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Friday, October 21, 2011

Conflicts of Interest at the Federal Reserve

The Huffington Post reports that “(m)ore than a dozen members of the regional Federal Reserve boards have had ties to banks or companies that received emergency funds during the [2008 financial] crisis, according to [a GAO report]. The report highlights a close relationship between the Fed's regional banks and many of the institutions they were lending to, adding credence to concerns that the financial sector enjoyed a largely consequence-free rescue in the wake of the crisis, thanks to its connections with the federal government.” Meanwhile, mortgage borrowers with houses “under water” got hammered. From the crisis to the release of the GAO report in October 2011, there were millions foreclosures in the United States, with very little in the way of mortgage modifications or refinancing for those homeowners who needed relief. In other words, the bankers had connections in the banking regulatory agency while Congress left the troubled homeowners—constituents—at the mercy of the bankers. Their agency having their backs, the bankers could afford to take a hard line on the mortgages. The playing field, in other words, is not at all level. 

The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.  

Thursday, October 20, 2011

E.U. Agenda: Taming Bloated Greek Patronage

As E.U. leaders wrestled in the fall of 2011 with how to bail out those state governments that had been amassing relatively large semi-sovereign debt loads, residents in relatively solvent states such as Germany were frustrated with what they perceived as profligate over-spending in Greece. It is possible that even the Germans did not realize how engrained the excessive politically-based Greek bureaucracy had become. I suspect that for many Greeks, news of their living beyond their means was met more with denial and utter disbelief than an attitude-adjustment. In other words, a vast disparity in perspective exists on the ground as the E.U. struggled to come to grips with the debt crisis. The “ever closer union” necessary for the E.U. to rise to the occasion has as its foremost obstacle the disparate perceptions existing within the union (and enforceable by state governments).

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Limited Tenure For CPA Firms?

Arthur Levitt, who headed the Securities and Exchange Commission from 1993 to 2001, “sought to root out conflicts of interest at audit firms in 2000, and urged Congress to adopt auditor term limits in 2002 after the Enron and WorldCom scandals.”  The Wall Street Journal also reports that Levitt did not buy the argument made by companies that it would cost them a lot of money to change audit firms. To be sure, he acknowledged that some added cost would be entailed in a system of mandatory auditor “term limits,” but a long auditor relationship “raises the perception,” he maintained, “that the auditor is very much beholden to the company and not totally independent. An environment of skepticism should trump the fraternal environment that tends to occur after a relationship has developed over a period of years.” Indeed, Arthur Andersen’s people were well ensconced at Enron by the time the energy giant went bust. In fact, the auditors even approved the questionable “partnership” accounting (used to hide debt).  Nor did the auditors communicate any misgivings to the audit committee of the company’s board of directors. The auditors were “in” with a rancid management. 

The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.  

The Franchise: A Flawed Arrangement

The franchise arrangement combines the reach (and efficiency) of central advertising with the ability to respond to local differences. I suspect that the benefit from local flexibility is typically overdrawn, such that the value of the franchise arrangement itself is overstated. Meanwhile, the downside in local autonomy is, I suspect, understated. That downside includes the propensity to engage unethically based in part on lack of character-virtues and on the accurate perception of weak accountability within the franchise arrangement. The downside also comes into greater play than perhaps is realized because management on the local level can be rather bad in quality (from a managerial standpoint). In other words, slim pickings with regard to managerial talent can be a factor at the local level. Without mechanisms of accountability from “higher up,” front-line managers can get away with an astonishing amount of bad (and unethical) managing.

For example, I stopped into a Papa John’s franchise on a weekday at 2:30p.m. to buy a slice of pizza. The employee told me that during mid-afternoons, he offers two for one slice at the regular price. So I bought two-for-one. The slices were terrible—the cheese almost non-existent. The next day, I happened to be passing the same establishment and thought I would see if the pizza was any better. I told the same employee that I wanted the same two-for-one. “I’m not doing that today,” he replied. “The pizza is fresher.” So apparently the two-for-one at the regular price is a matter of employee discretion, rather than being something a customer can count on. I was astonished because his manager was standing next to him as the employee spoke. As I was saying that I would pass on ordering anything, the manager suggested I order cheese-sticks instead. I just looked at him. He was utterly indifferent as to whether his employee had misled me, and yet that manager was in a position of authority sans accountability. There is probably nothing worse to a customer than an employee or manager going back on his or her word with the sense of impunity. I suspect that this is a common pattern in franchise businesses.

