that engagement. Once the audit firm from the exchange commences its engagement, there will be no additional contact with the contracting accounting firm until the engagement is complete. There may need to be a few exceptions to this rule, but those could be developed over time.
Accounting firms of all sizes can perform both types of services. Even a smaller accounting firm that’s aggressive could pursue contracting with big companies to be audited. This potentially levels the playing field for that type of firm to grow. Also, some firms may prefer to specialize in the audit function as well. Most importantly, however, is that the integrity of the independence both in fact and in appearance of the auditor is technically fairly easy to maintain. Importance must be placed on reputation. This can be incorporated into the renewal process of membership in the accounting exchange. Each member auditor should have a peer review annually. Also, there work must be examined through testing and an annual independence audit by an independent professional firm certified by the A.I.C.P.A. to conduct independence audits.
No academic or research paper would be complete without gathering data or metrics to evaluate. I believe that investors and end users of audited financial statements had begun to place too much emphasis on government protection or on the reliability of the financial statements because they were registered with the S.E.C. and not because they were independent. Also, I believe that under the S.E.C., auditors and those in the accounting profession became more concerned with following S.E.C. rules or influencing rule changes in the S.E.C. and less concerned with their reputation or independence. I would like to evaluate some of the behavioral aspects of end users of audited financial statements. I don’t currently have the resources to conduct the research to gather these metrics, but over time I’ll find a way.
Development of a survey or a simple poll could get some data on the first two topics mentioned in the paragraph above. I could simply develop some questions to ask investors, lenders and auditors if they think that having the S.E.C. require registering an audit with led them to place more trust in or feel more comfortable with the audited financial statements. Surveying could also be used to see where auditors placed there priorities under S.E.C. rules. Relative to behavioral aspects of financial statement end users, a neat experiment could be conducted. We could go to investors and tell them of an imaginary market whereby they could purchase stock in or lend money to companies doing business within this market. I’d call it the Brazilian Gold Exchange. Within the B.G.E. the companies would not be registered with any governmental agency. They would all have audited financial statements. But, the audited financial statements wouldn’t be registered with a governmental agency either. They would be registered with an exclusive firm that would evaluate them and grade their reliability. Each auditor auditing the financial statements of a firm traded on the B.G.E. would have an impeccable reputation and be a member of the exclusive Gold Audit Institute. They would have an independence certification from specialty member firms conducting annual independence audits. Also, all members of the accounting profession and the auditing profession likewise would be members of the professional organization and standards setting body Brazilian Gold Institute of Chartered Accountants. There would be no governmental involvement whatsoever. Then, I would develop some fictitious financial statements on some fictitious companies and through surveying compare how these financial statement end users respond to questions about companies from this system versus our system here.
Before anyone criticizes my ideas about government involvement in business and more specifically in the business of auditing, they have to get some data through the type of research I’ve laid out above. If you get the data through objective methods, and it shows that I’m right about government intrusion into free market capitalism and private enterprise through meddling in accounting rules, then we need use our channels of the rule of law to make changes. There is a peaceful and lawful agenda for doing just that. The Supreme Court’s ruling in Euclid that changed the government’s view on private property and watered down individual rights as they relate to the Fifth Amendment is not the endpoint. It is the beginning. These markets, the companies in them and the companies auditing them are private. They don’t belong to the government to regulate. The government is here for them, they are not here by or for the government. Therefore, in the face of convincing data that under the despotism of the rules of dogma from a governmental agency we’ve been conducting business wrongly, we will turn to state constitutions and legislatures and to unused portions of the United States Constitution like Article 5 to implement adequate changes.
Copyright Kevin P. Felty of Rogue’s Harbor
For more than a decade auditor independence has come under scrutiny by the public. Professor Yin Xu of Old Dominion University, which is my alma mater by the way, published a very eloquent article on the website of The Free Library entitled, “Whither the public accounting as a profession: historical lessons of auditor independence in the U.S.,” which chronicles the history of auditing and auditor independence in America, (http://bit.ly/5YVQrD). Professor Xu’s paper is very thorough and takes us step-by-step from the genesis of the auditing profession and the birth of the concept of independence through our latest round of accounting failures with the Enron/Anderson disaster. Through Dr. Xu’s paper, I’ve identified perception weaknesses among some practitioners and academicians within the accounting discipline if not the overall accounting profession itself as well as some structural problems that plague the profession likewise.
The accounting profession exists within a broader economic spectrum and within a broader political environment. The independent audit of the financial statements of a publicly traded company serves that broader world existing outside the accounting profession. Plain and simply, the audit is supposed to say to the end user that the financial information reflected within the statements is reliable. Therefore, it’s important to focus on the end purpose of the financial statements themselves. Audited financial statements have multiple uses; however, they are traditionally used for current or potential investors to evaluate the company being audited, bankers to make lending decisions, management to make capital structure decisions and in the case of banks for potential customers to make depositing decisions. Thus, largely the financial statements are relied upon for companies to raise capital and for investors to make prudent decisions. Therefore, the auditor has a significant role in maintaining the integrity of the market place; the accounting profession is a part of the capitalistic market place and a part of free market capitalism.
If the information in the financial statements is reliable and there are no hidden surprises, lenders stand ready to lend with shareholders standing ready to invest, and the capital markets continue to flow smoothly. This allows liquidity in the market and as you can see, the independent auditor is an important part of ensuring this liquidity necessary in capitalistic markets. Another important aspect of liquidity is an open market with few barriers to entry. This includes having few barriers to exit also. Thus, the independent auditor’s report is equally important to reveal to potential or current lenders and investors weaknesses in the financial structure of the audited company. Therefore, capital can be shifted away from failing companies allowing it to be absorbed by those companies that are profitable. Once again, the independent auditor has served as the steward of capitalism.
It must be noted here that the accounting principles underlying the audit must be relevant and reliable and developed and implemented to reflect the true overall financial structure of the company. Otherwise, a company may be given an unqualified opinion on an audit by an independent auditor yet have worthless financial statements for decision making purposes if the underlying principles don’t reflect the truth. The end user could unknowingly invest in a company with an overall unhealthy financial structure if off-balance sheet financing is used. The balance sheet may appear healthy yet the non-transparent off-balance sheet items are threatening to the company because week or flawed underlying accounting principles were developed and applied. This is where a financial statement user gets hit with on of those above mentioned hidden surprises; however, this requires scrutiny and research to determine the efficacy of the standards being set and quite possibly the standard setting body.
Dr. Charles W. Calomiris, American Enterprise Institute visiting scholar and Columbia University Professor of Financial Institutions points out in his study, “Banking Crises and the Rules of the Game,” that historically government imposed rules set in motion the conditions for banking distress and failures (http://bit.ly/3bRbrh). His paper states that risk-inviting rules causing structural constraints restraining competition, preventing diversification of risk and limiting the ability to deal with shocks caused bank failures. Dr. Calomiris is a proponent of and points out the need for a properly structured centralized bank to reduce liquidity risk without perpetuating moral hazard. Often, banking and financial market failures insight critics to pronounce capitalism, free-enterprise and free markets to blame. But, we must not forget that in America exists a unique blend between business and politics, regulators and regulated and government and industry. Therefore, it’s important to analyze all the variables involving all the parties and entities involved in a dynamic industry like banking before making decisions. It would be foolish to look to government as the solution while ignoring and refusing to at least analyze it as part of the problem.
