Munger Interview with Stanford Law

One more Berkshire note, here is an excerpt from a must read interview with Charlie Munger from Stanford Law.

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.  

This situation is very comparable to what happens in when auditors interview infosec. Auditor asks -do you have a firewall? Infosec says yes. Check.

Its too bad but assumptions of yesteryear lead to building things on shaky foundations