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.
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*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.
“But the president has called for the money to go to reducing the federal deficit and national debt.”
Ummm, what? The deficit in any given year and by extension the debt over the course of years, is the result of the balance of revenue and spending. Presidents can claim to dedicate some stream of revenue to some particular purpose, but that’s silly. Gross amount in minus gross amount out equals net amount.
*that’s odd…
my blog posts are full of amper&ands…& my post titles too…
The lede strikes me as a non sequitur for the rest of the post, and is “false but accurate”. The rating agencies rated the securities on the likelihood of default, not the volatility of their secondary market trading prices. Thus in some cases, they have proven to have been rated too highly, but not because they were valued to richly at the outset.
I don’t know why you should be surprised about E&Y. Like the rating agencies, the audit firm model is fundamentally flawed. Any time the company paying you is the one you are evaluating (or, in the case of the rating agency, is the one selling the product you are evaluating), there is a fundamental issue regarding the objectivity of the review.
M.Jed, the problem with the rating agencies was not the quality of the review. The fact is there was no review at all – if you were willing the pay high enough, you would get the rating you wanted. It was that simple, and that corrupt.
And don’t think the same doesn’t go for the auditing firms. Trust me, if you pay a high enough fee, issues will be downplayed and overlooked.
The fact that the rating agencies have any credibility at all, after the debacle of four years ago, to me is frightening.
The auditing/accounting profession is fast going down the same road….
Try backslash ‘and’ i.e. \&
Yahoo’s first report of the E&Y “study” includes this, “Ernst and Young prepared the report on behalf of several pro-business groups, including the Independent Community Bankers of America, the National Federation of Independent Business, the S Corporation Association and the United States Chamber of Commerce. (One of the co-authors, Robert Carroll, served as deputy assistant secretary for tax analysis in George W. Bush’s Treasury Department.)” So in effect we have a report prepared for big business by a representative of big business interests, Mr. Carroll amongst others. No surprise at the lack of candor in such cases.
And why would a public accounting firm think it appropriate to become involved in a starkly partisan political/legislative issue? In so doing that firm shold expect to suffer the fall out brought on by the biased nature of its preparation of the report.