In the United States, accounting failures arguably arose from conditions set in motion by regulatory bodies in the same way Federal Government agency rules set in motion the propensity for banks to fail. Remember, in essence, the independent auditor is the steward of the free market. Provided he is independent both in fact and appearance and the underlying accounting principles applied by the auditee reflect truthfully the financial status of the company in the financial statements, the independent auditor’s opinion signals to investors and lenders whether or not the company’s financial statements are in fact reliable. In turn, investors and lenders are able to make decisions to steer resources into or out of that company. In free market capitalism it is paramount that those companies approaching failure be dissolved whereby the resources of those companies can be steered to those that are profitable. More current accounting rules favored by other Federal Agencies like the F.D.I.C. using off balance sheet financing and in essence Government approval and support to lie to investors and shareholders contributed to America’s economic crisis and financial market meltdown in 2008, (http://bit.ly/5ycgmW), (http://bit.ly/4nRhWj), (http://bit.ly/7rQ472). Fortunately, it seems that the Financial Accounting Standards Board, thanks to the efforts of Chairman Robert Herz, was able to subvert the efforts of regulators within the F.D.I.C. to impede the free flow of financial markets solely to shore-up the banks run by their cronies that should have been left to fail, under the guise of protecting the American public. Unfortunately, all too often when there is a Government induced failure by tampering with the free flowing and natural physical principles of the market, free market capitalism and free enterprise is to blame. In 1934, the Securities and Exchange Act of 1934 required publicly traded companies to file audited financial statements with the S.E.C (http://bit.ly/8Rb7vo). In my opinion, this was the end of independence in auditing for reasons I will later describe, and in essence the beginning of the government takeover of what are supposed to be free markets of trade in America. This opened the door for later events causing accounting failures to occur.
I’ve established the independent auditor’s place in free market capitalism already. Briefly, let’s relate the independent auditor’s role as the steward of industry to professionalism within the realm of the accounting profession. Now will be a good time to actually define free market capitalism as well.
First, what is free market capitalism or free enterprise? Webster’s dictionary most simply defines capitalism as an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market (http://bit.ly/4pymwB). Dictionary.com defines capitalism as an economic system in which investment in and ownership of the means of production, distribution, and exchange of wealth is made and maintained chiefly by private individuals or corporations, esp. as contrasted to cooperatively or state-owned means of wealth (http://bit.ly/6J9L6p). Investorwords.com defines free market as Business governed by the laws of supply and demand, not restrained by government interference, regulation or subsidy, (http://bit.ly/7nBckn ). Thus, we can conclude that free market capitalism involves private ownership of and decision making over the capital or goods involved in production of goods and offering of services in a market place unencumbered or hindered by government and dictated by the laws of supply and demand.
There are a few things, fundamentally, you must understand about liberty, individual rights, freedom and property before you’re ready to start learning anything about business in the United States, period! You must understand the idea of a constitutional government, the rule of law and that these are fundamental to business, government and politics in America. And, you must understand John Locke and his influence on the founding fathers of America (http://bit.ly/6Fvfqe).
If there is one document that influenced America’s founding fathers more than any other when they were drafting the U.S. constitution, it is Magna Carta (http://bit.ly/4K92kK). Winston Churchill said in 1956, “…here is a law which is above the King and which even he must not break. This reaffirmation of a supreme law and its expression in a general charter is the great work of Magna Carta; and this alone justifies the respect in which men have held it,” (http://bit.ly/4K92kK). Although Magna Carta gave us the foundation of constitutional government, there are fundamental differences extant between Magna Carta and the U.S. Constitution. “In 1957 the American Bar Association acknowledged the debt American law and constitutionalism had to Magna Carta and English common law by erecting a monument at Runnymede. Yet, as close as Magna Carta and American concepts of liberty are, they remain distinct. Magna Carta is a charter of ancient liberties guaranteed by a king to his subjects; the Constitution of the United States is the establishment of a government by and for "We the People,"” (http://bit.ly/4K92kK).
I will briefly connect the dots and therefore correlate the concept of auditor independence with the aforementioned reference to Magna Carta, constitutionalism, liberty freedom and property rights. Then, I’ll move on to John Locke, which hopefully will help pull all this together.
Magna Carta evoked thought about constitutionalism in our founding fathers. With this came a way of thinking that was taken to heart by founding fathers like Thomas Jefferson given to them by John Locke about life, liberty and property (http://bit.ly/6Fvfqe). The Second Treatise along with his other works, very much impressed Thomas Jefferson. So, Locke's ideas very likely played a role in the writing of the Declaration of Independence and the Constitution of the United States (http://bit.ly/6L3JMF). There is contemporary thought that Jefferson changed Locke’s words while writing the Declaration of Independents because of the issue of slavery. I’ve not found any source information on this as of yet, and if I do at a later date, I will explore it. However, in contemporary times it could be and often is argued that the founders believed in slaves as property and therefore, their ideals are flawed and any reliance upon them should be disregarded and it is time for new ideals and a new form of thought. Those arguments can be rebuffed by the fact that John Locke was against the institution of slavery and never owned them personally. Yes, Locke did profit from investments in the world’s largest companies involved in slave trading; however, he no more actively condoned or participated in the slave trade than you or I participate in child labor when purchasing a pair of shoes made in China from Wal-Mart. Thus, even if Jefferson had issues with including property in the Declaration of Independence, a document along with the U.S. Constitution guaranteeing individuals liberty, freedom and rights because he considered slaves as property, Locke didn’t see them as such. Therefore, you may conclude that within the mindset of Lokean thought, which permeated the basis of thinking among American founders, even though the words aren’t scripted, that life, liberty and the pursuit of happiness includes property. The Fifth Amendment to the U.S. Constitution guarantees us certain property rights, which the U.S. Supreme Court limited in the same era that the Securities and Exchange Act of 1934 unscrupulously usurped property rights from individuals through regulation (http://bit.ly/6Fvfqe). I’ll explore these shifts in American thought on property shortly.
Professor Xu’s article states, “The exact origin of audits of financial reports is not clear, but it is known that as early as the fifteenth century auditors were called upon to ensure the absence of fraud in the record kept by stewards of wealthy household estates in England,” (http://bit.ly/5YVQrD). Thus, from the genesis of the independent audit, the independent auditor was called upon as a protector of property. This was decidedly Lokean in nature.
Now, I must reflect back to the beginning of this paper and address the concept of perception weaknesses among accounting professionals, accounting professors and teachers, the broader business community served by the accounting profession, lawmakers and the accounting profession itself. Once these are addressed, there will be a better understanding where the accounting profession and the independent auditor fit into the universe. Then, I can address the aforementioned structural problems which have grown by the lack of understanding of those in government and/or responsible for oversight and governance of the overall philosophy of the accounting profession, how auditing fits within the profession and free capitalistic markets and how both are a part of the broader political and capitalistic universe.
Sometimes, the accounting profession views itself through a very limited scope. Professors, decision makers within the standard setting bodies, regulators and individual CPAs often see themselves as separate or unique from the broader business world. The term “professionalism” or “professional” it seems conjures an image in the minds of some within the profession that they are the privileged few that have achieved the required education, demonstrated proficiency through testing and possess special insight and understanding of all things important within the profession. Therefore, a sort of elitist attitude becomes prevalent. And soon, you have a group of elitists in an ivory tower making decisions and implementing rules over the profession that impact the broader business world or community, yet, they may have little understanding of that broader realm.
Yes, it is important for the accounting profession to have standards. Minimal educational levels and demonstration of proficiency through thorough examination are paramount to professionalism. Practitioners within the accounting and auditing profession in contact with clients on a daily basis actually have the greatest insight and understanding of their role within the broader business community. It’s when centralized standard setting or regulatory bodies begin to lay down principles, rules or guidelines as some sort of an edict for those within the profession to follow without rule makers possessing broader understanding of the world in which the accounting profession is a microcosm or, worse yet, whereby the rule makers ignore the natural principles of that broader world motivated by political influence that problems arise. Therefore, it is paramount for the accounting profession to perceive it’s self as a part of the business community. It serves an important role in capitalism and enterprise within our broader economy. Professional accountants and auditors are more than buttoned down bureaucrats following edicts generated by politics and handed down by government agencies. The independent auditor has an obligation to end users of the financial statements and not to the government or the accounting profession. In the same light, the accounting profession and the accounting principles the standard setting bodies adopt must be developed with the same purpose in mind.
