Holding Accountants Accountable

If I had known that was the name of my accountant's firm, I don't think I would have turned over my life's savings....  (Photo by Indi Samarajia/Flickr)

If I had known that was the name of my accountant’s firm, I don’t think I would have turned over my life’s savings…. (Photo by Indi Samarajia/Flickr)

It’s on account of accountants that we can’t count anymore, and someone should hold them accountable. We call them bean counters not to disparage them — honestly, I mean no disrespect — but to remind us and them of their purpose: to tell us how many beans are in the jar. When instead they tell us how many beans were in the jar last year; or how many beans would be in the jar if we had only put more in; or exactly how many beans are in a jar we don’t have and can’t get, they are not just failing to do their job, they are doing a great deal of harm to the people and companies and system they serve.

For example: Phase Two of the collapse of the fracking oil business is going to kick in with a vengeance a few days into April, not because economic conditions in that industry will suddenly get worse on the last day of March (they could hardly get worse, as it is) but because an accounting “rule” is going to kick in.

(I put quotation marks around the word “rule” when it follows “accounting,” even though this breaks the rule against blind quotes, which are quotes not attributed to someone. But this is a special case. We all understand the Golden Rule, and the Rules of the Road, because their intent and effects are obvious. Accounting rules, not so much.)

What oil companies own, mostly, is oil that is still in the ground. They call this oil “proven reserves,” even though nothing about the oil is proven, and even though everybody lies about how much they think is down there. Since no one can prove whether they are lying about their proven reserves, and there has to be a rule, the accountants at the Securities and Exchange Commission have come up with a not-exactly-air-tight one: a formula for valuing however many barrels of oil the company claims to have in the ground. It is the average of the market price of oil on the first day of each month in the preceding year.

So: On January 1st, when a company reported its net worth, it was based on the number of barrels of oil it claimed to own times $95. On April 1st, when the same company reports, it will multiply barrels times about $50. Net worth cut in half overnight. Thank you accountants. In a world where the riverboat gamblers in the stock-market casinos can trade hundreds of thousand of shares in a nanosecond, couldn’t we come up with a real-time evaluation of oil companies. You know, with computers and all?

But wait there’s more. Another bubble about to blow is the subprime auto loan bubble, which has been pumped up by the same people doing the same things that blew up the world economy seven years ago. The accountants I have in mind here are the ones who work for the rating agencies, who look at a package of car loans, each for more than the car was worth the moment its tires touched the open road, each made to a person who is as likely to repay the loan as to discover cold fusion in the ashtray, and conclude that on average, these loans comprise a AAA investment. That rating allows the few investment companies that are still under any kind of regulation  — your insurance company and your pension fund, for example — to invest in  these turkeys and to say, when they flatline, “Hey, not my fault, they were rated AAA!”

So when your bank fails, your pension checks stop coming, your insurance company’s phone is no longer in service and your stock broker’s obituary says he was “unexpectedly called to be with the Lord,”  and you want to know what happened, ask an accountant. And then hold him accountable.

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4 Responses to Holding Accountants Accountable

  1. Rael Gleitsman says:

    Max Bialystock: Don’t you see, darling Bloom, glorious Bloom? It’s so simple. STEP ONE: We find the worst play ever written, a surefire flop. STEP TWO: I raise a million bucks. Lots of little old ladies out there. STEP THREE: You go back to work on the books, two of them – one for the government, one for us. You can do it, Bloom; you’re a wizard! STEP FOUR: We open on Broadway. And before you can say STEP FIVE, we *close* on Broadway! STEP SIX: We take our million bucks and fly to *Rio!*
    The Producers

  2. Tom says:

    Yes, and financial collapse, believe it or not, isn’t the worst of our troubles. Sure, that’s going to be a huge step down, but people will still be able to buy food, stay alive, hopefully ride it out to the ‘reset.’ It’ll cause chaos, crime and creativity but most will still be alive and trying to get by.

    i’m worried about the coming time when there’s no food to buy, no water to drink, and everyone loses it because it’s so hot they can’t stand it or natural disaster strikes their locale (sea level rise on the coasts is expected to effect about half of the people on Earth), or disease outbreak, war, brutal cold, animal, fish and bird die-off (just beginning with the pollinators), earthquakes and volcanic activity, loss of the polar ice, and a long list including man-made radiation, tropospheric ozone, methane and hydrogen sulfide plumes, and so much more (all related in fact) to which there IS no fix.

    Another aspect of the topic of this essay is currency wars:


    China Has Announced Plans For A ‘World Currency’

    Steps along the way. The world’s leaders and nations are playing chess on a burning table in a deteriorating room that sits on an active seismic fault.

  3. Rob says:

    Great blog, Tom. Help me understand your math – if the valuation equals “the average of the market price of oil on the first day of each month in the preceding year,” then wouldn’t the valuation equal the summation of the twelve opening day prices divided by twelve? Thanks!

    • Tom Lewis says:

      It’s not my math, it’s their math. But yes, that’s how they got $95 in December, to cover the first quarter of 2015, and that’s how they’re going to get $50 or so in March, for the second quarter.