Lack of financial regulation invites financial crises
While individual greed played a role in shaping the current financial crisis, the lack of regulatory oversight and accountability provided opportunity for financial products without any risk assessment. Evidence suggests that product life cycle modeling could have increased understanding of risks posed. It is now clear that these products were not adequately understood but were sold to consumers anyway!
Today, the majority of consumer products carry required warranties and warnings. Why should financial products responsible for supporting our individual and national wealth, national security and the stability of global financial markets be allowed to operate in a free-wheeling environment?
Better regulation supports risk reduction
Business process analysis has long been a key tool in providing better understanding of complex and critical events in the value chain. Modeling has been used widely to identify improvements in the key areas of product lifecycle management and monitoring regulatory compliance. Regulation can mandate more informed decisions and minimize risk.
No SOX, no service
The Sarbanes-Oxley legislation – a direct response to evidence of a lack of effective regulation of financial records keeping surfaced by the Enron and WorldCom scandals – was the driver behind the SAS 70 Type II audit requirements. PricewaterhouseCoopers, in their first Sarbanes-Oxley white paper, quoted the SEC’s basic statement describing adequate compliance:
“We believe that the purpose of internal controls and procedures for financial reporting is to ensure that companies have processes designed to provide reasonable assurance that: the company’s transactions are properly authorized, the company’s assets are safeguarded against unauthorized or improper use, and the company’s transactions are properly recorded and reported to permit the preparation of the registrant’s financial statements in conformity with generally accepted accounting principles.”
Transparency supports better accountability
A more careful analysis of processes that produced these risky financial products would have increased transparency to both to issuers and investors. This would have better communicated risks to legislators and the public and surfaced the need for controls to protect worldwide markets.
Accurate assessment and public disclosure of risk in financial products demands much better regulation and enforcement. Do you believe that the call for new regulation by Sarkozy and Merkel will result in better future operations of financial markets?
thanks for good post.
All points taken, but there is a big difference between regulation and arbitrary power, which is what Rep. Frank has on offer in his legislation. He would politicize finance. —- http://econometrician.wordpress.com/2009/12/19/politization-as-regulation/