The issue: Greater regulation is a dead end road
Mr. Rutger de Doelder (1976) is a researcher at Erasmus School of Law. He worked for the Netherlands Compliance Institute and for the Dutch Ministry of Finance, where he advised ministers Wouter Bos, Jan-Kees de Jager and Jeroen Dijsselbloem respectively on the structure of Dutch regulation. He was actively involved in the culture change and other “improvements” at DNB. He is now obtaining his doctorate in financial regulatory law, with a concentration on internal and external regulation to combat money laundering.
Stricter regulation is supposed to force accountants to do their work better. But is there really a problem here? Regulation specialist Rutger de Doelder says, “I would say the more debacles that come to light, the better.”
Text: Geert Maarse
Nearly half of accountant's reports are subpar, according to a report by the Netherlands Financial Markets Authority (AFM) that appeared last month. That is an alarming conclusion, isn’t it?
“It seems as if the average annual accounts aren't worth the paper they are printed on. As if we as a society are slipping further and further. But this is not fraud, as much as failing managers. The Financial Markets Authority has simply determined that, in 45 per cent of the cases, accountants should have gathered more information before signing off on the annual accounts. It is a clear-cut conclusion. Of course a call to action is the natural next step. The question truly is whether you really want that, as a society, even stricter monitoring by accountants.”
“As far as I know, this concerns annual accounts that still were approved even after follow-up study. More accountancy just costs more money. The accounting firms will be all for it, the extra work. This report will let them write twice as many hours on their invoices. But the fact is, their work is not to blame for all this. Also, the big stock-listed companies generally put their own figures in order. The importance of internal regulation is being recognised more and more.”
That is one way of looking at it, but there have been quite a few major mess-ups in the past years. Vestia, DSB, Imtech – how are we supposed to trust executives after these types of scandals?
“People tend to think there are so many problems, so the business world must be a real mess at the moment. I would argue the opposite. Messes are timeless. It is just that we find ourselves in a day and age when we can no longer sweep these types of fraud under the rug. So I would say, the more problems that are laid bare, the more transparent the system. And so the better it is going.”
Minister Dijsselbloem is pushing for tackling accountants harder, for penalties from the AFM, and requiring suitability screening for executives in accountancy. Is that the right path?
“If companies go over the line, they need to be penalised. But in the long term – and research bears that out – repression never works. In the US, they have very high penalties and punishments, and still you have a lot of fraud there. It may sound soft, but the only way to do it is to make sure a company wants to change its own culture. The board, the supervisory board, throughout the entire company.”
It sounds well and good, inside the walls of the university. But we are also receiving signals from the financial sector - for example from financial journalist Joris Luyendijk – who paints a picture in which responsibility and integrity are hard to find. To what extent is such a cultural change possible?
“By appointing the right people to the right jobs. In financial institutions and accounting firms, quite a lot of board members have stepped down in recent times, whether they were pressured to do so by regulatory agencies or not. You cannot have people who just surround themselves with yes men, nor authoritarian directors. Then things go awry, for example in risk management. Now you often see that risks are reported by employees - that is step one - but then the management drops the ball on analysis. At SNS, warnings by accounts and risk managers were resounding when the bank wanted to acquire the real estate portfolio. And then a board like that says, it’s okay, we think we know best.”
What do you think of the proposal to centralise regulation – in Europe for example – at a distance, and so completely independent?
“Someone who can arrange large-scale fraud is also certainly capable of skewing reporting to go his way so the regulator in Frankfurt or Brussels doesn’t notice anything. We really must move towards that cultural change, but that is even more difficult to evaluate from a greater distance.”
Accountants say themselves: we have to place societal interests above business interests. Do you believe that?
“Most scandals that have come to light in recent times have to do with an overly great focus on the short term. I do believe that most accountants have the interests of society at heart. In that area, accusations are better directed at investors. Institutional shareholders, like pension funds, watch from the sidelines while excessive risks are taken. If you are going to talk about the interests of society, they are the ones who can pose the critical questions about the culture and can effect changes in management.”
In response to the AFM report, the Stockholders Association says that accountants should lower their rates and should use the saved money to improve the organisation. They have this image of accountants as smooth operators with fat salaries who sign off on shaky annual accounts without thinking twice.
“Honestly, in general accountants are more the eggheads of the class. Boys and girls who like nothing better than to crunch numbers all day. But moneygrubbers? Most of them work hard and are really trying their best.”
Paul Frissen, administrative scientist, writes in his book ‘De Fatale Staat’ [‘The Fatal State”], that we no longer can cope with problems. Every incident creates a confusion of rules. Does this ring a bell?
“Every incident is a call for regulatory agencies to play a greater role. But their powers are already fairly broad in the Netherlands. In that respect, the harsh words of Dijsselbloem are also a bit populist. We should not have the illusion that we can completely rid ourselves of incidents – fraud, corruption, trickery with numbers. Then you would need to have a regulator looking over the shoulder of every employee. And then someone looking over him who regulates the regulator, because he can make mistakes too. That is a dead end road. If you really want to prevent executives from dipping into the kitty, you would have to take such severe measures that a company won’t have the freedom anymore to do business.”
In the wake of DSB, a suit was filed against De Nederlandsche Bank, because they supposedly did not act adequately in their capacity. How do these types of regulators function?
“A great deal has improved. There is greater regulation of the culture and the conduct of the people at the top, including having the suitability screening. There were executives who lived in a bubble. They had lost touch with the personnel and the outside world. And the same went for DNB. We tried to break through that. Now DNB is a trendsetter in Europe. The question is, what is the real risk to society? In that respect, I do really worry about a central regulatory agency. The question is whether the European Central Bank is capable of going through the same kind of development. Most European regulatory agencies work in a very rule-based way. They have a checklist based on the law and if a company meets it, everything is in order. I predict we will take a few steps backward.”
Are there alternatives to regulatory agencies?
“We could do a lot better by our whistleblowers. People are speaking up more, but all too often you see someone who– after trying in vain to bring a problem to people’s attention – falls silent. I always say everyone is a regulator. The market manager is, as is the secretary. What surprises me most in retrospect is that it all could have gone on so long. Dozens of people knew something wasn’t right, but no one said anything. You need to work towards a culture where the executive suffering from tunnel vision can be overruled, by fellow executives or the board of supervisory directors. Only then do you bring things to light.”
The issue is a section in Erasmus Magazine, the opinion and information magazine of Erasmus University Rotterdam, in which an EUR-academic responds to a current-social issue.