Fools And Cranks...

As many of my regular readers have noticed, in the past several weeks I've picked up a new dimwit to pick on: Richard "Our Dickie" Murphy. Murphy is a Chartered Accountant out of the United Kingdom, and quite alarmingly, he seems to have a certain cachet amongst Lefty/Progressive Euroweenies in matters having to do with accounting, finance and economics.

The reason I find his status alarming is simple: He's a fool and a crank.

The reason I say this is equally simple: Facts never trouble a fool or a crank. And the bottom line is Richard Murphy does not care a whit about facts. He has a dauntingly simplistic worldview that is based on a couple of pet notions, and his interest lies in nothing more than snatching whatever factoids he might come across that seem (and I emphasize the word seem here) to confirm those pet notions.

The fact that he's your basic garden variety anti-capitalist, anti-free market statist doesn't offend me. What offends about Richard Murphy is (a) his ignorance about a remarkable number of different aspects his profession, and (b) his hypocritical indifference to fact.

It further offends me that he is the British equivalent of a Certified Public Accountant, which means there are folks out there who could end up making the assumption that all Chartered Accountants and C.P.A.s are as sloppy and stupid as Richard is.

The first thing to remember here is that Richard Murphy spends a great deal of time claiming that the real problem with audits and auditors is that they don't "look behind"(i.e., audit beyond what is required by Generally  Accepted Auditing Standards) the valuations required by Generally Accepted Accounting Standards and establish a "true and fair" valuation based upon some sort of cosmic measure of worth.

It a standard he holds everyone but himself to. 

Here's Murphy's post:

Modern finance: making dividends out of loans

The N[ew] Y[ork] T[imes] reports:

From the fourth quarter of 2004 through the third quarter of 2008, the companies in the S.& P. 500 - generally the largest companies in the country - reported net earnings of $2.4 trillion. They paid $900 billion in dividends, but they also repurchased $1.7 trillion in shares.

We know the profits weren’t real. [My emphasis - DtP] Much of it was simple mark to market revaluation. [My emphasis - DtP] In which the dividends and share repurchases were paid for out of borrowing. [My emphasis - DtP]

No wonder leverage has shot through the roof. And now companies will fail as a result.

I know this is the US and they use different rules, but the IASB has a lot to answer for in releasing this madness on the rest of the world.

Those are three genuinely amazing generalizations. Here's the question I posted at his site:

Richard-

You say we know these $2.4 in earnings “weren’t real”.

Really?

Would you have anything in the way of documentation to support your assertion? Like, perhaps, a detailed analysis of that $2.4 trillion in earnings?

Just leave a link, if you please.

Thanks

Here's his response:

Kenton

Try this:

“A big part of the problem is that accounting rules have allowed banks to inflate the value of their assets, he said.

“Accounting has become a new exercise in creative fiction,” with the result that banks are carrying a lot of “sludge” assets clogging up the balance sheet, hindering their ability to fuel economic growth, he said.”

That’s Lazard Ltd (LAZ.N) Chief Executive Bruce Wasserstein

http://www.reuters.com/article/GCA-CreditCrisis/idUSTRE49T77O20081030

Why are you in denial when the rest of us aren’t?

Is it all hunky dory in your world?

Richard

And my reply was:

Dennis-

Why, in this context, would you ask me if all is hunky dory in my world? What a strange response to a straightforward question.

What I am trying to do is verify that your claim has is based in fact. That’s all.

Given that the financial sector represents 20% of the S&P 500, what you are claiming is the following:

1) All $2.4 trillion in profits are directly attributable to the financial sector of the S&P 500.
2) The remaining 80% of the S&P 500 had profits and losses netting to $0.
3) All of the $2.4 trillion in profits were a result of market-to-market gains.
4) The financial sector had, on a net basis, $0 in operating profit.

In other words, you’re claiming that 100% of the S&P 500’s profits for October 1, 2004 through September 30, 2008 were the result of mark-to-market accounting for marketable securities.

Those are extraordinary claims, which is exactly why I asked you to provide meaningful substantiation. I find it interesting that what you provide is:

1) An opinion expressed by a Wall Street executive, and
2) An accusation that I am “in denial”.

