AC answer to auditor independence

[Borodog]

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It probably doesn't matter, because anarchists want to get rid of corporations, limited liability, and passive investment.

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Is this true? This means that If I want to start a company, I am risking everything I own. Right?

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Perhaps. Perhaps not.

Why, in principle, is that a bad thing? Let's say you found a company that does $5M in damages. Your net worth is only $1M. Should you somehow not lose everything you own?

If the government artificially limits liability beyond what the market would, it incentives risky, negligent decisions and behaviors. It allows companies to externalize their risks and costs onto victims who's legal redress has been taken away.

[hmkpoker]

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If the government artificially limits liability beyond what the market would, it incentives risky, negligent decisions and behaviors. It allows companies to externalize their risks and costs onto victims who's legal redress has been taken away.

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Keynesians fear the obvious disincentive to passive investment that a free market would provide, only because their priorities are completely [censored] up. Productivity is more important than freedom.

[Borodog]

The funny thing being, of course, that freedom is more productive than coercion.

[Nielsio]

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It probably doesn't matter, because anarchists want to get rid of corporations, limited liability, and passive investment.

[/ QUOTE ]

Is this true? This means that If I want to start a company, I am risking everything I own. Right?

[/ QUOTE ]

Perhaps. Perhaps not.

Why, in principle, is that a bad thing? Let's say you found a company that does $5M in damages. Your net worth is only $1M. Should you somehow not lose everything you own?

If the government artificially limits liability beyond what the market would, it incentives risky, negligent decisions and behaviors. It allows companies to externalize their risks and costs onto victims who's legal redress has been taken away.

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Ofcourse they can take insurance.

[hmkpoker]

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The funny thing being, of course, that freedom is more productive than coercion.

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Depends on how you define "productive" [img]/images/graemlins/wink.gif[/img]

btw, I need a job and I hear you have windows that need repairing? (after I break them)

[jstnrgrs]

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It probably doesn't matter, because anarchists want to get rid of corporations, limited liability, and passive investment.

[/ QUOTE ]

Is this true? This means that If I want to start a company, I am risking everything I own. Right?

[/ QUOTE ]

Perhaps. Perhaps not.

Why, in principle, is that a bad thing? Let's say you found a company that does $5M in damages. Your net worth is only $1M. Should you somehow not lose everything you own?

If the government artificially limits liability beyond what the market would, it incentives risky, negligent decisions and behaviors. It allows companies to externalize their risks and costs onto victims who's legal redress has been taken away.

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I assume that if I bought stock in a company that went bankrupt, I would also be responsible for a portion of the companies debts. What if some of my fellow stock holders were unable to pay their share of the debt, would that also be on me?

If I owe 5M, but I only have 1M, do I continue to owe the other 4M until I can come up with it, or is there some mechanism for my debt to be discharged?

[Borodog]

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[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
It probably doesn't matter, because anarchists want to get rid of corporations, limited liability, and passive investment.

[/ QUOTE ]

Is this true? This means that If I want to start a company, I am risking everything I own. Right?

[/ QUOTE ]

Perhaps. Perhaps not.

Why, in principle, is that a bad thing? Let's say you found a company that does $5M in damages. Your net worth is only $1M. Should you somehow not lose everything you own?

If the government artificially limits liability beyond what the market would, it incentives risky, negligent decisions and behaviors. It allows companies to externalize their risks and costs onto victims who's legal redress has been taken away.

[/ QUOTE ]

I assume that if I bought stock in a company that went bankrupt, I would also be responsible for a portion of the companies debts. What if some of my fellow stock holders were unable to pay their share of the debt, would that also be on me?

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I can't answer definitely, because such a thing cannot be logically derived via a priori theory; it's something that the market would arive at.

My feeling that that this would not be the case; preciesly because it is "unfair." In such a case other investors would be externalizing their risks and costs onto you. In such a case, the plaintiff might not be able to recoup all their damages, but there is never any guarantee that someone who wrongs me will have the financial wherewithall to make me whole. The market does not guarantee that there are perfect solutions to every problem. It just tends to find the best possible solutions.

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If I owe 5M, but I only have 1M, do I continue to owe the other 4M until I can come up with it, or is there some mechanism for my debt to be discharged?

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I can't say what solution the market would arrive at under such a scenario. There are a number of possible resolutions. Some other theoretician may have given it deeper thought than I and might be able to say which ones might be more likely for what reasons.

My gut instinct is that the solution that minimizes everyone's costs is for the debtor and the creditor to arrive at some negotiated payment schedule where the creditor can recover at least some of what they are owed over time, or else the debtor has their credit (in private credit bureaus) severely damaged.

[bunny]

Thanks for this.

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Audits only exist because of government regulation.

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Surely this isnt true? It isnt in australia anyhow where private stock exchange has its own audit requirements separate (although often similar to) those required by government.

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In an AC world, the only audits that would happen would be from firms who wish to be listed on the fully unregulated exchanges that would demand their own audit criteria.

In this case, certain exchanges would have more stringent audit rules than others, and the audits would in fact be geared to making sure that the profits recorded are true.

In an environment where corporations are untaxed, the concern of the audit would be around proving income as opposed to hiding income.

Auditors would have a big incentive to be accurate because the exchanges would hold a lot of power over whose stock was offered and could literally put a accountants out of business with one stroke. They could blacklist accounting firms and disallow member companies from using the blacklisted accountants' audits.

If an exchange were totally corrupt then people would not buy the stocks listed on that exchange. Most of the market is driven by big buyers and mutual funds, so the mutual funds have a big incentive not to buy stocks from companies listed on an exchange known for looking the other way when companies lie about the profits.

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The trouble that did occur in the less regulated environment was that things went along rosy for a long time - having an auditor with compromised independence does not in itself lead to inaccurate audits, it just increases the likelihood. I was curious whether the stock exchanges would pay to police such hard to measure things as independence or if it would be seen as an acceptable risk (having no effect most years with the odd catastrophe).

[Mempho]

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I have been writing an essay on recent changes to auditor independence (a bunch of rules were introduced after the enron collapse amongst other things). I wondered if an AC fan might speculate on how auditor independence would fare under AC? It seemed to me on first blush that free-market/unregulated is what used to exist and it turned out to fail miserably. The "People will trust audit opinions from historically trustworthy firms" idea seems to fail since it would be easy to follow a high risk/high return strategy (ie give dodgy audit reports for good money) then constitute a new company if you ever got found out.

I cant imagine there being enough of a problem for people to fund a private audit regulatory system (plus it would face its own independence problems)

Any solutions? Or is it not really a problem?

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I think we auditors were doing fine self-regulating. IMO, Enron was a fraud that was brilliantly contrived by management. We have management representation letters to cover our a**** in those situations...of course, it didn't help Andersen.

The AICPA and the ASB have always done a great job and I think the PCAOB will end up just being a bunch of bereaucratic nonsense in the end. We did well self-regulating because we have always realized that of all the services that we give, integrity is the most important.