Peeling away financial reporting issues one layer at a time

Credit Rating Agencies and Auditors Have Something in Common: Independence Problems

Sarah Johnson of CFO.com has written a nice summary of congressional concerns about the independence and role of credit rating agencies arising out of Enron and now, the subprime loan debacle. 

Accounting and finance researchers have documented in numerous studies that rating agencies consistently lag market assessments of credit quality that is reflected in securities prices.  Is the reason due to the conflicts of interest of the kind pointed out in the article, or that too much is expected of the rating agencies, even in the best of circumstances?  It is probably a little of both, so SEC investigations won’t help to fix the problem–unless it leads them to undo the lucrative franchise they created for credit rating agencies in their own regulations.  At the very least, if credit assessments are provided to potential investors through SEC filings, they must come from experts that meet strict independence requirements.

But, as with auditors, it is impossible to be truly independent from the person who signs your paycheck, so maybe the SEC should hire the rating agency and pass on the cost to the issuer. Until then, the most reliable credit ratings will be ones that investors pay for themselves.

1 Comment

  1. Reply credit rating January 2, 2008

    Unfortunately, independence is difficult to achieve when there are not many credit players.

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