Accounting and bookkeeping is failing in an increasingly low trust world of ever less trusting and ever less untrustworthy 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 furniture 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 naive 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 people supposedly responsible for paying these mortgages, or the properties that were supposedly security for these mortgages.
Sox books just tend to not track value very well, 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.
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 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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