The Nature of Scepticism

I've been fascinated recently by the dearth of critical thought in the financial community. I still haven't found the time to read The Big Mo, but I have suggested an official Devil's Advocate, and tried to stimulate at least a little lateral thought by suggesting we allow an independent regulatory agency to short sell. I've also been interested in proposed reforms to the role of ratings agencies and audit firms. So imagine the thrill I experienced on seeing that the Auditing Practices Board of the Financial Reporting Council has issued a "Feedback Paper" that summarises the responses to its "Discussion Paper" called... [trumpets]

"Auditor Scepticism: Raising the Bar"

The feedback? Well, surprise surprise:

“While responses to the Discussion Paper demonstrate widespread agreement on the critical importance of auditor scepticism to audit quality, there is less agreement on the nature of scepticism and its role in the audit."

In other words, the accountants aren't really sure what the word "scepticism" means.

Well, for those of you up the back, the Oxford English Dictionary defines a "sceptic" as "a person inclined to question or doubt accepted opinions." So, I'm thinking "scepticism" might be... the inclination to question or doubt accepted opinions. Surely one does not need to be more specific.

However:

"In light of the responses to the Discussion Paper, the APB has decided to distribute copies of the Oxford English Dictionary to all audit practitioners undertake work in the following areas:

* Ensuring that there is a consistent understanding of the nature of professional scepticism and its role in the conduct of an audit.
* Reviewing ISAS (UK and I) for possible ambiguities in relation to the nature and importance of professional scepticism, and proposing such changes as may be needed to make sure the position is clear.
* Reviewing ISQC (UK and I) 1 to ensure that it has sufficient requirements and guidance relating to the need for firms to have appropriate policies and procedures for promoting the competencies that underlie professional scepticism.
* Considering how the application of scepticism can be made more transparent.
* Considering, with other parts of the FRC, whether there is a need for guidance on the approach to be taken by auditors when considering the presentation in the financial statements of matters that have been the subject of significant challenge by the auditors."

The situation is so dire in the audit world, that they have to teach auditors to be sceptical.

What next - teach coppers not to believe everything suspects tell them?

You could not make this up.

Image from The Philosopher's Magazine.

Never Retire

Pensions are underwater

It will be fascinating to see if we get real transparency and competition in pension provision, now that the vast horde of public sector staff can no longer rely on the taxpayer to fund a nice, cosy retirement.

No doubt the unions will fight for a reprieve, but ultimately public sector workers - like the rest of us - will have to focus very carefully on where their pension contributions go, and how much of their return is dissipated in fees, brokerage and dealing costs. No one will have the luxury of assuming they'll actually receive a pension (certainly not a life-sustaining one), just because they pay into one today...

The corporate pension deficit stands at £362bn, directly affecting 12m people. And while all sorts of indexing and accounting tricks changes will be used to reduce the impact on company balance sheets, that won't translate into pension incomes for employees.

And there's no reason that the public sector will fare any better, absent the taxpayer safety net.

Image from Early Retirement Today.

Conceptual Search: Putting "Mean" Into Meaning

This evening I caught the SCL's Annual Lecture. This year it was expertly delivered by Dr Mike Lynch OBE on the "Advent of Meaning Based Computing".

I want to say that "meaning based computing" is the enterprise version of the semantic web, if only to keep 'price comparison' web sites in the technological cross-hairs. But I can't really, as it wasn't even mentioned.

According to Mike, the more fundamental Information Technology challenge is that the world is producing far more human-friendly, unstructured data than structure data (compound annual growth rate of 62% vs 21%). Cloud computing might help scale the technology aspect, but that doesn't help you find the right information. Keyword search, PageRank, meta data and so on all help with the data. But if computers are to search more comprehensively, they must 'understand' the meaning, concepts or ideas you're looking for, and how these relate to one another.

Conceptual search is partly constrained by who is searching, and whether they know what they're looking for. Boolean and linguistic search models in particular require 'training' and lots of maintenance by very smart people who know a lot about what's being searched for. But Mike explained that probabilistic systems are independent of language and investigator bias. Instead, they process the whole data set and look for scenarios where words are 'more likely than chance' to appear together. In this way, a more objective set of search results are returned.

So what?

Well, Mike says the main applications for conceptual search currently seem to be amongst spooks, regulators and major corporations. In other words, it's a mean weapon in major games of cat-and-mouse - one that US financial markets investigators seem to have spent five years perfecting. In fact, the most worrying statement of the evening for some must be that "most of Wall Street's messaging is in the cloud".

Specific uses lie in improving document management, retention and electronic discovery, particularly as an aid to early case assessment and crisis management. A killer app, no doubt, and one where Mike reckons law firms can indeed make a killing - possibly providing outsourced data systems for their clients. But pre-programmed, conceptual search systems are also good enough to enforce corporate policies real-time, preventing 'smoking gun' emails from ever being sent, or corporate bribes being accepted.

If only they could help find decent car insurance, utility and mortgage deals, we'd be shot of price comparison sites as well ;-)

Credit Where It's Due

The long overdue move to regulate consumer credit the same way as other financial services has finally been announced.

I've been advising businesses on both sides of the strange divide between the Consumer Credit Act and the Financial Services and Markets Act regimes for the past decade, and I still find the dichotomy as maddening as when I first laid eyes on it.

Gold-plating the Consumer Credit Directive hasn't helped improve the cost and complexity, and transparency is not improved by obliging a provider to register under both the CCA and FSMA regimes for products that are part of the same sales process. Or by allowing banking groups to present themselves as "authorised and regulated by the Financial Services Authority", while in fact sheltering their consumer lending activities under an obscure self-regulatory regime. It defies belief that the banks' consumer lending processes should operate any better than those that have earned them big fines in recent months.

But perhaps the most interesting point, in these troubled financial times, is that the government department that's presided over the CCA regime estimates that we'll save a net £120m annually by repealing it.


Image from Midnight Poutine.

Anyone For 8% Market Share?

Barclays' withdrawal from the asset-based small business lending market is a real shot in the arm for peer-to-peer finance.

The head of the Barclays Business unit is quoted as saying, “It’s the leasing and hire purchase side [where] we found our proposition was not that compelling, comprehensive and competitive. Our market share was small, about 8pc.”

Those are my gob-smacked italics.

According to the same article, the Finance and Leasing Association "said asset finance represents the majority of debt-financed business, and that its members provided £1.7bn of funding to support business investment in December, 5pc higher than the same month in 2009."

Barclays says it can target this £21bn market segment with unsecured loans. But of course it's talking through its hat. The Basel III head-wind blows strongest in the unsecured lending space. So even if Barclays can magic the £1.7bn asset-based portfolio into unsecured loans, it doesn't seem a great alternative use of capital.

But it's an interesting strategy if you're lending some of your own cash on a peer-to-peer platform, instead of leaving it in a savings account.

Barclays stands to lose out on both fronts.

Image from Gogherty.com.