Related to the topic of professionalism, it is important to examine a statement in Professor Xu’s paper (http://bit.ly/5YVQrD). While describing changes that took place within the accounting profession throughout the 1980s and 90s, Professor Xu writes, “While concern about a potential lack of independence in auditors existed, the profession had been going through a tremendous change by adopting a more capitalistic fashion of market strategy. It had been common that auditors utilized advertising, personal selling, and other advanced marketing techniques to capture as much of the market as they possible could. As a result, the public accounting firms had aggressively expanded into more and more diverse areas of consulting and other non-audit services. It was all perfectly legal and legitimate business activity at the time, but somehow it did not seem professional,” (http://bit.ly/5YVQrD). This is disconcerting to me, and this statement cuts right to the heart of the matter that governmental elitists and academic elitists definitely foster ideals that are adverse to American thinking, American values and American freedom necessary for a robust economy of free enterprise in America.
Dr. Xu points out firms in the accounting profession had begun more aggressively pursuing market share and profits. She describes this as tremendous change and more capitalistic as if to allude to the profession as something other than capitalistic in the past. As far as I’m aware, firms and professionals within the accounting profession have always seen themselves as capitalists. She then describes the diverse services offered as legal at the time (http://bit.ly/5YVQrD). The tone of this statement makes it seem that perhaps expanding your line of services, aggressively pursuing market share and increasing your profits should be illegal! Lastly, Dr. Xu tells us that even though free market enterprise for accounting firms was legal, it seemed unprofessional.
This is where we have to be particularly careful to safeguard ourselves against the subtle creep of idealism into policies, rules and conventional thought within professions, business, laws and our minds. Dr. Xu has a fundamental primary education in China. Nothing against her, I’ve never met her personally, but, we must understand that her frame of reference is steeped in communism! She’s demonstrated that she’s studied the history of the accounting profession well by sighting many resources within her paper that she’s obviously read. Yet it’s obvious by her statement on capitalistic approaches to business and professionalism, she has a fundamental flaw in her perception of business, free market enterprise and where the accounting profession fits into it all. It would be unfair to fault Dr. Xu alone for this. We have a broader more systemic problem that if allowed to go unfettered and unchecked will only grow worse. Just simply conduct a search of the universities in the United States with PhD accounting programs. Then, search through the university’s site to find the page with the PhD candidates’ profiles. Also, the university will provide statistics related to the candidates’ undergraduate grade point averages and entrance exam scores as well as the background of these students. You’ll find that an extraordinary amount of these students are foreign. This does not appropriately reflect the makeup of the American population, by the way. Let’s not forget that these PhD students will soon be accepted with full weight and backing of the name of an elitist institution as the renown expert on their field of study. Many of these students come to our institutions with a fine fundamental education in communism and economic systems contrary to what belongs in America.
Some will argue that these students belong in the PhD programs simply because they have the highest scores on entrance exams and their grade point averages are the highest. So, we don’t get well rounded leaders under these conditions. Nor do we necessarily get the smartest candidates. What we get are candidates that have spent a lifetime sitting at a desk 16 hours a day solving calculus problems, being taught to the test that may never have thrown a football, played a violin or guitar, gone surfing or hit a baseball. All of which are part of a sound American experience. Also, many of these candidates may be lacking in common sense just as Dr. Xu is lacking in common sense in her understanding of free market capitalism, professionalism and the accounting profession!
I sit peering out the second story window over the Albemarle Sound as I write this paper. I’ve spent most of my life here, in what my friends just north of me in Virginia would have referred to snobbishly as Rogue’s Harbor in 1653 (http://bit.ly/4ZTV4q). This area as well as the Tidewater area of Virginia, home of my Alma matter, Old Dominion University, is steeped in American history. I would suggest to anyone in want of gaining a significant understanding of what American freedom and liberty is all about coming here, unplugging from all media sources for a time and reading the words of those who formed this great nation. John Locke, the seventeenth century philosopher that provided the framework of thought for our Declaration of Independence and our right to life, liberty and property wrote the Fundamental Constitutions of Carolina (http://bit.ly/5Uca8g). Thomas Jefferson used Locke’s words in our founding documents. Jefferson was educated at the College of William and Mary. It was the second college in America. I attended Old Dominion University where I received my degree in accounting. Old Dominion University was started in the 1930 as the Norfolk Division of The College of William and Mary (http://bit.ly/7LjlMF). In 1962 Old Dominion was converted to a state school and became its own entity. Thus, I like to facetiously say I got my accounting degree from the Norfolk Division of Thomas Jefferson’s school, William and Mary. I know, it’s a stretch, but it’s fun. And, even though I’ve lived down in Atlanta, Georgia and Virginia, I’ve never enjoyed as much solace from the surrounding waters, freedom and understanding of the liberty promised by the great thinkers like Locke and Jefferson as I feel here watching the sunset over the sound in Rogue’s Harbor. You can read Locke, you can debate Locke you can fight your best friend, professor or spouse over Locke, but, coming down here and erasing prevalent indoctrinations from your mind while meditating on a full moon over the sound is the only way to feel Locke. And, you must feel Locke to have any inclination about business, property, rights, the independent audit, freedom and liberty in America.
George M. Stephens describes Lokean theory on property on the website of the John Locke Foundation (http://bit.ly/6Fvfqe). By now, I’ve been over this several times and it should be impressed upon the reader how important individual property rights are to the foundation of America. However, Stephens goes on in the website to chronicle several Supreme Court decisions that in essence eroded individual’s property rights. Without getting bogged down in the minutia of these cases, it’s merely important to note that this shift away from protecting individual’s property rights began with the Supreme Court’s decision in Euclid Village v. Ambler Realty in 1926 (http://bit.ly/6Fvfqe). The court’s ruling established that there need only be a rational relation to a public purpose of land being taken in order to escape judicial scrutiny (http://bit.ly/6Fvfqe). Simplistically, The Court relegated the Fifth Amendment rights related to takings of property less important than the rights of speech in the First and against illegal search and seizure in the Fourth (http://bit.ly/6PMNY8). Thus, in one fell swoop The Court had stripped the basic property rights America was founded upon and individuals had been guaranteed dating back to Magna Carta in 1215. Take notice that shortly after this landmark case the door was opened for many sweeping changes in government like the Securities and Exchange Act of 1934 takeover of private markets and in essence the truly independent audit.
The following statement will garner vast criticism; however, it’s true, it must be understood and it must be accepted in the heart almost religiously by anyone desiring success in business in the United States. The government, on any level, has no business involving itself in business in America! Our political system, which guarantees liberty, freedom, individual rights and the right to private property, including business property was given to us by our founding fathers. Thomas Jefferson wrote in the Declaration of Independence, "Prudence, indeed, will dictate that governments long established, should not be changed for light and transient causes; and, accordingly, all experience [has] shown that mankind are more disposed to suffer while evils are sufferable than to right themselves by abolishing the forms to which they are accustomed. But, when a long train of abuses and usurpations, pursuing invariably the same object, evinces a design to reduce [the people] under absolute despotism, it is their right, it is their duty, to throw off such government, and to provide new guards for their future security," (http://bit.ly/4U65ho ). The Securities Exchange Act of 1934, (http://bit.ly/8Rb7vo), was the beginning of the Federal Government takeover of capital markets and thus free enterprise in America. This was the first step in the Jefferson described long train of usurpations obliging us to throw off government chains over markets and implement revolutionary free market changes.
