The Cassandra effect

According to Wikipedia:

In Greek mythology, Cassandra (Greek: Κασσάνδρα, “she who entangles men”^[1]; also known as Alexandra^[2]) was the daughter of King Priam and Queen Hecuba of Troy. Her beauty caused Apollo to grant her the gift of prophecy. However, when she did not return his love, Apollo placed a curse on her so that no one would ever believe her predictions…

In more modern literature, Cassandra has often served as a model for tragedy and Romance, and has given rise to the archetypal character of someone whose prophetic insight is obscured by insanity, turning their revelations into riddles or disjointed statements that are not fully comprehended until after the fact…

Negativity is often attached to Cassandra and her many ideas; her goodness and virtue are not examined as readily as the veracity of her predictions. By means of this ‘Cassandra Effect’ (see below), we fail to understand her hardship; the reality of her visions, and the partial helplessness she suffers as the result of her curse…

The Cassandra effect is when a person believes he or she knows the future happening of a catastrophic event, having already seen it in some way, or even experienced it first hand; however, the person knows there is nothing that can be done to stop the event from happening and that nobody will believe it even if he or she tries to tell others. For example, in finance, the more you warn your colleagues about the tail risks—the rare but devastating events that can bring the bank down—the more they roll their eyes, give a yawn and change the subject. This eventually leads to self-censorship.^[7]

I’ve been thinking about this the last couple of days and in particular as it relates to the profession and the financial crisis. There have been plenty of people coming out the woodwork saying they had predicted the collapse of the financial system. That’s true. It’s also true to say that few if anyone really believed those predictions. Sometimes when you’re looking at something it is almost impossible to envisage it as anything other than what is in front of you. That can be incredibly frustrating when you just ‘know’ there are systemic problems. I got that sense in reading Francine McKenna’s post about the crisis where she enumerated the years over which she has been talking about subprime. I look back over my own posts on the topic and especially about the parlous state of the profession with that same sense of frustration – at least on occasion.

Richard Murphy recounts an incredible piece of Big Four puff and fluff coming out of the FT. When I read it, I almost spat coffee at the computer screen:

Arguably, though, the most important asset accountants have maintained in this recession is their reputation.

In some ways it is surprising that the downturn has not notched up a big accounting scandal. The reasons are two-fold. First, firms and their auditors have become more conservative since the Enron and WorldCom accounting debacles. Second,� Sarbanes-Oxley in the US and harmonised reporting standards elsewhere have forced greater disclosure requirements. With this has come more work for accounting firms. Indeed, strong recruiting has continued through the downturn.

Are we on the same planet? Hasn’t the FT heard of Satyam, Madoff, Northern Rock to name but three scandals in which auditors are implicated? Perhaps the writer was wowed by PWC’s results? Whatever your thoughts, I am still firmly of the opinion that at least one of the Big Four will fail even though I know ICAEW members and colleagues who think I’m utterly wrong. I agree with Francine the weight of impending litigation is what will bring the situation to a head. The pile of lawsuits is simply too high and in the case of Satyam, will almost certainly require litigating in order to settle. That is one of what I believe will be a series of tipping points. Having said that, my opinion about which of the Big Four fails first varies depending on which news I’m reading at the time. There’s just too much bad news out there. Regardless, the die is cast.

As and when (not if) it happens, we will see a radical recasting of the profession. It will be a golden moment when it will be possible to think about how the profession might morph into something in which people can place genuine confidence once again and where a meaningful ethical compass drives the way they do business. That is for those who are not already thinking these matters through.

In the meantime, people like Richard, Francine, myself and Adrienne will keep plugging away at the issues – even if that means we individually and collectively sound like Cassandra. At times completely out of step with consensus thinking, at others apparently baying at the moon.

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• Andy Ostroy: The Lesson to be Learned from Bernie Madoff (huffingtonpost.com)
• What a Culture of Candor Really Takes (blogs.harvardbusiness.org)
• What Don’t Corporate Executives Understand About “Thou Shalt Not Steal?” (tpmcafe.talkingpointsmemo.com)

Tagged as: Bernard Madoff, Big Four auditors, Cassandra, Northern Rock