Ernst and Young, Make-Up Artist*

A key but seriously underemphasized factor in the near-collapse of the financial system and economy in 2008 was the role that the two largest securities-ratings firms, Moody’s and Standard and Poors, played: The two agencies routinely and deliberately overrated the value of mortgage-backed securities. 

So I was momentarily (and naively) stunned to read this morning the specifics of the highly-publicized Ernst and Young report released yesterday claiming that Obama’s main tax proposal could cause the loss of 710,00 jobs. A Yahoo! News article summarizes:

On the official White House blog, senior Obama economic policy aide Jason Furman ripped the new study. Among his complaints:

–       The report, funded by pro-business groups generally hostile to Obama’s agenda, assumes that none of the revenue generated by raising taxes on the richest Americans goes to deficit reduction. Instead, it assumes the money would go to expanding government spending. But the president has called for the money to go to reducing the federal deficit and national debt.

–       The report omits Obama’s push for new tax cuts to spur private-sector hiring and investment. By ignoring the predicted impact on jobs growth, Furman argued, the study distorts the impact of the president’s agenda.

The article goes on to say that “Furman, whose title is Principal Deputy Director of the National Economic Council, also charged that the study’s conclusions are ‘dramatically out-of-line with estimates by other analysts’ like the Congressional Budget Office (CBO), the non-partisan standard for judging the economic impact of federal legislation.”  Furman also noted that the proposal would restore tax rates to their Clinton-era level, a time of significant jobs creation.

Good grace.  Ernst and Young is not an ideological think tank.  Not openly, anyway.  It is instead one of the very largest and most prestigious accounting firms in the world, and, like Moody’s and Standard and Poors, is relied upon by securities investors and merger-and-acquisition folks for honest evaluation of corporate value and the like in SEC filings and private deal-making. 

It also is generally considered a proverbial gold-standard firm in preparing tax documents for corporations and (wealthy) individuals.

Which brings me to the subject of the IRS.  Needless to say, the IRS’s investigatory powers cannot be used for political purposes.  For the most basic and obvious reasons, that would be illegal; it would undermine democracy itself.  (See, e.g., Richard Nixon; Watergate.)  But if this firm is simply altering or removing relevant facts from its computations in order to meet a client’s pre-calculation demand—which apparently is what happened in this instance—its very credibility is so undermined that the firm’s identification on IRS, or for that matter securities, documents, as having played a role in the preparation of the document, should begin to raise red flags for the relevant government agencies.  And for anyone reading a securities prospectus or considering the purchase of, or investment in, a particular business.

There’s simply a limit to the extent to which relevant facts can be manipulated or discounted and still have the financial representations not amount to fraud.  In the case of this Ernst and Young report, it’s fraud, but not illegal fraud.  But that’s only because the report itself was not part of a securities or IRS filing or some other financial transaction.  

*Oookay.  Blogger is not letting me use the ampersand, saying it’s a character that’s not allowed. Thus, my use of “and” rather than the forbidden character in the corporate names.