The tide of socialism and communism around the world was rising in 1926 during the Euclid decision and in 1934 when congress passed the Securities Exchange Act of 1934. The ideal of public interest or collective interest stems from the socialistic school of thought. This was the era that spawned the beginning of the end of big government guaranteeing the protection of individuals’ rights. The Act is permeated with language using words like, “In the interest of the public, or “As the Commission deems necessary,” (http://bit.ly/8Rb7vo). I would ask any business owner or corporate board chairman or stockholder for that matter whether he wants the S.E.C. to deem what’s necessary for his business. The Act presented the Commission as seemingly benign and for a benevolent purpose initially, leaving the accounting profession to remain self regulated; however, the Act is riddled with language like this, “Each audit required pursuant to this title of the financial statements of an issuer by a registered public accounting firm shall include, in accordance with generally accepted auditing standards, as may be modified or supplemented from time to time by the Commission,” which leaves the Commission legal authority to make arbitrary decisions (http://bit.ly/8Rb7vo). Thus, the Commission may have left the accounting profession to be semi-self regulating initially, but, it’s been increasingly usurping more and more power over the markets since its inception. Yet, it hasn’t prevented one accounting, banking or stock market failure. In fact, the S.E.C. has opened the door for these failures by duping the public into thinking the Commission has individuals’ investment interests at heart. With statements like, “As the Commission deems necessary, “and, “In the interest of the public,” how could the S.E.C. foster individuals’ or businesses’ property rights? Professor Xu tells us about the S.E.C.s greatest failure in her paper, “One year after the SEC issued the final independence rule, one of the largest accounting scandals in history--the Enron/Anderson scandal occurred, followed by the demise of Anderson,” (http://bit.ly/5YVQrD). This was in 2001, seemingly after the S.E.C. had issued it’s independence rule fixing all the problems related to the independent auditor. This prompted the S.E.C. to develop a whole new set of rules with the help of congress under the Sarbanes-Oxley Act that once again are destined for failure and are under judicial scrutiny relative to their constitutionality as this paper is being written.
I tend to rely on the founding documents of America and the portion of American History that evokes patriotism and strong emotions to build my argument that we Americans were promised something special and big government regulatory agencies like the S.E.C. take these things away. Also, I rely on common sense that the hindrance and costs resulting from the rules and edicts of these agencies are bad for business. From these, I build my argument that the S.E.C. is unconstitutional. These arguments are credible and may evoke interest and/or empathy from many. But, in America, it takes strong legal persuasion and judicial acumen from legal scholars to forge legal changes in the judiciary. Some of our greatest contemporary legal scholars argued or heard arguments on the constitutionality of the Public Company Accounting Oversight Board, or P.C.A.O.B., before the Supreme Court of the United States, or S.C.O.T.U.S., on December 7, 2009 (http://bit.ly/8zuJcX). The P.C.A.O.B. is a board appointed by the S.E.C. and given authority by the Sarbanes Oxley Act. At issue is whether or not the structure of the P.C.A.O.B. is constitutional under the separation of powers provision and considering what contemporary legal scholars call the unitary executive theory. Thus, even tough I consider the entire S.E.C. an unconstitutional body, and there are constitutional scholars that have made this argument much more intelligibly than I’m capable of making it under the unitary executive theory (http://bit.ly/8d9Fkb), Chief Justice John Roberts, Justice Samuel Alito and Justice Antonin Scalia among them(http://bit.ly/830fcK), the issues pertaining to this case only consider the constitutionality of the P.C.A.O.B. to regulate the accounting profession and not the S.E.C. itself. Next, I’ll discuss the issues involved in this case and how it involves the accounting profession and the independent auditor.
There is an endless amount of material written by lawyers, legal scholars an constitutional experts on the P.C.A.O.B. case before the S.C.O.T.U.S., unitary executive theory, Supreme Court case law, precedents involving this issue and constitutionality in general. The S.C.O.T.U.S. will ultimately rule on this case in a few short months and lay out for us if the P.C.A.O.B. is constitutional and why. Thus, I’ll leave the link to the transcripts for the reader to investigate in order to develop his own opinion of the arguments made before the court (http://bit.ly/8d9Fkb). I’ll avoid getting into the he said, she said issues of the case. Instead, I’ll introduce the issues involved which make the constitutionality of the P.C.A.O.B. questionable in the first place, and relate them to our founding documents and history. Ultimately, I’ll try to use more of a common sense presentation as to why the current structure of standard setting and oversight governmental bodies regulating the accounting profession are unconstitutional and illegitimate. I’ll briefly follow this up with solutions we within the accounting profession should consider.
At the heart of the matter in the P.C.A.O.B. case is executive or presidential power over officers appointed by the President of the United States. So, we have to consider Article 2 of The Constitution of the United States of America as this is the document that gives the President his authority (http://bit.ly/7Lxskl). In section 2 of Article 2, the president is given the authority to appoint officers with the consent of the senate (http://bit.ly/4D1oa6). It must be noted that the constitution within Article 2 gives congress discretion to decide who appoints inferior officers. This clause, assuming that a particular board or ancillary agency would be filled with inferior officers, allows for heads of departments to appoint the said would be inferior officers. This is where there is a difference of opinion between those within the government defending the P.C.A.O.B. as constitutional and the plaintiffs in the case. Under the Sarbanes Oxley Act, the four commissioners of the S.E.C. are given authority to appoint the five board members of the P.C.A.O.B. Thus, the presidential administration is not involved in appointing P.C.A.O.B. board members in any way. Likewise, arguably since the board members are able to wield such extraordinary power, both regulatory and enforcement power, it appears P.C.A.O.B. board members are more than mere inferior officers.
Michael Carvin, the lawyer for the plaintiffs in the case, reminds us of the history leading to the Revolutionary War (http://bit.ly/830fcK). King George placed officers here in the colonies combining the authority both to make laws and to enforce them. According to Cravin this is not only unconstitutional, but it’s the ultimate definition of tyranny (http://bit.ly/830fcK). In fact, one of the complaints against the United States Government argued before the S.C.O.T.U.S. parallels one of the chief complaints against King George prior to the American Revolution which Thomas Jefferson wrote in the Declaration of Independence as follows:
“He has erected a multitude of New Offices, and sent hither swarms of Officers to harrass our People, and eat out their substance,” (http://bit.ly/6zOIpc).
In an article in freemarket.org, Hans Bader wrote, “The General Accounting Office describes the PCAOB as “an independent board with sweeping powers and authority;” its rules and red tape cost the economy billions of dollars every year (with an long-term cost of perhaps $1 trillion),” (http://bit.ly/5KzFzC). If $1 trillion doesn’t equate to Jefferson’s description of King George’s officers eating out the substance of the people, I don’t know what would!
Let’s take a quick inventory of what has happened to the accounting profession and in essence to publicly traded companies under government regulation. In 1934 the S.E.C. was formed and began requiring publicly traded companies to register with the S.E.C. and to file its annual independent audit with the S.E.C. as well. The S.E.C. left the accounting profession relatively self regulating; however, congress through it’s language in the Securities Exchange Act of 1934 left the Commission the authority to become more interventional as it deemed necessary for the sake of public interest. The accounting profession shifted its focus increasingly toward consulting and other services than auditing. Thus, one year before the Enron meltdown, with heavy lobbying from the largest firms in the accounting profession, the S.E.C. updated and thus changed the rules for independence in an audit. All during the history of the S.E.C. scholars have argued that it’s an unconstitutional regulatory body. The Enron meltdown occurs. Congress reacted and in 2002 passed the Sarbanes Oxley Act giving the S.E.C. that authority to appoint primary officers to the P.C.A.O.B. arguably unconstitutionally.
