If the global
tumult of the last two years has taught us nothing else, it’s that reliable
forecasts on complex issues are damnably hard to come by.

So where can wisdom
be found today, on the vexed and pressing question of the survivability of the
Big Four accounting firms and their franchise to audit the world’s large
companies? Arrayed in an existential threat are the aggregated forces of
unachievable performance expectations, unrelenting regulatory hostility and
devastating litigation exposure – against which, what are their chances?

The question about
the presumptively available but failed sources of advice and prognostication is
not whether the recent performance of model-builders and risk managers has
failed to provide actionable guidance – plainly it has not, as credit markets
seized up and venerable institutions toppled — but how extensive were their
own contribution and culpability.

A possible source
came on the screen last week. Clive Thompson’s article in the New York Times
magazine for August 16, “Can Game Theory Predict When Iran Will Get the Bomb?”
features the “black box” prediction methodology of a New York University
professor and Hoover Institution fellow. Bruce Buena de Mesquita’s forecasts on
the complex interactions of variously influential parties are applied in
contexts ranging from the business strategies of large companies to geopolitical
hot spots for the Central Intelligence Agency.

Bruce’s method
starts with identification of those with interests – whether the conflicting
constituencies in the ever-shifting landscape of Iranian politics, or the negotiating
partners in a potential corporate merger. He assigns values to their respective
goals, commitments and capacity for influence – numeric inputs which are then
processed by his proprietary (and opaque) computer model in an iterative series
of scenarios, eventually leading to a conclusion as to the outcome.

Here’s the thought:
an identifiable set of inter-locking antagonists are now in
mutually-reinforcing paralysis on the fate of the large accounting firms – each
with deeply committed self-interests being served, and all suffering
limitations of vision and authority:

That roster
includes — along with the issuers of financial information and their auditors
themselves — the banks, investors and other users; the professional
standard-setters, regulators and politicians; and the several-faceted machinery
of law enforcement including prosecutors, judges and lawyers – as well as,
probably for completeness, the communities of academics, critics and other
observers.

Bruce’s techniques
of inputting stakeholder interviews into a multi-scenario decision algorithm
yield predictions that are valued and used at the level of global intelligence
agencies, regarding issues on the scale of nuclear deterrence policy or the
evolving role of the BRIC economies. So he should find it a piece of cake to
crank up a view on a question as straightforward as whether the Big Four and
their one-page auditors’ report have a viable future.

Considering that
the present models underlying the use of Value-at-Risk, dynamic hedging and
complex derivatives valuations have been shown no more robust than
old-fashioned consultations with the oracle at Delphi or the entrail-reading of
a Roman haruspex – or for that matter, turning over today’s desk-top 8-Ball —
Bruce’s approach might well be of great value.

Or at least,
shouldn’t somebody think it an undertaking worthy to be engaged and widely
shared?

Let me know if you
think so.

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