Failure and Capitalism

Last week I updated you on the AICPA 125th anniversary and Council meeting that took place in Washington DC.  One of the benefits of meeting in Washington is that you have the opportunity to hear from a variety of regulators and politicians.  Senator Ron Johnson from Wisconsin addressed most of Council during the traditional PAC breakfast.  He made the statement that “Capitalism doesn’t work if you don’t allow failure.”

The problem we are dealing with as a society is that, with apologies to NASA, in some areas failure is not an option.  9/11 taught us that a single failure can cost thousands of lives. In a world with biologic and nuclear weapons, a single failure can be catastrophic.  But just like we have the difference between internal control over financial reporting and internal control over operations, there is a difference between the impact of failure over security and the failure of a business.

Internal control over financial reporting is all about minimizing risk.  Internal control over operations is different.  In business, the whole point of operations is about taking risk to make money.  The point of internal control is to make sure that the risks taken are known and within acceptable tolerances.   So, like financial reporting, risks over security only have one direction – minimization.  But like operations, for risks in our capitalistic economy, failure must indeed be an option – but with the appropriate controls in place to make sure those failures are kept within appropriate tolerances.

The danger we face today is that we will take the failure is not an option attitude to our economy.  We have major problems to deal with in order to permit orderly failures, but the answer would seem to me to continue to allow capitalism to do what it does best – allow failures.  If the risk of a business is too great to allow failure (to big to fail) then I submit the solution is not more regulation to prevent failure, but instead enforcement of existing or heaven forbid, creation of new rules to split businesses that are too big to fail.

This sounds more radical than what Frank-Dodd proposed, but in the defense of capitalism, I have come to the conclusion that being radical is what is needed.  And being radical means bringing back to capitalism its most basic control – the risk of failure.

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