Thus, throughout its history, the S.E.C. has never stopped one accounting or one financial market meltdown or failure. In fact, its regulations and interventions into the self regulating nature of the accounting profession has created the meltdowns. Each time there’s a market or accounting failure, we go back to the agency that failed to begin with and ask them to implement more bureaucratic layers and solutions. Until ultimately, we have them to set up an entirely unconstitutional body to oversee the rules that represent and allow free market capitalism and thus freedom and liberty in our country. This is insanity. I can only ask, when are we going to make it stop?
Often, the reasons by the regulators, scholars and so called experts on the topic of regulation of the accounting profession, banking and capital markets is pure nonsense. In one NPR interview former S.E.C. Chairman Hills goes to the length to say that if the S.E.C. and other New Deal created agencies were rendered unconstitutional, alluding to a scenario that they would be eliminated, it would be too dangerous to our capital markets doing far too much damage to our system (http://bit.ly/830fcK). Analyzing this logic, we can see that openly and honestly those of the elite status, like Chairman Hills, privileged to hold such great regulatory power that few in the world will ever hold, arrogantly discount constitutionality and threaten us that if their system is changed we will encounter a meltdown. Well, we’ve already encountered many under their direction! And, this viewpoint is not a very scientific or educated viewpoint on Chairman Hill’s behalf. He actually made the fundamental error of rejecting the null hypothesis that a capital market without S.E.C. regulation will fail without conducting an experiment or gathering data. Until you set up an experiment where capital market fails without the profound wisdom and guidance of the S.E.C., Chairman Hill’s statement is just nonsense.
In the past, there was precedent in the Supreme Court giving the president executive power over branch officials. For example, in the 1926 case of Myers v. United States, ‘The United States Supreme Court decided that the President has the exclusive power to remove executive branch officials, and does not need the approval of the Senate or any other legislative body. The Court also wrote:
The ordinary duties of officers prescribed by statute come under the general administrative control of the President by virtue of the general grant to him of the executive power, and he may properly supervise and guide their construction of the statutes under which they act in order to secure that unitary and uniform execution of the laws which article 2 of the Constitution evidently contemplated in vesting general executive power in the President alone,’ (http://bit.ly/8d9Fkb).
Thus, in the case of P.C.A.O.B., it seems its unconstitutionality is sure. It will be interesting to see how the S.C.O.T.U.S. rules.
I’ll next lay out for you why the independent auditor ceased being independent on the day of the Securities Exchange Act big government takeover of the free market capitalism and why independence in auditing can’t exist until the accounting profession is left to be truly self-regulating. There are two things that are of utmost importance to the end user of audited financial statements. First, in order for those statements to be reliable, the auditor must be independent in fact and appearance. Second, the underlying accounting principles of which the auditor is giving his opinion must truthfully represent the audited company’s financial picture. When the S.E.C. created the image to the public that it had a role in the audit by requiring the audit to be registered with the Commission, the end users of the audited financial statements stopped placing reliance upon the reputation of the independent auditor and whether or not he would actually be independent, and began relying whether or not the guidelines of the S.E.C. are being followed. Likewise, the independent auditor stopped worrying about his appearance of independence and began focusing on following the rules of the government agency. The agency left the appearance that the accounting profession was self regulating; however, it wields the stick, through the legislative language within the Act itself, to force its will and push its agenda upon rule makers in the accounting profession’s standard setting bodies.
The S.E.C. is a governmental agency. Therefore, it must be considered in light of the language within the Securities Exchange Act of 1934 leaving it discretion that every decision, rule or action by the Commission is politically motivated. With that being the case, it is ridiculous, nay, unfathomable that such a political body could ever decide what does and what doesn’t represent independence in fact and appearance. Dr. Xu once again presented quite keenly in her paper the vociferous lobbying efforts by the accounting profession to influence the S.E.C. rules just one year prior to the Enron/Anderson meltdown (http://bit.ly/5YVQrD). Again, there are those that will blame capitalism, free market enterprise and the relationship between big-business and the legislative process. None of those are to blame. We have only the lack of common sense of those left to make decisions and analyzing the situation to blame. Relying on a political agency to tell us what is independent when we already know that throughout history regulatory agencies favor but a few very large players in an industry with lobbying power and, therefore, political capital simply doesn’t make sense. Always and forever, regulatory agencies hinder or harm free markets. They change the rules to favor the few biggest players within the industry they regulate and they cause structural barriers which often result in market or industry failures.
Thus, when it comes to the independent auditor in business today, we don’t have an economic philosophy problem. We have a structural problem disrupting the relevance and the reliability of audited financial statements to end users which ultimately disrupts the free flow of capital in financial markets resulting from reliance upon government agencies. As this relates to the independent auditor, there is a simple solution. The independent auditor must be independent in fact and in appearance. A government agency can’t tell us whether they are or aren’t actually independent. The S.E.C. and all government agencies should cease having any say over the accounting profession. There is a good argument for the Commission giving up it’s authority over investment banking and the exchanges as well. The accounting profession would thus become truly self regulating. This being the case, standards for those entering and/or working within the profession would probably become more stringent. Just as in the days of old, prior to the Securities Exchange Act of 1934, one’s reputation in the accounting profession and more especially for the independent auditor would be of utmost importance. There would be a very similar structure to what we have today, only the accounting profession would be unencumbered and untainted by government agencies. The A.I.C.P.A. would be the primary professional organization to which all professional accountants and accounting firms must be a member.
The member firms within the accounting profession can be as aggressive and capitalistic as they want or need to be. Once structured properly, this will have no effect on independence for the auditor whatsoever. The member firm can do whatever services it desires for its clients.
Each member firm conducting audits will have to become a member of a private audit exchange. There are several ways to structure the audit exchanges. Initially, I thought one national exchange would be the best; however, competition is important, and regional audit exchanges can address regional differences and needs. The audit exchanges would be private businesses unencumbered by government regulation. Remember, the professional independent auditors as members of these exchanges must be highly reputable, maintain independence and are the true stewards of private property, capitalism, free enterprise and the free markets. They can’t have their independence compromised by the taint of some government agency. Each exchange would be a member of the A.I.C.P.A. or the private national professional accounting organization.
A member firm will contract with its client to be audited. That firm will negotiate all compensation for the audit. Here’s where it becomes prudent for the firm contracting with the client to have a clear understanding of the scope of the audit and the expenses involved in conducting that audit. Once the contract is completed, the member accounting firm will turn around and notify the audit exchange that an independent audit firm is needed for the engagement. Here’s where the exchanges will need to be prudent in helping the audit exchange member auditors and audit firms determine their capabilities to conduct audits of particular size and scope. Once the accounting firm hired by the client engages the audit firm from the audit exchange it’s simply a go or no go answer from the audit exchange member firm or auditor. The accounting firm has the contract, that firm presents the scope and magnitude of the audit to the auditor from the audit exchange, informs the auditor that this is the your subcontracted rate of what you get paid for conducting the audit, and the auditor simply accepts or rejects the engagement. The independent auditor is not a negotiator, and in order to maintain independence doesn’t get involved in such. The market will determine if the contracting accounting firm is charging enough to the client and in turn paying out enough to the auditor from the exchange. If the contracting accounting firm finds its offers for an audit being rejected by several auditors from an audit exchange, it will have to raise its rate to the auditor for that engagement. Once the audit firm from the exchange commences its engagement, there will be no additional contact with the contracting accounting firm until the engagement is complete. There may need to be a few exceptions to this rule, but those could be developed over time.
