A lot of you have commented on the last article I wrote, “The Box Checking Syndrome.” Some of you have agreed with me and given me some great examples of box checking in practice, and others of you have vehemently disagreed with my opinion, which I also like, as it gives me different perspectives to think about. But what really gets me excited about all the responses I have received, is that it has indicated to me that this viewpoint has struck a cord with many of you, which means, of course, that this a good debate to have.
And as I have thought more and more about the article, and more importantly all of your responses, it struck me that there are several additional examples of box checking, rather than only the “financial advisors” that I singled out in the first article. The first of these that comes to mind is the accounting industry, which I might add, Berkshire Hathaway (BRK-A) Vice-Chairman Charlie Munger regularly pontificates about each year.
In my opinion, the accounting profession--and for that matter most consultant practices--have made a huge push over the last several years for focusing entirely on a particular firm’s process of doing things—rather than asking why a particular company does things a certain way during an audit.
The reason for this, in my opinion, is not because it is better accounting, bur rather, because it is better for business for these firms to focus on process. If an accounting firm develops what it decides is “best practices” for doing something a particular way, it helps to insulate them from potential lawsuits down the road should something have run afoul during an audit. The defense thus becomes, well if everyone does this particular activity the same way, how can it be wrong? To me, at least, that’s like saying, well if everyone decides to jump off the Golden Gate Bridge, how can that be a bad idea? Doesn’t make a lot of sense now, does it?
The other main reason that I think there is a focus on process, is because it helps the margins of the accounting firms. By developing what they feel is a “best practices” process, they can, in effect, create a simple check-list that their employees can run through during an audit, without ever having to even think about if something makes sense or not. As such, these firms can hire throngs of folks right out of college, which helps to keep their compensation costs down, and effectively pay the people to check boxes off their list, as long as the process is the same. Check, check, check, you’re done, and then onto the next client. Again, any type of thought or rationality has been removed from—ironically—their process, in favor of box checking.
What I find so ironic about all this, is that every four or five years or so, there is some type of fallout or scandal in the markets, and each time most folks try to point their finger at the accounting profession. And rather than examining if the box checking culture could be the culprit, laws are simply passed which require even more “best practices,” processes, and box checking, without ever addressing the real problem. Is it any wonder that accounting shenanigans get repeated over and over again every few years?
The other industry that, in my view, is guilty of the “box checking syndrome” is the credit rating agencies. In my opinion, several of these firms simply developed a bunch of ratios for each particular industry or group of securities, and then associated a group of ratios with a particular credit rating. Then they had their analysts simply crunch a bunch of numbers, and run a bunch of stress tests, and then assign several securities or companies certain ratings, depending on what boxes were--or were not--checked.
Given what has happened in the markets over the last couple years, I think it’s fairly evident what the outcome of all this box checking was. In fact, the reputation of many credit rating firms is now on life support, at best. What makes it even worse, though, is many investors were simply checking boxes of their own, and overly relied on the credit rating firms to help them decide which investments to make. Scary, I know.
Essentially what all this box checking does is try to make shortcuts for things that require a lot of thought, analysis, and judgment. The lesson from all this is not new, as there is simply no substitute for sitting down and rolling up one’s sleeves, doing the analysis, and independently thinking about what makes sense. The bright is, though, that as long as the great majority of people keep going through life checking boxes, for those of us that don’t--and also have the wherewithal to think sensibly--there is huge opportunity.
I welcome dialogue with my readers, so please send me any questions and comments you have. Also, if you haven’t already done so, please be sure to sign-up for my free email alerts email me at buffettinsights@gmail.com.
Justin
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The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author
