Accounting vs. Technology - Who's At Fault
Posted by Brian Sommer @ 9:28 am
Did technology play a role in the financial services meltdown?
A columnist for a major ITpublication documented his positions on the role of IT in the current financial services meltdown. He asked questions such as “Were the internal IT groups in these firms working on projects that were misalignedwith the financial services firms’ business strategy?” The article attempted to place blame where it does not belong.
At the heart of a these spectacular business failures rests a complex andintentionally opaque maze of documents that were designed to obscure anyone’s understanding of the true risk involved in the financial instruments being sold. These instruments wrapped up a mix of high,medium and low risk mortgages into prepackaged bundles that few people could understand. Fewer still understood that these mortgage portfolios would be so vulnerable to a drop in housing valuesnationwide. Over time, we will probably learn that this obfuscation was absolutely intentional. The firms that created these documents and the financial instruments that went with them were built them in a waythat few people could ever understand.
Several months ago, I had a conversation with the head of the school of accounting at a major United States university. We spoke at length about the recent BearStearns collapse. I told him that I had read their most recent annual report and wondered if he had an opinion of it as well. The company had used a number of special purpose entities (SPEs) much likeEnron. These are off-balance-sheet tools used to contain specific assets or liabilities. While some companies have successfully used these to smooth out the effect of erratic or highly variablebusiness transactions on their own books, the lack of transparency into these transactions is unfortunate and subject to abuse. I know I couldn’t follow the financial structures in the Bear Stearn’s...