My Diigo Bookmarks 09/30/2008
September 30, 2008
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NetNewsWire iPhone Application is Very Popular: NewsGator Widget Blog
Shows the power of the widget - in the right circumstances
Brian echoes my (and others) sentiments
September 29, 2008
This from Brian Sommer, my co-author of a report about SAP Business ByDesign and former senior director of Andersen Consulting’s (now Accenture’s) global Software Intelligence unit
Accounting firms just don’t get it. Their industry has become ever more irrelevant because of their inability to provide timely insights into business deals and operations. Every accountancy with a Wall Street audit client should publicly apologize for their firm and their industry’s inability to understand or clearly report the true financial situation each of these failed businesses faced. It is a damning embarrassment to the accounting industry that so many giant firms have failed in such short order and yet these companies received pretty clean audits just last year.
I am virtually certain that lawsuits will emanate from these spectacular failures and aggrieved litigants and shareholders alike will seek redress from the accounting industry. While I would like to be sympathetic, I cannot be. Auditing has to come back to its roots. It has to be about presenting the total picture of a company’s financial situation, warts and all. This selective inclusion or exclusion of multi-billion-dollar transactions is unacceptable and should have never been permitted in the first place.
I and others have been saying very much the same thing for years. So when someone like Brian comes out and validates that point of view, it is hard to disagree. The $64K question - is anyone out there listening? They should be.
PS - Francine is running a red, amber and green light tally on who’s got problems in all this and who hasn’t.
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Harvard thinking about the financial crisis
September 29, 2008
If you have 96 minutes to spare then the Harvard Business School discussion about the US financial crisis is worth the time investment. It was recorded last Friday. The panel members:
Jay Light - Dean of HBS
Robert Kaplan - board member Harvard Management Company
Elizabeth Warren - law professor, specializing in bankruptcy
Greg Mankiw - professor of economics
Kenneth Rogoff - professor of economics and public policy
Robert Merton - 1997 Nobel prize winner for economics based on work on a new method of pricing derivatives
While each provided cogent insights into causal factors and possible solutions, which varied according to their perspective, only Liz Warren critiqued the executive compensation element of the rescue package. It was the only segment that received spontaneous applause.
No-one dealt with the greed issue that Al Wood so eloquently discussed in my last piece.
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What can you trust?
September 29, 2008
While I have been fairly strident about the problems attached to the US financial markets and in particular the role of the audit crews, it turns out that one of the main problems was much simpler. According to the New York Times:
The people who ran the financial firms chose to program their risk-management systems with overly optimistic assumptions and to feed them oversimplified data. This kept them from sounding the alarm early enough.
The methods they used hinged on assuming long term risk factors rather than taking into account relatively short term risk events. As Saul Hansell, the reporter says:
It was like a weather forecaster in Houston last weekend talking about the onset of Hurricane Ike by giving the average wind speed for the previous month.
As anyone who has developed a cashflow forecast will tell you, short term factors carry as much if not more weight when trying to assess a forward position because the longer the timeframe under review as the basis for assumptions, the more uncertain the model becomes. That’s why we’ve developed systems of rolling forecasts.
This is not rocket science but forecasting 101. So if that’s the case, then why didn’t anyone ask the obvious question as to the underlying assumptions governing the creation of risk adjusted models? I suspect the answer is equally prosaic. As professionals, we are accustomed to running tests around the transactional controls rather than the underlying assumptions which govern those controls beyond the audit trail and authorization processes. Or maybe the audit folk took one look at the models and were blinded by their complexity or simply relied on the outcomes as reported to them by actuaries?
What is becoming clear to me at least is that US bankers didn’t have the experience to realize that housing markets don’t have an ever upwards trajectory. Or maybe they were too terrified to face the truth.
Either way it is a classic case of garbage in, garbage out.
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