The Reckoning: Financial Accountability and the Rise and Fall of Nations

302 Pages·2014·3.83 MB·English

by  Jacob Soll

More Advance Praise for The Reckoning
“Packed with riveting stories of how empires can be so easily felled by
poor accounting, whether through willful disregard (Louis XIV) or lack
of training (Lorenzo de’ Medici), The Reckoning is a must read for
anyone who hopes to avoid similar fates. But the book is more than a
litany of woes. Every student, teacher and practitioner of finance should
know this history of accounting, from its grounding in theology and
philosophy to its central place in the rise of modern commerce, statecraft,
and, indeed, civilization itself.”
—Robert Bloomfield, Nicholas H. Noyes Professor of
Management and Accounting, Cornell University
“Accountability and the trust it breeds made possible business and
government as we know them in the West, a history The Reckoning
recounts engagingly. Yet every era’s Madoffs, magnates and mega-
organizations—and, critically, their minions—subverted that relationship
with catastrophic results of which 2008–09 is only the most recent. Jacob
Soll has persuaded me that this time, it’s different: our traditions of
accountability could be destroyed yielding a reckoning we cannot
project.”
—Peter D. Kinder, co-author, Ethical Investing and Investing for
Good; co-founder, KLD Research & Analytics, Inc.
THE RECKONING
THE
RECKONING
FINANCIAL ACCOUNTABILITY
and the RISE and FALL of NATIONS
JACOB SOLL
BASIC BOOKS
A Member of the Perseus Books Group
New York
Copyright © 2014 Jacob Soll Published by Basic Books, A Member of the Perseus Books Group All rights
reserved. No part of this book may be reproduced in any manner whatsoever without written permission
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Designed by Jack Lenzo A CIP catalog record for this book is available from the Library of Congress.
ISBN (e-book): 978-0-465-03663-9
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I credit this book to Margaret Jacob
C
ONTENTS
Introduction
CHAPTER 1: A Short History of Early Accounting, Politics, and Accountability
CHAPTER 2: For God and Profit: The Books According to Saint Matthew
CHAPTER 3: Medici Magnificence: A Cautionary Tale
CHAPTER 4: The Mathematician, the Courtier, and the Emperor of the World
CHAPTER 5: The Dutch Audit
CHAPTER 6: The Accountant and the Sun King
CHAPTER 7: The First Bailout
CHAPTER 8: “Fame and Profit”: Counting on the Wedgwood Vase
CHAPTER 9: Big Debts, Big Numbers, and the French Revolution
CHAPTER 10: “The Price of Liberty”
CHAPTER 11: Railroaded
CHAPTER 12: The Dickens Dilemma
CHAPTER 13: Judgment Day
Conclusion
Acknowledgments
Notes
Bibliography
Index
I
NTRODUCTION
In September 2008, just as I was finishing a book about the French King
Louis XIV’s famed finance minister, Jean-Baptiste Colbert, I found
something remarkable: Colbert commissioned miniature golden calligraphy
account books for the Sun King to carry in his coat pockets. Twice a year,
starting in 1661, Louis XIV would receive these new accounts of his
expenditures, his revenues, and his assets. It was the first time a monarch of his
stature had taken such an interest in accounting. Here, then, it seemed, was a
starting point of modern politics and accountability: a king who carried his
accounts so that at all moments he might have some reckoning of his kingdom.
I was at least as startled to learn next just how short-lived this experiment
was. For as soon as Colbert died, in 1683, Louis—consistently in the red due to
his predilection for costly wars and palaces like Versailles—discontinued the
account books. Rather than tools of administrative success, Louis came to see his
account books as illustrations of his failings as a king. He had created a system
of accounting and accountability, and now he began breaking up the central
administration of his kingdom. This made it impossible to unify the accounts of
each ministry into one clear, central register, as Colbert had done, and for any
minister to effectively critique, let alone understand, the king’s financial
management. If good accounting meant facing the truth when the news was bad,
Louis, it seemed, now preferred ignorance. Speaking those famous words,
“l’État c’est moi,” he apparently really meant it. No longer would a functioning
state interfere with his personal will. On his deathbed in 1715, Louis admitted
that he had in effect bankrupted France with his spending.
Rather than some relic of a bygone age, the story of Louis’s rise and decline
seemed to me all too familiar as I digested the parable of the Sun King’s golden
notebooks. That very week in September, a startling parallel story was taking
place during the collapse of Lehman Brothers Bank. A monument of American
and world capitalism, Lehman was suddenly exposed now as little more than a
mirage. Just as Louis had held onto his power through snuffing out good
accounting in his government, so U.S. investment banks had made untold riches,
even as they destroyed their own institutions by cooking their books through
trading overvalued bundles of worthless subprime mortgages and credit default
swaps. A financial system, which had been deemed healthy by accountants and
regulators alike, now revealed itself as dysfunctional by design.
If Louis preferred not to know, so, too, it seemed, Wall Street and its
regulators had chosen to overlook the rot threatening the entire financial system.
The chairman of the New York Federal Reserve, Timothy Geithner, was
supposed to have at least an expert knowledge of the financial markets, yet he
appeared not to know, or know fully, what was going on just blocks from his
office. The Securities and Exchange Commission (SEC)—whose responsibility
it is to enforce good corporate accounting—was caught similarly unaware, as
were the Big Four accounting firms—Deloitte, Ernst & Young, KPMG, and
PricewaterhouseCoopers. No one, it seemed, had effectively audited the bank’s
books. They missed the barely hidden fact that Lehman Brothers used
1
accounting fraud to manipulate its accounts and appear solvent.
Soon after Lehman Brothers collapsed in September 2008, other American
investment banks began failing, and the world financial system was threatened
with collapse. In October, the Bush administration stepped in to bail out the
banks and buoy the financial system. Thus came to pass the Troubled Asset
Relief Program (TARP), which gave massive funds to troubled banks and put
the American capitalist economy on a government life support system. By 2009,
Barack Obama was president, promoting Geithner to Secretary of the Treasury.
Yet, in spite of Obama’s claims of a new age of accountability, a sense of
impunity pervaded Wall Street. The $350 billion recapitalization of American
banks managed to stave off the financial chaos that risked consuming the world
economy. Yet, no strings were attached to the money. No audits were ever made
to see how the banks spent it. America’s economy stumbled, but the bankers, at
least, had avoided a reckoning.
Six years later, it is not just banks that are threatened by financial crisis
brought on by bad bookkeeping. Leading nations—the United States, European
countries, and China—find themselves facing their own larger potential crises of
accounting and accountability. From opaque banks and the sovereign debts of
Greece, Portugal, Spain, and Italy, to the financing of municipalities worldwide,
there seems little certainty in balance sheets and reports on debt levels and
pension obligations. Confidence in private auditors and public regulators also