Grundfest: As we look at the current situation, how much of the responsibility would you lay at the feet of the accounting profession?
Munger: I would argue that a majority of the horrors we face would not have happened if the accounting profession developed and enforced better accounting. They are way too liberal in providing the kind of accounting the ﬁnancial promoters want. They’ve sold out, and they do not even realize that they’ve sold out.
Grundfest: Would you give an example of a particular accounting practice you ﬁnd problematic?
Munger: Take derivative trading with mark-to-market accounting, which degenerates into mark-to-model. Two ﬁrms make a big derivative trade and the accountants on both sides show a large proﬁt from the same trade.
Grundfest: And they can’t both be right. But both of them are following the rules.
Munger: Yes, and nobody is even bothered by the folly. It violates the most elemental principles of common sense. And the reasons they do it are: (1) there’s a demand for it from the ﬁnancial promoters, (2) ﬁxing the system is hard work, and (3) they are afraid that a sensible ﬁx might create new responsibilities that cause new litigation risks for accountants.