Why I Love Accountants: the Subprime Mortgage Debacle

If you were the head of some large organization and faced some really serious crisis with which you had little experience—who would you want at your side?

1. your lawyer
2. your CFO
3. your management consultant
4. your PR and marketing guru
5. your COO

Me, I’d pick the CFO. Why? Because (s)he’s most likely trained in accounting. And I have come to believe that accountants have—overall—the clearest and most practical view of the world of all the professions.

I suppose it has something to do with a closed system view of the world. Everything’s either a debit or a credit; it must have an account, and an offsetting account. And everything must cross-foot; it must all add up.

But unlike other closed systems (scientology? creationism?) there are very few gaping holes of the “here a miracle happens” sort.
When I was a management consultant, I built a case study out of a client experience, and frequently used it as an interview case.  I also tested it on many of my own colleagues.  Most cracked the code after about three minutes; some in two minutes; a very few in one minute.

Our CFO —Ross Currie—got it in 15 seconds, and he wasn’t a consultant.  He was a trained accountant.

For a example of what I’m talking about, try a delightful column by Jim Peterson, who writes for the Business Section in the International Herald Tribune. In Accounting for Subprime—Scoring the Scorekeepers, he writes:
 

As soon as commerce moved beyond one-to-one barter, conventions were required to quantify such inherently judgmental issues as the hazard of re-payment in future periods, the time value of money to change hands at a later time, or the transfer of performance to a third-party.

So viewed, subprime and the credit market turmoil are all about the accounting, and nothing else. Fundamentally flawed assessments were made – whether out of venality or ignorance – about the quantification, of timing and transferability of the risks associated with uniquely complex financial derivatives, and the collapse in their values as knowledge and experience eventually caught up.

So the accounting for mortgage-based assets and their off-spring should be seen as a proxy for the reckoning of financial reality in all aspects:

He then goes on to describe the accounting view of each player in the debacle—people who overpaid on houses with over-leveraged credit; the investment banks who dreamed up the toxic waste; and the merry-go-round investors who bought it.
Read the rest his article to find out its implications for Sarbanes Oxley.

Like I said—in a crisis, I’d pick the CFO.

Who would you go for?

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