forked from cheng/wallet
144 lines
7.1 KiB
Markdown
144 lines
7.1 KiB
Markdown
---
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title: >-
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Sox Accounting
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...
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Accounting and bookkeeping is failing in an increasingly low trust world
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of ever less trusting and ever less untrustworthy elites, and Sarbanes-Oxley
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accounting (Sox) is an evil product of this evil failure.
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Enron was a ponzi scam that pretended to be in the business of buying and
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selling. They would sell stuff cheap for cash on the barrelhead, then buy it
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dear on credit, and have the seller deliver the stuff to the buyer, without
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themselves ever going near the stuff, or knowing anything about the stuff.
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And, as ponzi scams tend to do, need to do, they grew and grew and grew,
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resulting many excited investors buying Enron shares.
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And some people wondered, “where are these mighty profits coming from. How
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can you create value without ever getting anywhere near anything that actually
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has value?”. To which Enron replied “financial wizardry”, which was, in a
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sense, true.
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But Enron kept books.
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Enron hired the very best and most respectable accountants to go over its
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books with the greatest of thoroughness, and paid them very well indeed
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to do so.
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The very respectable accountants turned somersaults to avoid seeing evil.
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Some suspicious investors hired a bunch of accounting students, who were
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not employed by a respectable accounting firm, nor subject to any
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respectable authority of respectable accountants properly established in the
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respectable accounting profession, to go over Enron’s books with a fine
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tooth comb.
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It quickly became obvious to these disreputable accounting students that
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Enron was a ponzi scheme, that the books were the books of ponzi
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scheme, that the books were true though misleading, and truly reported a
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ponzi scheme losing money hand over fist.
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The investors made the results of this examination of Enron’s books
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public.
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When the whole thing blew up, a great many discussions came to light
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which amounted to Enron asking the very respectable accountants how to
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help the very respectable accountants refrain from seeing what they were
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seeing, the very respectable accountants asking each other and other very
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respectable accountants how to not see what they were seeing, and the
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very respectable accountants then telling Enron how protect the very
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respectable accountants from seeing what they were seeing.
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And suddenly people stopped being willing to pay Enron cash on the
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barrelhead for goods, suddenly stopped being willing to sell Enron goods
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on credit. Suddenly Enron could no longer pay its employees, nor its
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landlord. Its employees stopped turning up, its landlord chucked their
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furniture out into the street.
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Problem solved.
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If only it had stayed solved, but much bigger trouble was in store.
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Suddenly people started not respecting very respectable accountants.
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Suddenly people started not trusting books kept by very respectable
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accountants for very respectable businesses.
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The accountants rushed to the government, and said “Accounting is
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collapsing. Business is in chaos. You must *force* people to respect us. (And
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also regulate the hell out of us to ~~make our crimes legal~~ ensure that none
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of us commit these crimes again)”
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Investors who had purchased Enron’s shares, and sellers who had sold Enron
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stuff on credit, rushed to the government and said “Accountants are
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untrustworthy, businesses are untrustworthy. We have a crisis of trust. You
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must regulate the hell out of them to *force* them to be trustworthy.”
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Of course you cannot force people to be trustworthy. You can, however force
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people to act as if they trusted people that they do not in fact trust.
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Which prevents people from freely associating with trustworthy people
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and from refusing to associate with untrustworthy people, the crisis being
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in large part that people were disinclined to associate with very respectable
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accountants, and were instead inclined to associate with the thoroughly
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disreputable accounting students and the investors who had hired them.
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So there was in practice a great deal of overlap between very respectable
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accountants asking government to force business to use their services and
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naive idiots asking government to force business and accountants to
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behave in a more trustworthy manner.
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And so, we got a huge bundle of accounting regulation, Sarbanes-Oxley.
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Sox required publicly traded companies to keep their books in accordance
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with certain rules, and has in fact successfully prevented any publicly
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traded companies from doing an Enron in the exact same way that Enron
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did it, though what MF Global did was not hugely different.
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But it directly contributed the Great Minority Mortgage Meltdown. The
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purpose of book keeping is to track the movement and creation of value.
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Accounting is the art and science of making sense out of the books, and
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making sure the books make sense. In the aftermath of the Great Minority
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Mortgage Meltdown, a whole lot of entities went belly up, and when the
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creditors went through the books, they found all the mortgages the entities
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supposedly owned, but were frequently unable to find the people
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supposedly responsible for paying these mortgages, or the properties that
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were supposedly security for these mortgages.
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Sox books just tend to not track value very well, being designed for a
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different, more complex, and difficult to define, task. Sox books tend to
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track official reality and disregard the reality of the ground beneath your
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feet, the things in your hands, and what is before your eyes, with the result
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that they tend to track the creation of holiness and ritual purity, rather than
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the creation of value.
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But the biggest problem with Sarbanes-Oxley is not that it has failed to
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force publicly traded companies and their accountants to act in
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a trustworthy manner, but that it has forced them to act in an untrustworthy
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manner.
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It is not only very difficult and enormously expensive to comply with Sox.
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It is also *impossible* to comply with Sox. What publicly traded companies
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do instead is hire an accounting firm so well connected to the regulators
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that when it blesses the books it has prepared as Sox compliant, the
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regulators will pretend to believe. Which is great for the very respectable
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accountants, who get paid a great deal of money, and great for the
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regulators, who get paid off, but is terrible for businesses who pay a great
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deal of money and do not in fact get books that accurately tell
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management how the business is doing, and considerably worse for
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startups trying to go public, since the potential investors know that the
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books do not accurately tell the investors how the business is doing.
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What established businesses do instead is prepare one set of books for
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Sox compliance, and another set of books for management that do not comply
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with Sox but which actually do reflect the movement and creation of
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value, but a startup is not allowed to tell potential investors about the
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real books that actually reflect the movement and creation of value for the
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purpose of an IPO.
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Which has killed off startups and IPOs, which used to be my bread and
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butter.
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To do a startup again, we are going to have to do it on a blockdag.
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(Blockdags being the latest advance in blockchains, an unbalanced Merkle
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dag instead of an unblanced Merkle tree.)
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