Accounting firms of all sizes can perform both types of services. Even a smaller accounting firm that’s aggressive could pursue contracting with big companies to be audited. This potentially levels the playing field for that type of firm to grow. Also, some firms may prefer to specialize in the audit function as well. Most importantly, however, is that the integrity of the independence both in fact and in appearance of the auditor is technically fairly easy to maintain. Importance must be placed on reputation. This can be incorporated into the renewal process of membership in the accounting exchange. Each member auditor should have a peer review annually. Also, there work must be examined through testing and an annual independence audit by an independent professional firm certified by the A.I.C.P.A. to conduct independence audits.
No academic or research paper would be complete without gathering data or metrics to evaluate. I believe that investors and end users of audited financial statements had begun to place too much emphasis on government protection or on the reliability of the financial statements because they were registered with the S.E.C. and not because they were independent. Also, I believe that under the S.E.C., auditors and those in the accounting profession became more concerned with following S.E.C. rules or influencing rule changes in the S.E.C. and less concerned with their reputation or independence. I would like to evaluate some of the behavioral aspects of end users of audited financial statements. I don’t currently have the resources to conduct the research to gather these metrics, but over time I’ll find a way.
Development of a survey or a simple poll could get some data on the first two topics mentioned in the paragraph above. I could simply develop some questions to ask investors, lenders and auditors if they think that having the S.E.C. require registering an audit with led them to place more trust in or feel more comfortable with the audited financial statements. Surveying could also be used to see where auditors placed there priorities under S.E.C. rules. Relative to behavioral aspects of financial statement end users, a neat experiment could be conducted. We could go to investors and tell them of an imaginary market whereby they could purchase stock in or lend money to companies doing business within this market. I’d call it the Brazilian Gold Exchange. Within the B.G.E. the companies would not be registered with any governmental agency. They would all have audited financial statements. But, the audited financial statements wouldn’t be registered with a governmental agency either. They would be registered with an exclusive firm that would evaluate them and grade their reliability. Each auditor auditing the financial statements of a firm traded on the B.G.E. would have an impeccable reputation and be a member of the exclusive Gold Audit Institute. They would have an independence certification from specialty member firms conducting annual independence audits. Also, all members of the accounting profession and the auditing profession likewise would be members of the professional organization and standards setting body Brazilian Gold Institute of Chartered Accountants. There would be no governmental involvement whatsoever. Then, I would develop some fictitious financial statements on some fictitious companies and through surveying compare how these financial statement end users respond to questions about companies from this system versus our system here.
Before anyone criticizes my ideas about government involvement in business and more specifically in the business of auditing, they have to get some data through the type of research I’ve laid out above. If you get the data through objective methods, and it shows that I’m right about government intrusion into free market capitalism and private enterprise through meddling in accounting rules, then we need use our channels of the rule of law to make changes. There is a peaceful and lawful agenda for doing just that. The Supreme Court’s ruling in Euclid that changed the government’s view on private property and watered down individual rights as they relate to the Fifth Amendment is not the endpoint. It is the beginning. These markets, the companies in them and the companies auditing them are private. They don’t belong to the government to regulate. The government is here for them, they are not here by or for the government. Therefore, in the face of convincing data that under the despotism of the rules of dogma from a governmental agency we’ve been conducting business wrongly, we will turn to state constitutions and legislatures and to unused portions of the United States Constitution like Article 5 to implement adequate changes.
Copyright Kevin P. Felty of Rogue’s Harbor
Monday, November 23, 2009
My First Christmas Parade
This past Saturday, November 21, 2009, I experienced my first Christmas parade. I know those of you that know me are aware that I recently reached the advanced age of forty one. You might be wondering how a guy forty one years old could have possibly gone forty years without experiencing a Christmas parade. Hopefully you'll experience it with me and understand how this happened after I explain.
I had my usual weekend visitation with my three beautiful children, Justine Alexis, eleven years old, Jenna, age seven and Jordan who is eight. Friday evenings usually pass smoothly during these visits as we meet in the usual and customary place where their mother transfers them to me. We are usually very busy making our rounds through the grocery isles at Wal-Mart or Food Lion picking out goodies to last the children through the weekend. The grocery cart filled with goodies is usually interspersed with a few healthy items as well. And, Jordan never leaves us short of entertainment riding the cart as if it's an amusement park ride making various gestures and saying things that make us laugh that I'd rather not repeat. Thus, our Fridays are usually fairly ritualistic, fun and they serve to bring us together and set the tone for the visit.
Saturdays can often be difficult for a dad in my situation during visitations. It has taken several years to resonate in the minds of all the parties involved, i.e., my ex-wife, that after support payments, there just aren't a lot of activity resources when the kids visit. Yet, I understand, more especially this time of year, it's very important to build positive memories with these precious little jewels. Thus, I'm often caught masking and hiding feelings of inadequacy from my kids, and seeking out ways to focus our energy on doing fun things or positive things we can afford. During the summer months this is a little easier. During the fall and winter I try to keep the kids involved in playing music together. Alexis and Jordan play violin, Jenna plays the piano and I play the mandolin. We read, visit parks and visit extended family, too. However, I'm always looking for something to do that the kids find fun. We found this last Saturday.
The kids were having what I call a blasé Saturday, and I was still unsure what we were going to do, and it was getting late. The kids' mother made her usual call to check up on them around 4:30pm. They were excited to talk to her. She mentioned to the children that the grand illumination parade would start in Norfolk, VA at 7:00pm. The kids got excited and asked if we could go. In my usual less than exuberant manner I whined and whimpered and said, "Uh, I don't know!" But, the kids' mother said she'd meet the kids at the parade and drag them along. This way, I merely needed to be the chauffeur. I wouldn't be required to do the hard work to be the fun and outgoing person to entertain the kids at all. So, I thought, "Here's a bailout that even I can subscribe to."
The kids and I rushed, packed up the car and headed toward Norfolk, making our forty five minute drive from the Carolina side of life. All during the drive I was thinking to myself, "I'll hate the traffic, they can watch the parade, they'll have fun, but, it won't be fun for me." But, I was also happy that at least my kids would now have something to fill their weekend they could talk about on Monday.
The downtown Norfolk parade event traffic was not disappointing. In usual fashion, I was frustrated. A nice NPD officer pointed out a parking garage right beside the parade street. The parade had just gotten under way, we were in a hurry and it was only $5. So, we lucked up and got a good space. The kids tracked down their mother on the cell-phone. We hustled down to the parade street, they found their mother and pushed me right out to the edge of the street so close to the parade I could reach out and touch the participants.
Finally, it started to sink in. It was a typical Norfolk late fall evening. The temperature was about 52 degrees. It was humid and cool with that slight fog we get around here in the evening from the cooling air meeting the warmer bodies of water that have yet to cool down completely for the season. Thus, it was cool enough to get you in the mood of the Christmas season, yet it was pleasant.
The parade proceeded along Waterside Drive from east toward the west taking a turn onto Granby Street and heading north for about three quarters of a mile. The kids had positioned us right on the corner of Granby Street where the parade took its turn from Waterside Drive. I noticed the lights, the temperature, the kids' glowing smiles from the happiness and surprise of watching the parade with their mother, the ringing out of the band, the crowd of all the happy people, and Santa Clause. All of these things were building my excitement just as the ability of the bands to command control over the crowd built throughout the parade as the skill level of each band passing by increased.