I have experienced local managers of Best Western, Motel 6, and Days Inns hotels/motels going back on their word, only for the corporations’ respective “customer service” employees to tell me that the managers at franchise properties can do whatever they want. In one such case, I later learned that the local police department had had so many complaints from customers about the local hotel’s manager that the chief had called the corporation only to be told that the buck stops with the local manager! The corporation could do nothing (apparently). At the very least, a conflict of interest exists in turning over a complaint against a manager to the manager himself, yet this ethical issue is apparently a casualty of the franchise arrangement; accountability regarding unethical local managers simply does not exist where the franchisee owner looks the other way. I suspect that the squalid managers know when they can get away with cheating customers for short-term financial gain. Such managers can thus easily exploit one of the downsides of the franchise arrangement itself, with the customers having little recourse.

We can perhaps generalize to say that the managerial skill (and ethical conduct) at the local-franchise level is insufficient to justify the looseness in the franchise-arrangement’s mechanism of accountability on managers and employees (and even franchise owners). That is to say, the franchise arrangement itself is flawed because it does not permit mechanisms that are sufficient to correct bad and unethical local managers—or at the very least to give those winners the sense that there could be such accountability exerted on them. 

In fact, the franchise arrangement is flawed even apart from local managerial decadence and incompetence. For example, particular Subway franchises do not honor the specials advertised by Subway. In fact, next to the Papa John’s franchise location that I walked away from, a Subway franchise was selling subs, only without the month’s specials. Here, the problem is not managerial ineptitude or unethical conduct; rather, the fault lies in the franchise agreement itself, wherein individual franchisees can opt-out of particular advertised-specials. This loophole enables the possibility wherein a customer drives to a subway expecting to be able to purchase a special only to 1) be informed that there is no special there and 2) go home empty-handed. A potential customer in that situation would not be wrong in feeling misled even if it is not technically false-advertising (given the ads’ fine print). Franchisees should be required to honor and fulfill anything promised in the corporation’s advertisements. Otherwise, the arrangement itself is inherently unfair to customers. Again, the structure of the arrangement is found wanting and should be tightened, both for reasons of effectiveness and ethics. 

The weakness inherent in the franchise arrangement can be grasped by situating it along a spectrum running from a confederal alliance to (modern) federal government. I contend that the franchise arrangement is too close to the confederal arrangement in the case of managerial and employee accountability. Whereas the polity members of a confederation hold all of the sovereignty in the confederal system, both the members and the government at the federal level are semi-sovereign in modern federalism. Also, whereas the confederal level can only reach its member polities, a federal government can reach the individuals inside the member polities. A federal government thus has more authority to hold citizens accountable even within their respective states (state governments do too). Where a state government looks the other way on racial violence, the FBI can step in and arrest the KKK individuals. In a confederation, this would not be possible; the state government alone reaches the citizens, and the authority at the confederal level is typically very limited and subject to support from all or a supermajority of the polities in the confederation. 

The franchise arrangement evinces “dual-sovereignty” by analogy because the contract gives the franchisees autonomy to run their businesses as they see fit while subjecting them to specific requirements (e.g., products, signage, furnishings) that represent the “unity.” However, even though it is technically “modern federalism,” the arrangement resembles a confederation as regards managerial and employee accountability. That is, they requirements do not typically include managerial standards and accountability mechanisms; these are left to the “state governments.” As long as they adhere to the specific requirements, franchisee owners are largely autonomous in terms of how they have their businesses managed internally, or “domestically.” If there is a violation of one of the specific requirements in the franchise agreement, the corporation treats the franchisee business as a unit and holds the franchisee-owner to account. In this sense, the arrangement functions like a confederation. I submit that local management (and staffing) is typically not sufficiently capable (and forthright) to justify this. Therefore, to remedy the problem, an additional transfer of “sovereignty” to the corporation should be made such that a “check” or accountability mechanism can exist at the corporate level and reach directly to the franchisee’s managers and employees, even without respect to the franchisee-owner. By analogy, the FBI can arrest individuals at a KKK rally without checking with the governor of the particular state. Otherwise, inept or unethical franchisee owners will be able to cover for their hires. Indeed, “bad” employees may simply be doing an owner’s dirty work.

