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Sox Accounting

Accounting and bookkeeping is failing in an increasingly low trust world of ever less trusting and ever less trustworthy elites, and Sarbanes-Oxley accounting (Sox) is an evil product of this evil failure.

Enron was a ponzi scam that pretended to be in the business of buying and selling. They would sell stuff cheap for cash on the barrelhead, then buy it dear on credit, and have the seller deliver the stuff to the buyer, without themselves ever going near the stuff, or knowing anything about the stuff.

And, as ponzi scams tend to do, need to do, they grew and grew and grew, resulting many excited investors buying Enron shares.

And some people wondered, “where are these mighty profits coming from? How can you create value without ever getting anywhere near anything that actually has value?”. To which Enron replied “financial wizardry”, which was, in a sense, true.

But Enron kept books.

Enron hired the very best and most respectable accountants to go over its books with the greatest of thoroughness, and paid them very well indeed to do so.

The very respectable accountants turned somersaults to avoid seeing evil.

Some suspicious investors hired a bunch of accounting students, who were not employed by a respectable accounting firm, nor subject to any respectable authority of respectable accountants properly established in the respectable accounting profession, to go over Enron’s books with a fine tooth comb.

It quickly became obvious to these disreputable accounting students that Enron was a ponzi scheme, that the books were the books of ponzi scheme, that the books were true though misleading, and truly reported a ponzi scheme losing money hand over fist.

The investors made the results of this examination of Enron’s books public.

When the whole thing blew up, a great many discussions came to light which amounted to Enron asking the very respectable accountants how to help the very respectable accountants refrain from seeing what they were seeing, the very respectable accountants asking each other and other very respectable accountants how to not see what they were seeing, and the very respectable accountants then telling Enron how protect the very respectable accountants from seeing what they were seeing.

And suddenly people stopped being willing to pay Enron cash on the barrelhead for goods, suddenly stopped being willing to sell Enron goods on credit. Suddenly Enron could no longer pay its employees, nor its landlord. Its employees stopped turning up, its landlord chucked their stuff out into the street.

Problem solved.

If only it had stayed solved, but much bigger trouble was in store.

Suddenly people started not respecting very respectable accountants. Suddenly people started not trusting books kept by very respectable accountants for very respectable businesses.

The accountants rushed to the government, and said “Accounting is collapsing. Business is in chaos. You must force people to respect us. (And also regulate the hell out of us to make our crimes legal ensure that none of us commit these crimes again)”

Investors who had purchased Enron’s shares, and sellers who had sold Enron stuff on credit, rushed to the government and said “Accountants are untrustworthy, businesses are untrustworthy. We have a crisis of trust. You must regulate the hell out of them to force them to be trustworthy.”

Of course you cannot force people to be trustworthy. You can, however force people to act as if they trusted people that they do not in fact trust. Which prevents people from freely associating with trustworthy people and from refusing to associate with untrustworthy people, the crisis being in large part that people were disinclined to associate with very respectable accountants, and were instead inclined to associate with the thoroughly disreputable accounting students and the investors who had hired them.

So there was in practice a great deal of overlap between very respectable accountants asking government to force business to use their services and naïve idiots asking government to force business and accountants to behave in a more trustworthy manner.

And so, we got a huge bundle of accounting regulation, Sarbanes-Oxley.

Sox required publicly traded companies to keep their books in accordance with certain rules, and has in fact successfully prevented any publicly traded companies from doing an Enron in the exact same way that Enron did it, though what MF Global did was not hugely different.

But it directly contributed the Great Minority Mortgage Meltdown. The purpose of book keeping is to track the movement and creation of value. Accounting is the art and science of making sense out of the books, and making sure the books make sense. In the aftermath of the Great Minority Mortgage Meltdown, a whole lot of entities went belly up, and when the creditors went through the books, they found all the mortgages the entities supposedly owned, but were frequently unable to find the physical people supposedly responsible for paying these mortgages, and were sometimes unable to find the physical properties that were supposedly security for these mortgages.

Sox books just tend to not track value very well, because they just don’t track physical reality, being designed for a different, more complex, and difficult to define, task. Sox books tend to track official reality and disregard the reality of the ground beneath your feet, the things in your hands, and what is before your eyes, with the result that they tend to track the creation of holiness and ritual purity, rather than the creation of value.

From the seventeenth century to the nineteenth, bookkeeping was explicitly Christian. The immutable append only journal reflected God’s creation, the balance of the books was an earthly reflection of the divine scales of justice and the symmetry of God’s creation. When the dust settled over the Great Minority Mortgage Meltdown it became apparent that the books of the financial entities involved had little connection to God’s creation.

The trouble with postmodern accounting is that what goes into the asset column, what goes into the liability column, and what goes into the equity column bears little relationship to what is actually an asset, a liability, or equity, little relationship to God Creation.