You know, you often go on at great length about the duty of an auditor being an obligation to “look behind” the numbers to get to the “true and fair” value of an asset.

What I am doing is much the same. I am attempting to look behind your claim (to the actual numbers - not Wall Street opinions) to get the true and fair value of its merit.

That has nothing to do with denial. Or the level of hunky dory in my world. What is has everything to do is with having a appropriate level of professional scepticism for sweeping generalizations and extraordinary claims.

Again, I request that you provide appropriate substantiation.

This is where we stand at the moment. Once again I have not linked to Murphy's post because he seems to still be unaware that Kenton E. Kelly, CPA and Dennis The Peasant are one in the same. For my purposes I would prefer to keep it that way for the time being.

I find it interesting to see the sort of replies I am getting as a named member of his profession... You'd think (or at least I'd think) he would understand that as a C.P.A. I'd be harder to bluff than the average bear, but evidently that is not the case.

To the extent that Murphy continues to oblige, I'll continue to report here.

Update: Well, it's been roughly 24 hours and Our Dickie still hasn't found the time to provide us the information we requested. He has, however, found the time to put up a few new posts. Guess he was talking out his ass. Imagine that.

Comments

[daphne]

Sounds like you had a pretty nifty time jerking his chain in that thread!

[jcw]

Dennis,

Mr. Murphy obviously doesn't know much about how mark to market works because a quick search would explain quite a bit to him. Financial companies choose one of three ways to classify their assets:
1)as part of a trading account
2)available for sale or 3)held to maturity. If they value their assets as part of a trading account the movement up or down in market value is recorded in net income. If they choose available for sale the movement is recorded as a change in surplus but is not recorded in net income. If they choose held to maturity the assets are not marked to market. If Richard had done his homework he would have discovered this from the SEC,

"The first thing to note is that a majority of financial institution assets (55%) are not accounted for at fair value, and only half of those that are at fair value are of the type that affect the income statement (and therefore regulatory capital)."

Now maybe the SEC is trying to cover their asses with this statement but the least Ricky could do is google some information so that he at least looked like he knew what he was talking about. Maybe you should email him FASB 115. Maybe not, though, you'd have to explain it to him. And as a disclaimer I am an accountant for a large insurance company. We classify our assets as available for sale and all changes go through surplus.

[Dennis The Peasant]

jcw-

You're exactly right on all scores. But then we've already shown that Murphy seems to have some problems with relatively elementary accounting concepts. The point is this: He doesn't care whether the facts support is views... He makes these wild pronouncements and then simply tags anyone who questions him as delusional or reactionary.

On a purely professional level, the fact that he routinely fucks up basic (and when I say basic, I mean really basic) accounting and tax concepts scares the shit out of me. The man is out there in the field doing work for clients! God help them all.

It's telling that his U.K. politics translate to the U.S. as follows: If he was here, he'd be advising the likes of Cynthia McKinney.

[Tim Worstall]

Dennis, that's being a little hard on Cynthia. Ritchie added to a report by the new economic foundation in which this remarkable suggestion was made. A country which has had (for decades) a trade deficit and thus has had (for decades)a capital account surplus could increase the amount of capital available for domestic use if they reduced interest rates and imposed capital controls to stop foreigners sending capital into the country.

Cynthia is more coherent than that. Think rather the lower IQ set of Kos commenters.

[Mike C.]

Okay, the accounting stuff isn't my field (Don't snicker - how are you on geophysics ?) But I must say, I am enjoying this lates series of rants immensely. It would seem as if you a cutting this clod a new one on at least a semi-daily basis. Keep it up !

[markg8]

Accounting isn't my field either but correct me if I'm wrong it seems to me that American and British accounting nomenclature and standards are completely different. Is that the case and if so why? Aren't American accounting practices derived from English like law or is it a case where the accounting profession only grew in the last 200 years and did so independently of each other. I guess I'm asking for answers from all the people who majored in international history of accounting who hang out here so feel free to make something up about how you know this.

[markg8]

http://www.washingtonpost.com/wp-dyn/content/article/2009/01/13/AR2009011302326.html

Dennis maybe you'd like to take on Harold Meyerson of the WaPo too. He says by 2007 Wall Street's profits amounted to an astonishing 40 percent of all American profits.