In conclusion, effective and ethical management does not extend as far locally as we, the general public, tend to assume (particularly in the food and hotel/motel industries). Corporations utilizing the franchise legal arrangement should strengthen their ability, in the legal documents, to hold local managers (and their employees) accountable. Customers would appreciate an employee in customer service actually going to bat for us, rather than giving us the quotidian “apology” only to say they can’t actually do anything about the problem because the buck stops with the local managers on X. We should not have to accept bad or dishonest business practitioners simply because they are numerous and the franchise arrangement itself is inadequate. Furthermore, just because certain customers can indeed be quite rude does not mean that holding managers and employees accountable for going back on their word is somehow excessive because serving the public is difficult. I suspect that American consumers in particular put up with much more crap at the retail level than necessary. In other words, the business of America could be done a lot better, yet for some reason we tend to assume that the status quo is unavoidable. We may even have convinced ourselves that efficiency justifies “a few bad apples.” Business itself would benefit were accountability mechanisms strengthened, and you and I would not suffer so many fools holding leverage over us on account of their positions. We need not be utterly frustrated with a dishonest, “my way or the highway” rigid and self-centered manager or employee. Life is too. So we do not have to accept the franchise arrangement in our business system and society simply because franchising is convenient to corporations. I contend that the arrangement only seems to be in their financial and strategic interests. The corporate executives are overstating the quality and honesty of their franchisee-owners and their hires. Sadly, uprooting even a putrid tree can be an exercise in futility if the sordid roots are deep and entrenched with vested interests. 

Click to add a question or comment on managerial (and employee) accountability in the modern franchise arrangement.

Tuesday, October 18, 2011

Deloitte: A Culture of Least Resistance

On October 17, 2011, the Public Company Accounting Oversight Board issued a statement saying audits should protect investors. “The board therefore takes very seriously the importance of firms making sufficient progress on quality control issues identified in an inspection report in the 12 months following the report,” the statement said. Not having seen such progress at Deloitte, the board made its 2008 report on the firm public. The report “cited problems in 27 of the 61 Deloitte audits it reviewed, including three where the issuing company was forced to restate its financial statements.” This was “an unprecedented rebuke to a major accounting firm,” according to The New York Times. “In too many instances,” the report stated, inspectors from the board “observed that the engagements team’s support for significant areas of the audit consisted of management’s views or the results of inquiries of management.” In some cases, according to the Times, “Deloitte auditors did not bother to even consider whether accounting decisions made by companies were consistent with accounting rules. Instead, auditors accepted management assertions that the accounting was proper, the board’s report said.”

The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.

Sunday, October 16, 2011

Police Against Protesters: Sadism or Politics?

The day after several marches and rallies by the “Occupy Wall Street” movement in New York City, The New York Times reported that “two dozen people were arrested at a Citibank branch on LaGuardia Place on trespassing charges. Some witnesses said that the protesters had tried to leave but were locked inside by bank employees. ‘They were trying to leave, but they wouldn’t let them,’ said Meaghan Linick, 23, of Greenpoint, Brooklyn. She said one woman who had been inside and left was forced back inside by police officers. Citibank, in a statement, said the protesters ‘were very disruptive and refused to leave after being repeatedly asked, causing our staff to call 911.’ The statement continued, ‘The police asked the branch staff to close the branch until the protesters could be removed.’” The Times report does not mention whether the protesters were existing Citibank customers trying to close their accounts. The report does refer to this at a Chase bank. “Earlier, about a dozen protesters entered a Chase branch in Lower Manhattan and withdrew their money from the bank while 300 other people circled the block, some shouting chants and beating on drums. The former Chase customers, who declined to reveal how much they had in their accounts — though a few acknowledged it was not much — said they planned to put their money into smaller banks or credit unions.’ The more resources we give to small institutions, the more they’ll be able to provide conveniences like free A.T.M.’s and streamlined online banking so they can compete with the larger banks,’ said Hannah Appel, 33, a postdoctoral fellow at Columbia University.” The report does not indicate whether the former customers were arrested.
From the report, it does not appear that anyone was arrested for closing a bank account; the protesters at Chase closed their accounts but were not arrested, while the protesters at Citi did not close their accounts but were arrested (for trespassing). Of course, the newspaper’s information could be mistaken. Were any customers arrested simply for closing a bank account, both the bank branch’s manager and the police involved should be terminated from their respective employments and prosecuted. The report does indicate that Citi employees locked protesters inside the bank. This act constitutes false imprisonment, which is illegal. I would think that the subsequent arrests would be thrown out by a judge.
I suspect that psychologically abusive persons are a sizable presence on many police forces. From casual observation, I have been surprised at how quickly and easily a significant number of police employees cross the line simply because they can—meaning that they assume without reservation that they can get away with trespassing the rights of others with impunity. The pattern is no accident.
Beyond orchestrated political uses of police forces (e.g., to teach those kids a lesson), present police recruitment procedures across the United States are inadequate in ferretting out mentally disturbed, abusive personalities. Furthermore, mechanisms to impose accountability on individual employees of police departments are woefully impotent, given the lack of self-restraint or even apparent self-questioning by police employees who are going to do what they are going to do, period. So, besides investigating particular cases of how the political or business elite uses police departments against the rights of protesters, elected officials in towns and cities (at the urging of state- or federal-level officials if necessary) could do more in seeing to it that the citizens are not abused by individual police employees by 1) ordering police chiefs to expand the role of psychological tests and interviews in the recruitment process and 2) instituting an external, independent committee or board with the power to fire police employees for abusing (or threatening to abuse) their authority.
Concerning recruitment, it is important to keep in mind that no one has a right to be on a police force. It is especially the case that bad attitudes need not apply, yet it does appear that they are extant on police forces. The NYPD, for example, has a long history of police brutality and cover-ups, which suggests that the recruitment process is woefully inadequate in screening out psychologically troubled candidates.

