Friday, April 17, 2009


The WSJ did an article on possible changes in regulation and compensation of the rating agencies entitled SEC Puts Rating Agencies On Notice.

Every time there is a major fraud at a public company or some other event that causes a rapid decline in a company's stock, there is an outcry that the rating agencies did not do there job and changes are required. Then just as soon as some other event diverts our attention, the rating agency business model continues largely unchanged. Until the next crisis.

The issue once again is the perceived lack of independence of the credit rating agencies as they are paid by the company being rated. The SEC has told the rating agencies that there is more to do in regulating the credit rating firms.

The article includes the following paragraph:

"Ms. Schapiro on Wednesday said the performance of rating firms in mortgage-backed securities has "shaken investor confidence to its core." She was referring to criticism that firms gave overly optimistic ratings to mortgage-backed debt and were slow to make downgrades when defaults by homeowners rose."

I agree that the regulators need to look at the entire economic mess started with the mortgage backed securities and re-evaluate the regulatory rules and processes.

However, I also believe strongly in market demand. Where is the demand, from those that rely on these agencies for ratings, for more accurate and independent evaluations? If there was more market demand, there would be a quicker and better answer than we are likely to get solely from regulatory demand.

So here is a wild thought.

What if accounting firms issued a risk rating in addition to their audit opinion? This could be an overall business risk applied to debt and stock or separate risk evaluations.

I know, the accounting firms have their own issues.

But what a new mouse trap!

Thoughts? Alternative ideas?

Until Next Time,


  1. Gail, great comment as usual. I am enjoying your blog. My thoughts on your idea of an Accounting Firm issuing a risk rating is mixed. On the one hand, it is far better than what we have now. However, they are also not independent, particularly if it is the firm performing the audit of the company. It might be better to have an accounting firm who is not performing the annual audit or other services do the risk assessment. At least we are moving the conversation in the right direction.

  2. Sorry,
    The last round of frauds at Enron, Worldcom, etc were accouting frauds that were not uncovered by accounting firms and perhaps the accounting firms were duplicitous in the frauds. The result of that was the demise of Anderson and then legislation that made accounting firms more profitable and more difficult to do businsess called Sarbines Oxley.

    I believe accountants are over their heads already.

    Perhaps the independent financial analysts who have been spun out of the investment banks might make a better home for the ratings.