The pinnacle was reached when finally the Norfolk State University band passed. I was so close to the band, I could smell the sweet perfume from the majorettes as they marched by us. The rhythm section vibrated the street where I was standing. I noticed that the members in the wind section were so good, they seemed relaxed and conversed among themselves, yet continued counting and came in on cue. The NSU band can take credit for ringing me into the Christmas spirit on cue.
The parade was reaching the end, and I was lost in the mood to the point that I had almost forgotten what the kids were doing. The last float passed by, and my kids rushed me, grabbed me, pushed me into the street and said, "Come on dad, it's a tradition to follow the parade!" Once again, my standoffish behavior kicked in. I thought, "I'm forty one years old, how is it that I've missed knowing about this tradition!" However, we were on our way, and I couldn't escape now. I looked behind us, and an intensely thick crowd of people had closed in along the parade street behind us. I have never participated in a parade in my life. So, I was about to experience something new.
My kids continued to drag me along, as I looked left and right and relaxed a little. I must have been smiling by this point. There were bleachers aligned along the sides of the street, all of which were filled with people waving, cheering and smiling. Also, the buildings had people on every deck and hanging out every window doing the same. There were at least 20,000 spectators. By this time, I felt like I was part of the parade.
I had been taken over by the pure spiritual power of the collective gathering of so many people merely to have fun peacefully. The diversity of those gathered both to watch and participate in the parade was impressive. I looked around me and noticed the young and beautiful, black and white, Asian and East Indian, old and wise and the glowing people everywhere. We approached the end of the parade, the participants started to disperse, the floats were being disassembled and I finally realized it. I had just experienced my very first Christmas parade!
copyright Kevin P. Felty
Thursday, November 19, 2009
Tuesday, November 17, 2009
Senate healthcare debate could insight innovative solutions
A report by AFP states that the research of two Harvard medical researchers found lack of healthcare killed 2,266 U.S. veterans last year (http://ow.ly/BCVi). The study was conducted by David Himmelstein and Stephanie Woolhandler both professors at Harvard medical school. David Himmelstein is a founder of Physicians for a National Health Program. It’s a smart and well developed study on an important healthcare related phenomenon that should never happen in America. But, Himmelstein’s proposed solution drawn from the findings of the study must be examined and practical solutions implemented. No veteran, nor should any person in America for that matter, die due to lack of health insurance coverage; however, it’s important to develop policies intelligibly.
Dr. Charles W. Calomiris, AEI economist and PhD from Stanford, points out in his study, Banking Crises and the Rules of the Game, that historically government imposed rules set in motion the conditions for banking distress and failures (http://bit.ly/3bRbrh). His paper states that risk-inviting rules causing structural constraints restraining competition, preventing diversification of risk and limiting the ability to deal with shocks caused bank failures. Dr. Calomiris is a proponent of and points out the need for a properly structured centralized bank to reduce liquidity risk without perpetuating moral hazard. Often, banking and financial market failures insight critics to pronounce capitalism, free-enterprise and markets to blame. But, we must not forget that in America exists a unique blend between business and politics, regulators and regulated and government and industry. Therefore, it’s important to analyze all the variables involving all the parties and entities involved in a dynamic industry like banking or insurance before making decisions. It would be foolish to look to government as the solution while ignoring and refusing to at least analyze it as part of the problem.
The health insurance industry, healthcare delivery and healthcare coverage and the crisis we are faced with in our healthcare markets' distress in America today can be compared in some ways to the recent banking and financial crisis. Relative to private health insurance, a private market brings insurer and insured together. We have medicare and medicaid which are funded by taxpayers and managed by government. Thus, we have a hybrid government/free-enterprise system for healthcare currently. There is a government option in place. The private insurance portion of our current healthcare system is heavily regulated by government just as the banking and financial industries. There have been many government rules restricting private health insurers at many levels. These will be discussed in more detail later. The point here is that regulations imposed by government exist for insurers creating barriers to entry, restricting competition and restricting and altering products health insurance companies can offer their customers just as they did for banks. These restrictions on private companies, the customers demanding their products and the markets in which they come together doom the success of the industry to failure. When this happens, many , such as Dr. Himmelstein from Harvard Medical School incorrectly jump to the conclusion that free enterprise and capitalism are the problem and full sail government intervention and takeover of the industry is the solution. Let me remind you that the medicaid and medicare government option is headed toward failure as this is being written. Let’s not use this failing government option as a model to repeat failure on a more grand scale.
There are many government imposed rules and regulations that have actually lead to the inability of Americans to procure healthcare. Many states have only a small and restricted number of insurers approved to offer health insurance. Government imposed barriers to entry exist for these health insurance companies. From a pure supply and demand standpoint, there is a government imposed restriction on the supply of health insurance available to the citizens demanding or needing the service. This artificially inflates the price of health insurance. Also, the insurers have not been able to offer “smart policies” that cover insureds' needs excluding coverage for treatments and services not needed. They’ve not been given to ability to offer a basic plan, and like life insurance, the ability to offer a rider for a higher premium when it’s needed. Government has greatly restricted the ability of the insurers to bring affordable innovative products to market in order to cover everyone regardless of socioeconomic class. Further, health insurers have been restricted in the ability to manage risk. These are but a few of government imposed inhibitions either impeding or restricting insurers to bring affordable healthcare to those in need of and demanding their products and services.
Harvard’s Dr. Himmelstein actually found in his study that thousands of U.S. military veterans died from lack of healthcare coverage. These veterans relied on the military’s version of the government option for treatment and care, and by Dr. Himmelstein’s own findings, these veterans died awaiting treatment. Yet, the Harvard professor advocates placing more Americans in the precarious position of being forced to rely on a government agency for their healthcare only to be treated the same as these poor veterans. I’m not sure what Dr. Himmelstein is advocating; however, being a Harvard professor, we can assume he’s intelligent enough not to overlook the obvious. Is he actually proposing a system of delivering healthcare that will fail a statistically calculated number of us like the VA? Is he saying that since the VA failed these veterans resulting in their death we should have some other government agency like the VA manage the healthcare of civilians anyway? Is he actually oblivious to the probabilities that a government option on a more grand scale than medicaid and medicare as well as the VA will be even more deficient resulting in more deaths and negative outcomes?
There are many smart and innovative people that stand poised, when given the freedom, opportunity and leeway to do so, to study, organize the people and resources and execute common sense and smart solutions to deliver healthcare to all Americans. Business, free markets and capitalism can and will provide the solutions under the direction of the proper people and with proper leadership. Without profits, there will be no tax dollars to run government nor retained earnings to grow the businesses that provide the care to citizens. Innovation and creation through research, development and profits have given Americans the best healthcare in the world right here in the United States. Next, I will discuss a few people whom definitely should be tapped because they are innovative and smart people able to solve the difficult problems required to revamp the healthcare industry to deliver care to all Americans.
I would first look to Dr. Srikant M. Datar, professor and associate dean of Harvard Business School, to head up organizing those with the capital to move into ventures involved in the private re-vamping of healthcare (http://bit.ly/4ywwiJ). Dr. Srikant is on the boards of Stryker Corporation, Novartis and many other companies. He is also a managing partner in a venture capital firm and he is intimate with free enterprise delivering the best solutions to patients needing them. Stryker Corporation employs some of the industry’s best minds and greatest business people to work hand-in-glove with the doctors to heal patients. There are reps on the ground delivering service to the doctors delivering care like Steve Anderson, from the University of Georgia, who’s been bringing patients Stryker’s most innovative orthopaedic implants for 25 years. Stryker seeks out good people like Brian Daigle down in Durham, North Carolina and delivering care at Duke (http://bit.ly/1QgIPD). Brian is a graduate of Harvard and served the United States as an agent within Homeland Security prior to joining Stryker Orthopedics. The bottom line is, Dr. Datar is one of the smartest minds in business, he knows free markets and how capital is raised and directed and is familiar with organizations getting the absolute best people to give the best service with the most innovative and superior products. These are all things the American people deserve and Dr. Datar can help solve the problems to deliver them.