                           Anthony Bologna of NYPD pepper-spraying protesters following his orders

Concerning accountability, enforcement of the law against police who go beyond their authority at the expense of other people should be strengthened and harsher sentences should be enacted. In some jurisdictions, even the laws by which police can make arrests should be tightened. In New York City, for example, police can arrest people for deemed “safety issues” even if no law had been broken. Outside an event run by the Huffington Post, the police lied to author Naomi Wolf when they stated that the Post’s permit barred protests on the sidewalk. Even though Wolf verified with the event organizer that the police claim was false, the police arrested her after she joined some protesters walking up and down the sidewalk (i.e., not obstructing foot traffic). At the police station, a sergeant told her she was arrested for a “safety issue.” According to the Huffington Post, “The cop didn’t dispute her claim that she wasn’t breaking the law. But she said he explained that whenever police deem it a safety issue, they can make an arrest.” Given the propensity of the police to arrest unlawfully, this loophole should be tightened or replaced with procedures triggered in the event of a disaster (not just safety) that can be independently documented (e.g., an explosion in a subway station).  
I suspect that the lack of accountability on police employees who take it on themselves to extend their force beyond the law stems from the fact that enforcement mechanisms are not typically sufficiently independent of the police and local governments. Even “internal affairs” is evidently not sufficient. Police on the beat not sensing any viable external restraint in abusing others is itself indicative of too little accountability on the books as well as in practice. In other words, the attitude itself bespeaks a lapse in the system, which the offending persons undoubtedly know exists and can be counted on as they impose themselves even on people they know to be innocent. A police employee who uses his or her position to intervene in a civil matter, for example, should be fired because it can be assumed that the encroachment was intentional. Also, a police employee who pushes or hits a non-violent citizen without the latter having resisted arrest should be fired. Additionally, the offending officer should be prosecuted. In fact, state legislatures should stiffen the penalties as a deterrent. The penalties for police employees should be stiffer than for other citizens because the right to legitimate force carries with it a special obligation. Breaking a special duty warrants a longer sentence.
Whereas some of the “Occupy Wall Street” protesters referred to “police terrorism,” such hyperbole should be replaced by sadism, the deriving of pleasure by inflicting pain on others. This diagnosis would doubtless apply to Anthony Bologna, who sprayed innocent people with pepper-spray. Beyond politics, the deeper problem is that of sickness. What would happen, je me demande, if the protesters simply chanted, “Sicko! Sicko! Sicko!” or “You’re sick!” at an offending officer as he violently lashes out without provocation?  I suspect that the truth would hurt. Moreover, the protesters could pressure elected officials to stiffen the enforcement mechanisms and sentences.


Cara Buckley and Rachel Donadio, “Buoyed by Wall St. Protests, Rallies Sweep the Globe,” The New York Times, October 16, 2011. 

Jason Cherkis, “Author Naomi Wolf Speaks Out About Her Arrest at Occupy Wall Street,” Huffington Post, October 19, 2011.