Thread by @doctorow

Capitalism is weird.

Almost without exception, people who invest in businesses do so without personally inspecting the business, overlooking its processes, seeing its bank statements, meeting its managers and going on the road with its sales-force.

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Whether you're managing a giant pension fund, buying into a fund with your 401k, or buying stocks (or STONKS) you likely have little to no direct experience of the firm you're buying into. At best, you have visited a retail premises or tried a product, but that's very thin.

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Even if you think a business operates a tidy and efficient store, even if you love its products, you still have no basis to assess whether it is a sound investment. Maybe the business is selling products at a loss and teetering on the verge of bankruptcy.

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Maybe those gorgeous stores are run by creepy harassers who've created billions in liabilities by abusing their employees. Maybe the owners have borrowed heavily to fund a cocaine habit.

You have no way to personally verify a firm's commercial soundness prior to investing.

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Instead, you must rely on the business's own assurances about its viability - the balance sheets it publishes, the risks it discloses, its own profit and loss statements.

If these are competently prepared, it's impossible to tell fraudulent statements from true ones.

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Regulators aren't much help. They're mostly reactive, coming in AFTER a fraud to figure out what happened and (sometimes) punish the perps.

While the fraud is in play, they're unwitting participants, publishing those potentially fraudulent documents blended with true ones.

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The main assurance that investors get comes not from regulators, but from auditors: those arms-length, third-party referees whose job it is to personally verify all those bank-statements, sniff around the shop floor, examine the P&Ls, and promise that it all adds up.

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Auditors are the refs that keep the game honest. In theory, auditors are kept from cheating by strict ethics codes, licensure and regulatory oversight. Auditors are posed as neutral, trusted third parties who mediate between businesses and investors.

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But a funny thing happened on the way to the Great Neoliberal Decline: world governments stopped enforcing anti-monopoly laws, allowing every industry to shrink down to a handful of firms that are too big to audit, let along punish for wrongdoing.

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This isn't just true of the companies seeking investment - it's ESPECIALLY true of the auditors themselves. The Big Four accounting firms - KPMG, PWC, E&Y and Deloitte - now control virtually the entire market for auditing, having bought all of their competitors.

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But these Big Four - who audit nearly every large business - make most of their money from "consulting" - selling companies business advice. The Big Four claim that their auditors and consultants are separated, but those claims are hard to credit.

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Time and again, we see Big Four firms fudging the books for their best clients - as with "zombie banks" whose reckless lending has made them the walking dead, sure to collapse and require government bailouts.

pluralistic.net/2020/09/28/cyb…

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These banks pay Big Four firms vast sums to consult for them. Between 2009-17, Big Four-audited bank financials failed 800 (!) audits (!!).

But the regulator only initiated enforcement action against the auditors 53 times (!!!).

pluralistic.net/2020/09/28/cyb…

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It's not just the businesses that Big Accounting audits that are too big to regulate. Big Accounting is ALSO too big to regulate, even when it conspires with its clients to commit vast, terrible frauds.

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Accounting fraud is the norm in big business. Big Four firms have their fingers in every one of these frauds, from Exxon lying about shale gas to Facebook lying about video views.

pluralistic.net/2021/02/18/ink…

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It's the inevitable and foreseeable outcome of merging "consulting" and "auditing." Auditing's job is to bring clarity to numbers. Consulting's job is to obscure them. You can always make more money with fraud (for a while) than you can with honesty.

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The Big Four are far more likely to cook books than straighten them - every one of the Big Four firms is deeply implicated in tax evasion, for example, using numbers to obscure a business's financials, rather than reveal them.

pluralistic.net/2020/09/15/sho…

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It's been nearly two decades since Arthur Andersen - part of the then-Big-Five accounting cartel - was given the corporate death penalty for its role in the Enron fraud. That was the last time a Big Accounting company really suffered over a fraud.

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Since then, the regulators overseeing Big Accounting have largely ignored its crimes, or, at worst, charged the companies penalties that were smaller than the profits they realized through fraud. A fine is just a price.

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Take KPMG.

In 2019, the SEC found that KPMG's most senior managers were helping their auditors cheat…ON ETHICS EXAMS.

KPMG execs bribed employees at the Public Company Accounting Oversight Board to slip them advance copies of the ethics exams.

nysscpa.org/news/publicati…

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Even better (worse): the bribe that KPMG offered to regulators was A JOB AT KPMG.

Remember, KPMG plays a vital role in the market system: to be perfectly, scrupulously honest, so that rich people (and regular slobs) can make sure that they're not getting ripped off.

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KPMG's job is to stop cheating. And KPMG cheats.

Not surprisingly, a company whose official policy is to help its employees cheat on ethics exams keeps getting embroiled in ethics scandals, which end up costing regular investors and even very rich people a LOT of money.

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Here's a good one: since 2016, investors have been suing KPMG for signing off on the books of Miller Energy Partners, a dirty-as-fuck oil company that turned out to be a giant scam.

desmog.com/2021/06/03/mil…

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Miller claimed that it could profitably extract oil from wells other companies had abandoned as too dry to pump (energy companies routinely incorporate standalone businesses for each field, then declare those companies bankrupt rather than pay to shut down when they dry up).

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Miller was a fraud. It inflated the value of the wells it bought by $400m. Miller was run by serial scammers. Its CEO, Scott Boruff, stole $6m from his father-in-law, and was a veteran of a company that went bust after roping for Provident Asset Management, a Ponzi scheme.

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Boruff brought in Provident's former National Sales Director to oversee Gibson's sales - publicly praising the Ponzi schemer's "proven track record in raising capital."

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Miller was full of red flags and might have struggled to attract investors, but then it paid KPMG millions to sign off on its fraudulent books. That was the clincher than brought in millions more from investors who lost everything.

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Even after the SEC fined KPMG for helping commit fraud, the partner who masterminded the crime kept his job at KPMG, staying on until retirement.

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Now, it's possible the reason KPMG's internal watchdog missed all this was because it was a little distracted at the time - you see, that was around the time that David Middendorf - who ran KPMG's Department of Professional Practices - was being sent to prison for fraud.

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Meanwhile, Miller's top fraudsters got paid millions - and paid fines of $125,000, each.

KPMG tried to weasel out of the Miller victims' class-action suiit, but a judge in Tennessee just overruled its objections, so it's going to court:

goingconcern.com/kpmg-class-act…

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But the days of corporate death penalties are long behind us. If KPMG loses this suit, it will pay out a few million, but it will continue to operate, providing assurances of probity where none exist.

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Big Accounting is a rarity in late-stage capitalism: a sector that preys on wealthy people as well as everyday people. Somehow, it gets away with it - perhaps because there is no honor among thieves?

eof/

ETA - If you'd like an unrolled version of this thread to read or share, here's a link to it on pluralistic.net, my surveillance-free, ad-free, tracker-free blog:

pluralistic.net/2021/06/04/aar…