This paper is not intended to be a commercial for Stryker Corporation, and competition is paramount to efficiency in free markets delivering what’s demanded. Thus, on the topic of orthopaedic implants I would be remiss to fail mentioning Synthes, Inc. and describe how two great companies like Stryker and Synthes competing result in the best solutions for patients. Sytnthes, too, is renowned for seeking out the best reps to bring the best products to the doctors giving care to patients. These are people like the late Ben Jupiter, son of the renowned professor and trauma surgeon from Harvard, Dr. Jesse Jupiter. Synthes is known as the gold standard in orthopaedics, and all orthopaedic surgeons are trained with Synthes systems as residents. Thus, like Stryker, putting into place the very best talent to work hand-in-glove with the physicians to provide the very best equipment and care is what capitalistic and profitable companies like Synthes do.
Delivering healthcare to every American efficinetly through the use of free enterprise and capital markets will require constructing, expanding and maintaining an IT network and infrastructure more sophisticated than any in history. This type of endeavor requires the direction, oversight and implementation of an innovative and smart person like Dr. Maggie Johnson from Stanford (http://bit.ly/1PD7PY). Dr. Johnson is a professor developing and teaching many innovative courses to students at Stanford. She also happens to be the Development Manager at Google. She is in the company of a very few that are developing and implementing the most cutting edge and greatest computing power in the world’s history. Dr. Johnson could definitely organize the right group of smart people to build the infrastructure and link the networks to give healthcare facilities and providers the ability give every patient the coverage they need.
It cannot be overlooked that business operates in a political environment. In order to relax state laws to allow insurers to come into a state and cross state lines to compete and to develop specialized and innovative products not previously offered requires the decisions of the legislature. Many state legislatures will not consider revolutionary change to allow businesses the ability to deliver care to every citizen until they see it done successfully in another state. Thus, there must be a model of success. Given the stiff debate in the U.S. congress currently, the passage of healthcare reform by the house and the almost certain passage of the act in some form by the senate, there seems to be few legislatures and governors willing to take on the task of implementing innovative change. However, Virginia stands poised to provide America the solution for healthcare and to become the model of success.
Bob McDonnell is Virginia’s Governor-Elect (http://bit.ly/1AaAUS). He has built significant political capital in Virginia. He garnered more votes in this past gubernatorial election than any other election in Virginia’s history. He was formerly the Attorney General in Virginia and spent more than 10 years as a Delegate in Virginia’s house. He authored a great deal of legislation in Virginia, and he has a history of being able to get legislation passed with bipartisan cooperation. Bob is also very smart about cutting through bureaucratic and complex issues to figure out what makes since. He’s not averse to being innovative if what’s proposed or what needs to be done is right for the people. Also, he understands the complex relationships between government, businesses and individuals and how all exist under the umbrella of the constitution. He’s been able to consistently develop and implement policies that are effective yet fall within the framework of America’s unique partnership between government and people. Bob is poised to be the leader to get businesses and brilliant minds together to build the successful model to deliver all Americans affordable healthcare.
Hospitals do not currently price their products and services according to any scheme that would make sense in any other business. There must be an IT system and infrastructure built, which they can subscribe to, that will allow adequate pricing. This is one of the first tasks for a team of thinkers like those that Dr. Johnson could bring to the table. Often, a hospital or facility will arbitrarily charge $1,200 for an MRI. When you research it, the price is just arbitrary. Every other business model would build pricing based on a price which after costs would bring a reasonable profit margin. It is difficult to determine, given that hospital services are unique; however, it’s not impossible. Wall Street calculates and accurately records billions of transactions a day accurately. Hospitals, healthcare facilities and providers can accomplish the same. A system with the power and capacity of those used on Wall Street must be built that the hospital clients can subscribe to that could process the data, take into account market differences such as location, costs, etc., and generate accurate price-points for a specific hospital for a specific patient and procedure.
A patient should know up front what the costs will be for their treatment. This will lend to them being able to make decisions. Also, one centralized finance department, again, with smart people like those mentioned earlier that are reps delivering services, and every bit as smart as those working on Wall Street, should be implemented in each facility. The old system of getting multiple bills from multiple providers will go away. All billing, collections and reimbursements will be managed through the central finance office. These functions could be outsourced, and firms providing these professionals independently of the facility or providers could set up in the hospitals.
The endeavor of upgrading and building the IT infrastructure and filling the roles of the healthcare facility finance departments will put a significant number of Americans back to work. These will be good paying professional jobs. Among these, a smart force of statisticians and actuaries will need to be employed. They will help develop new products. These products need to include smart policies. For example, computer programs can statistically calculate what health issues are most likely needed for a 23 year old healthy male. The young man should be able to buy a ‘smart’ policy that is affordable because it only covers what is needed. This is contrary to our current policies that include coverage for things the insured doesn’t need.
Also, an emphasis should be placed on higher deductable or catastrophic plans. With these, riders should be able to be added. Again, I would refer to the powerful IT structure that will be necessary to calculate pricing for these new smart policies and help insurers manage their risk. Since hospitals will be pricing accurately, insurers will have more accurate information to manage the said risk and to negotiate reimbursements. The disconnect that currently exists between patients’ bills and providers’ reimbursements needs to go away. Billing should be transparent and to reiterate, so should pricing.
Emergency ‘point of service’ pay forward plans should be developed. Again, we have the talent and computing power to calculate the risks of these policies so that they can be managed and insurers can offer them profitably. For, example, a young male might fracture his tibia. He comes to a hospital emergency room. He needs a surgery for a tibial rod. He and his family should know the price of that service right then and there. He should be able to pay cash, get a loan from a rep in finance, use his own insurance or purchase a ‘point of service forward paying’ policy. In our example, we’ll say he takes the point of service policy. Again, the new healthcare IT super system will be relied upon by the insurer underwriting the policy for this young patient. The patient and/or his family can be told at that time, you have to purchase this policy for your treatment, it will be $25/ month and you’ll need to be contracted for 3 years to pay the premiums. Then, the insurer can have its risk of the patient defaulting over the 3 years insured by an institutional investor. The forward paying policy default insurance becomes a marketable security.
A central health insurer willing and able to manage and take on risk, thus maintaining liquidity in the forward paying point of service health insurance market, must be established and implemented. Just like the flow of currency and capital is paramount to the banking industry, the providing of care through underwriting a policy for a patient in need is paramount in the healthcare industry. The centralized insurer needs to be private and independent of government. A chairman of insurance similar to the chairman of the fed will be necessary.
There will be debate on the risk taken when an insurer underwrites a point of service forward paying policy. Some will argue that the patient should be mandated under stiff penalties to pay the insurance for the contracted period. Technically, since they aren’t purchasing a policy including coverage for things they don’t need , and they’ve actually received the service and benefitted from it, there is a stronger position for a mandate to keep the forward paying policy in force for contractual period. I have my opinion that no government mandate is ever justifiable. But, there is a certain amount of uncertainty that will come with the new forward pay policies until they have been in force long enough to analyze and generate statistics. So, this will be policy maker’s toughest decision, to mandate or not to mandate.
Simply stated, the free market system, capitalism and smart people coupled with good leadership will solve Americas healthcare problems and put Americans back to work. Higher taxes and big government mismanagement of the problem is not the solution to the problem. I would just remind you of the study by Harvard professor, Himmelstein, that shows clearly that relying on a government agency to give you the care you need will get you killed.
Copyright Kevin P. Felty
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