The state of our financial markets rests firmly on its credibility. However, it would not be surprising if few individual investors felt that there was no credibility in the current system. A perfect example is the recent case of MF Global. MF Global isn’t just a firm that was poorly managed, it also had the misfortune of “not properly segregating client’s accounts.” This means that MF Global mixed their customers money with the firm’s money.
It turns out that MF Global was betting big on European debt at the same time the European debt was imploding. As MF Global files for bankruptcy, a sizable portion of customer funds has gone unaccounted for. However unlikely it may be, the regulators and those in charge of MF Global should be severely reprimanded.
As further proof of the problem we’re faced with, the recent fine levied by the Accountancy& Actuarial Discipline Board, in London, against PricewaterhouseCoopers (PwC) goes a long way to explain how MF Global and many other investment firms manage to violated seemingly simple rules. PwC was fined $2.17 million for not “…properly segregating an average of $8.6 billion of client funds” as reported by Bloomberg News (article here).
To put this fine into perspective, $2.17 million is 0.03% (3/100ths of 1%) of $8.6 billion. Imagine if the penalty for robbing a bank of one million dollars was $300. There would definitely be much more bank robberies if this were the case. The current maximum penalty for robbing a bank is $250,000 and 20 years in prison. Based on this penalty, the robbers would have to try getting away with a minimum of $833 million before such action seems “feasible.”
Regardless of the amount stolen and depending on the circumstances, convicted bank robbers could easily face the maximum penalties of $250,000 and 20 years in prison. Although there is no accounting for the logic of bank robbers, there appears to be plenty of logic for investment and accounting firms.
This brings us back to those who are responsible for enforcing the rules, the regulators. If the Accountancy & Actuarial Discipline Board(AADB) and Public Company Accounting Oversight Board (PCAOB) cannot set meaningful penalties for the crimes committed, then such penalties will be considered a legitimate cost of doing business instead of a penalty. So much for the credibility of the markets.