A “sarbanes-oxley” for Credit Rating Agencies? a Comparison of the Roles Auditors’ and Credit Rating Agencies’ Conflicts of Interests Played in Recent Financial Crises

Both auditors and credit rating agencies have been linked to financial scandals in recent history. In the early 2000’s, several of the “big five” accounting firms issued favorable audit opinions to public companies employing deceptive accounting practices. Some of these companies even committed outright fraud. Once the investing public caught wind of these accounting irregularities, it lost trust in the auditing industry, companies’ financial statements, and the financial market as a whole. Today, we face a new financial crisis and have found a new party to blame. When we discuss the current financial crisis, talk of the credit rating agencies is usually not far behind. These agencies issued notoriously favorable credit ratings to thousands of subprime residential mortgagebased securities and related financial instruments. However, once the housing bubble burst and interest rates rose, these financial instruments proved to be toxic investments. As the credit rating agencies downgraded the instruments, the public lost trust in the credit rating industry, credit ratings, and once again, the financial market as a whole. At first glance, it appears that similar problems with auditors and credit rating agencies contributed to both financial crises. Foremost, both the auditing and the credit rating industries were premised on independence. However, over time the two industries faced external