(Modernity begins in the seventeenth century, with joint stock publicly traded limited liability corporation, the industrial revolution, and the scientific revolution. Postmodernity is practices radically different from, and fundamentally opposed to, the principles of the that era. Such as detaching the columns of the books from the real things that correspond to those names. If science is done by consensus, rather than the scientific method described in “the skeptical chymist”, it is postmodern science, and if the entries in the books do not actually correspond to real liability, real assets, and real equity, it is postmodern bookkeeping. Postmodern science is failing to produce the results that modern science produced, and postmodern bookkeeping is failing to produce the results that modern bookkeeping produced.)

The state has been attacking the cohesion of the corporation just as it has been attacking the cohesion of the family. Modern corporate capitalism is incompatible with SoX, because if your books are detached from reality. lies that hostile outsiders demand that you believe, the corporation has lost that which makes it one person. When the books are a lie imposed on you by hostile outsiders you lose cohesion around profit, making things, buying, selling, and satisfying the customer, and instead substitute cohesion around gay sex, minority representation, and abortion rights. If the names of the columns do not mean what they say, people do not care about the effects of their actions on those columns.

Notice Musk’s tactic of making each of his enterprises a moral crusade, and also of giving them a legal form that evades SoX accounting. Which legal form does not permit their shares to be publicly traded.

To believe the corporation is real, for the many people of the corporation to believe the corporation is one person, the books have to reflect reality, and reality has to have moral authority. The Christian doctrine of the Logos gives reality moral authority, since reality is a manifestation of will of God.

In the Enron scandal, the books were misleading to the tune of about seventy billion dollars, in that they creatively moved their debts incurred by buying things on credit off the books, and that was the justification for SoX accounting. Which is very effective in preventing people from moving debts off the books.

In the Great Minority Mortgage Meltdown, the SoX books were misleading to the tune of about seven trillion dollars, about one hundred times as much money as the Enron scandal, largely due to the fact that the people responsible for paying the mortgages could not be found or identified, frequently had about as much id and evidence of actual existence as a democratic party voter, and many of them probably did not exist, and many of the properties were not only grossly overvalued, but pledged to multiple mortgages, or were impossible to identify, and some of them may not have existed either. It usually said that the losses in the Great Minority Mortgage Meltdown were the result of housing prices being unrealistically inflated, but they were unrealistically inflated because people who, if they existed at all, had no income, job, or assets, were buying mansions at inflated prices. To 2005, it looks like poor people who actually existed were buying mansions they could not possibly afford at market prices, but market prices were artificially inflated because of this artificial demand. From 2005 to 2007, it looks more like people who did not actually exist were buying houses at prices far above market price and market prices were irrelevant.

And that the alleged sale price of the property underlying the mortgage had been inflated far above realizable value, and often far above even what the prices had been at the peak of the bubble in 2005 was not the only problem. The creditors frequently had strange difficulty actually finding the houses.

A person who actually exists and actually wants the house is going to sign the papers at a location near the house. Towards the end, most of the mortgages were flipped, and the alleged flippers signed the papers in big financial centres far from the alleged location of the alleged houses. The mortgagees did not demand id, because id racist. Much as demanding id is racist when you want to ask voters for id, but not when you want entry to a Democratic party gathering.

Enron’s books implied that non-existent entities were responsible for paying the debts that they had incurred through buying stuff on credit, thus moving the debt off the books. In the Great Minority Mortgage Meltdown, the banks claimed that people who, if they existed at all, could not possibly pay, owed them enormous amounts of money.

Sox has prevented businesses from moving real debts off the books. But it failed spectacularly at preventing businesses from moving unreal debts onto the books. In the Great Minority Mortgage Meltdown, the books were misleading because of malice and dishonesty, but even if you are doing your best to make SoX books track the real condition of your business, they don’t. They track a paper reality disconnected from reality and thus from actual value.

But the biggest problem with Sarbanes-Oxley is not that it has failed to force publicly traded companies and their accountants to act in a trustworthy manner, but that it has forced them to act in an untrustworthy manner.

It is not only very difficult and enormously expensive to comply with Sox. It is also impossible to comply with Sox. What publicly traded companies do instead is hire an accounting firm so well connected to the regulators that when it blesses the books it has prepared as Sox compliant, the regulators will pretend to believe. Which is great for the very respectable accountants, who get paid a great deal of money, and great for the regulators, who get paid off, but is terrible for businesses who pay a great deal of money and do not in fact get books that accurately tell management how the business is doing, and considerably worse for startups trying to go public, since the potential investors know that the books do not accurately tell the investors how the business is doing.

What established businesses do instead is prepare one set of books for Sox compliance, and another illegal and forbidden set of books for management that do not comply with Sox but which actually do reflect the movement and creation of value, but a startup is not allowed to tell potential investors about the real books that actually reflect the movement and creation of value for the purpose of an IPO.

Which has killed off startups and IPOs, which used to be my bread and butter.

To do a startup again, we are going to have to do it on a blockdag.

(Blockdags being the latest advance in blockchains, an unbalanced Merkle dag instead of an unblanced Merkle tree.)

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