If all else fails…

…throw your toys out the pram. That certainly seems to be the MO of Tim Worstall and his mob of goons. For those that don’t know, Tim Worstall is a self styled pundit and apologist for the so-called ‘free market.’ There is nothing wrong with that as there should always be room for contrarian views. His current target of abuse is my friend Richard Murphy. Those that know me will also know that I don’t always agree with Richard. I don’t have to in order to support the broad swathe of his arguments that the audit system as we currently know it, articulated through lax and ineffective oversight and made possible by markets that are poorly (or not) regulated is in a mess.

Unfortunately for Tim and his ilk, it seems he can barely pass a day without descending into character assassination. I’m all for robust debate but it comes to something sordid and seedy when a person finds it necessary to attack the person rather than the message. That’s not a sign of intellectual rigor but of intellectual dishonesty. I hope that as we move towards a period of reflection and, hopefully professional renewal, that the quality of debate will be lifted. Having said that, I’m not sure Richard covers himself entirely in glory when he counter attacks although I fully appreciate his anger and frustration at trying to tilt at the powers Worstall represents. I prefer to deal with the realties I see on the ground.

That’s why a Securities Litigation and Enforcement Channel discussion hosted yesterday evening (my time) on BrightKite was of such interest to me. In a wrap up covering 2008, US lawyers I have only just started to follow and Francine McKenna gave their opinions on what’s been happening the last year and what’s likely in the year ahead.

The US is, as we know, famous for being litigious. While I am far from in favor of that, it is easy to see why rules based systems provide fertile ground for the legal profession. Rules are there to be broken – that’s the way of the world – yet the US has tenaciously clung to this way of regulating and, I would argue, it has in part led to its economic demise.

If Francine is correct – and I think she is – then the coming litigation around the Madoff securities fraud and the calls for vengeance alone could well be the tipping point for the demise of at least one major accounting firm. In her presentation, Francine said that while getting solid facts is difficult, her assessment of the damages claims faced by major firms in the US is as follows:

• Pre-Madoff, 6 largest auditing firms engaged in 90 actions with damages claims in excess of $100 million
• 41 cases seeking damages in excess of $500 million
• 27 cases seeking damages in excess of $1 billion
• 7 cases seeking damages in excess of $10 billion

By any stretch, these are huge numbers. Regardless of the outcomes the scale of damages being sought should be a firm indicator that even if Worstall thinks otherwise, litigators in the US at least are pointing the finger firmly at the auditors. Yes, there has been systemic failure. That’s easy to see in the articles coming out of the US speculating on the shape of the Obama government. But as Financial Week pointed out:

He has called for adoption of “new common-sense rules of the road that will protect investors, consumers and our entire economy from fraud and manipulation by an irresponsible few.”

The early signals point to “a very new and different and activist era,” Mr. Ornstein said.

Of course, Mr. Obama is not the first president to target this issue. The streets of Washington are littered with bold blueprints to reform the financial oversight bureaucracy.

Past efforts have crumpled, victims of agency turf battles and attacks from industry lobbyists defending the status quo.

However, I believe we are in a very different environment to that we have seen in the past. Information is much more freely available and easily diesseminated than at any time in the past. The fact US taxpayers are in effective ownership of significant well known institutions strikes a very different tone to that in the UK, where notions of public ownership are not such a distant memory. The fact people like Francine are bewing asked to participate alongside lawyers on these matters of importance speaks volumes about the need for genuine reforms and transparency.

Worstall might not like, indeed seems to loathe, the direction Francine, Richard, Prem Sikka and myself are arguing but that misses an essential truth. The hidden world of finance is now being exposed in a way that has not been seen in the past. People are hurting as a direct result of the economic plight in much of the western world. People want explanations for sure but they want change so that the privatised excesses of the past do not become the public lame ducks of the future where all our livelihoods are overshadowed for years to come.

Tinkering around the edges or apologizing for laxity won’t do it. The question on many people’s minds right now is just how far Obama will go and what the backwash will feel like for the profession. Despite requests to make public my predictions, I want to see the look on Obama’s face when he opens the books on Janury 21st. Many of my colleagues believe he has a good insight into what’s going on. I’m not so sure.

Right now I’d like to see ICAEW’s CEO Michael Izza being pro-active. Sitting in front of a House of Commons Select Committee on the affects of the credit crunch in the SMB sector is all good PR. But when is he going to acknowledge the responsibilities the profession itself faces? As the man whose vision is one of ‘confidence’ his silence on this topic is deafening.

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Tagged as: Francine McKenna, Free market, Tim Worstall