Any member of the American Institute of Certified Public Accountants who performs an audit must be peer reviewed. Cutting through the technical jargon, this means another CPA comes in and looks at your work product and passes judgement about whether you are doing your job properly.
Brokerage companies usually must be audited by firms that are registered under the Public Company Accounting Oversight Board (PCAOB) which was created under the Sarbanes-Oxley Act to help prevent fraud (how’s all that working out?). The SEC exempted companies like Madoff Securities from this audit requirement, which means that the firm auditing Bernie Madoff did not have to be registered with PCAOB or be peer reviewed. What we have here is a phenomenal failure of regulatory oversight.
Remember that Bernie Madoff was chairman of the NASDAQ Stock Market for a period of time.
Source: AICPA Issues Briefing
Richard Watson 
A brief but damning post. Is the SEC being taken to task by a curious, aggressive media? How about a curious, aggressive Congress?
Off the topic, can credit swaps and derivatives be explained to the lay person (me), so that they can be understood? Or is that impossible?
Nestor Patoo
Thanks for your comment. It made me think of an article in Monday’s Financial Times which uses the phrase “casino capitalism.” The FT is running a series of articles on the “future of capitalism,” and today’s piece was looking at the Asian approach. The dean of Singapore’s Lee Kuan School of Public Policy is quoted as saying Asians have added the following lessons to the capitalist mix – “…borrow in moderation, save in earnest, take care of the real economy, invest in productivity, focus on education.”
The “casino” phrase is relevant to American capitalism I think because of credit default swaps (CDS). I have been trying to think of a an analogy to describe swap agreements, and the closest I can get is to discuss the game of blackjack. If a dealer turns up an ace as the face card, you will be offered insurance against the dealer having a 21 at the price of up to one-half of your original bet. If the dealer has a blackjack, you lose your original bet (unless you also have a blackjack), and the net effect is that you break even (assuming you bet the full half-bet for insurance). If the dealer does not have 21, you lose the insurance and still have to play the original hand. In this sense, placing an insurance bet in blackjack is like entering into a hedging transaction.
But what if instead of buying insurance from the dealer you buy it from one of the other players at the table. And then what if the other player buys insurance from yet another player to offset the possibility of having to pay you if the dealer has a blackjack. This is staring to look like a CDS.
Consider an investor that has lent money to a corporation. The investor may turn to Bank A and buy protection against a default on the part of the corporation by entering into a CDS. Bank A may then decide that it wants to hedge its exposure to your CDS by entering into another CDS with Bank B. And so it goes. Ultimately, there is only one “real” asset – the loan the investor has made to the corporation. But several parties have placed many bets on whether the loan gets repaid.
A hedging transaction is rather like buying a little insurance, and a CDS is a type of hedge. Suppose I invest $100 and stand to get $200 back if all goes well. Depending on my risk tolerance, I may let it ride, or I may buy insurance for $50 (a “hedge”). If the investment tanks, I get my $100 back from the insurance but am out the $50 for the cost of the insurance. I have limited my possible downside. Of course I’ve also reduced my possible profit as well.
I agree that the media swings too far in each direction. When things are bad, they are often reported as worse than they probably are. When things are good, the glasses are probably just a little too rosy. For a good portion of the Iraq war, criticism of the Bush administration was seem as being unpatriotic and the media went along with it in what Salman Rushdie called the “Dixie Chicking of America.”
I think you have to watch carefully when someone tries to deflect attention by blaming the media. Magicians deflect attention to work their craft. Paul Clikeman (in Called to Account – Fourteen Financial Frauds that Shaped the American Accounting Profession) noted that both Ken Lay and Jeffrey Skilling blamed Enron’s “..collapse on the bear market that followed the September 11 terrorist attacks in New York and Washington, ‘manipulative’ trading practices by short-sellers, and panic caused by ‘irresponsible’ news articles in the Wall Street Journal.” Interesting how these magician’s tricks never grow old.