No, really, this is glorious

So, the auditors to the big banks were worried, back in financial crisis time, that they might not in fact be going concerns.

And they were right to be so of course. Banking is an inherently frail industry and even more so when bank runs are breaking out. For of course bank runs are what make frational reserve banking fragile.

Now, if an auditor thinks that the company he/she is auditing is not a going concern they\’re supposed to say so. Except, of course, saying that a bank is not a going concern is exactly what precipitates that bank run and thus makes it not a going concern. The simple qualification of the accounts is all that is required to cause the run (or at least possibly this is so).

So, what did our auditors do at this point? They went off to the government and said, in effect, \”well, you know, these banks might not be going concerns. We might have to qualify their acounts. And that, of course, would precipitate the runs. So Mr. Government, whadda\’ ya\’ gonna do about it, eh?\”

To which the response was \”we\’ll make sure they don\’t go bust as a result of bank runs\”.

Phew, right, so they are going concerns then and no qualification to the accounts is necessary, no qualification that would cause the bank runs to occur.

Now, this looks to me like the auditors using their judgement. You know, checking with the Government about support for the banks before they bring the entire financial system crashing down around all our heads sorta\’ thing?

And what does our favourite retired accountant from Wandsworth have to say about this?

But what is becoming increasingly clear is that a society where playing by the rules is the aim is not sustainable. Auditors and tax accountants are meant to exercise their professional judgement. And candidly I don’t think they are. And that is dragging down the whole basis of the corporate edifice with risk to the entire market system, at cost to us all.

Those with a neoliberal bent who argue otherwise threaten us all. The time for a revival of the exercise of sound judgement is now.


12 thoughts on “No, really, this is glorious”

  1. Translating from RitchieSpeak ™, when he says it’s “time for a revival of the exercise of sound judgement”, he really means “Someone should be able to make this all up as we go. And I reckon I could be on the shortlist for that job. And I want it baaad.”

    When he says “Those with a neoliberal bent who argue otherwise threaten us all” he means “those pedants focused on low level bullshit like the rule of law threaten all of us who are on the shortlist for that job to make this all up as we go. And I reckon I could be on the shortlist for that job. And I want it baaad.”

  2. Anyone who has read Ritchie for any length of time understands that his emnity towards the Big Four auditing firms is based largely on the fact that none of them offered him a position when he finished up his education.

  3. should there be a “sound judgment” revolution, Mr Murphy will be the first up against the wall, metaphorically speaking of course.

  4. I don’t agree with Tim Worstall that “Banking is an inherently frail industry…”. It’s allowing fractional reserve and maturity transformation (borrowing short and lending long) that makes it fragile. Outlawing these two practices would not be easy, but it could be done.

    There are plenty of economists who advocate such a ban. Prof Huerta de Soto is one. See here:

    Tim adds: Wll, yes, but elsewhere on this blog you’ll see that I define banking as maturity transformation. If you’re not borrowing short and lending long then what you’re doing is not banking. You’re simply a funds broker.

  5. OK, as a non-economist, I want to know how do you get the liquidity deposit multiplication gives you without fractional reserve banking and the implicit guarantees against runs that governments give you? Really, I don’t know this stuff and would like to.

  6. David,

    I’m not sure this answers you question, but if you did something like Kotlikoff’s limited purposes banking and replaced banks with 100% equity backed mutual funds (rendering bankers mere loan brokers) you would still have a very liquid mutual fund market (for people to withdraw their money) and lots of suppliers of loans.

    the cost of loans might rise in that world, however, as lenders are not insulated from risk

  7. Brian, follower of Deornoth

    “clear is that a society where playing by the rules is the aim is not sustainable”

    He’s quite right, of course. Such is the grotesque rapacity of the public sector that paying your taxes is quite unsustainable.

  8. “Now, if an auditor thinks that the company he/she is auditing is not a going concern they’re supposed to say so.”

    The pedant inside of me insists on yelling “CORRECKSHUN!” at that. The directors are supposed to use the going concern basis unless it’s inappropriate to do so, in which case they must prepare the accounts on a ‘firesale’ not-going-concern basis. It’s only then that the auditors make their judgement about going concern.

    The way the media report the going concern issue, you’d be forgiven for believing that the directors deliberately hide going concern problems from their auditors until they’re forced to disclose them unwillingly to the world.

  9. This week, the Telegraph has run four columns condemning ‘banker-bashing’, and saying we should ‘get behind’ the banks. No explanation is offered as to why we should chant in support of very rich people whose achievements to date are:-

    (a) Emptying the Treasury
    (b) Starving small business of much-needed capital
    (c) Cheating, overcharging and mis-selling customers at every opportunity
    (d) Poking us all in the face by continuing to award themselves bonuses with our money
    (e) Lying to every stress-test on every continent
    (f) Lending money rashly to sovereign and private borrowers
    (g) Laundering money for terrorists and …
    (h) Forcing almost every worthwhile institution in Britain to cut back on social and health programmes, some of which might at least do some good.

    The only thing I’d ever get behind big banking is the largest steel-tipped boot I could find….followed by a demand for our $23 trillion back.

    Thanks to “The Slog”.
    Evidence-based bollocks deconstruction

  10. I have just noticed that if you type “richard murphy tax” into Google predicitive search, one of the options it comes up with is “richard murphy tax idiot”.

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