Trust in American Institutions is Critical to Economic Recovery

Over the past several weeks, the nation has been thrust into important economic and policy debates whose core questions have been the subject of much consternation in Washington: Do we know enough about cryptocurrency to properly regulate it? Is inflation an existential threat, or merely an economic interloper? What is the appropriate definition of the word “infrastructure”?

These debates are complex and often heated. Historically, a moderating force in these conversations has been the ability of America’s institutions — businesses, government, and especially the media — to give people the facts. Unfortunately, one need only tune in to the cable news channel of their choice to be thoroughly convinced that such “straight talk,” as it used to be called, has come and gone.

The transparency, trust, and honesty that used to be demanded of these institutions as a prerequisite have become nearly absent commodities — and as the U.S. emerges from the scourge of Covid-19, they are needed now more than ever before.

Americans will once again believe the country is on the right track when its basic institutions — in finance, business, government, and the media, in both public and private entities — can demonstrate that they have earned the people’s trust and respect it. Reinforcing this trust will pave the quickest route to a robust American revival in the years ahead. 

Recent history provides good reminders of the important and often sweeping impact these institutions have in society. The outsized role the “Big Three” credit ratings agencies played in precipitating the 2008 financial crisis, for example, looms large as one of the worst examples of how public and private-sector actors should perform their fiduciary duties today. Neither are our nation’s top management consulting firms immune from very recent examples of bad behavior.

The “Big Four” accounting, audit, and professional services firms are similarly situated in the public eye as a bastion of transparent objectivity that help consumers make decisions about the companies whose products they purchase and in whose businesses they invest.

Auditors like the Big Four are entrusted with an important responsibility. Far from menial bookkeepers or number-crunchers called upon to double-check other people’s work, auditors take upon themselves an immense duty of care. Their affirmation — their promise — that a company’s activities are being reported accurately and validated independently creates that critical element of trust necessary for the economy to function.

In recent weeks and months, however, “Big Four” accounting has looked more and more like the “Big Three” of the late aughts. Specifically, world-renowned audit and business advisory firm KPMG has been plagued by one scandal after another

The most recent revelation, which broke recently, finds KPMG being sued for $600 million for “alleged sloppy auditing” of Dubai-based private-equity firm Abraaj. The allegations can be examined in detail across a series of Wall Street Journal, Reuters, and Financial Times articles that published over the summer outlining the connections between KPMG and Abraaj. KPMG is accused of willful negligence, turning a blind eye to rampant internal malfeasance at the highest levels of the fund, overlooking glaring accounting deceptions and allowing the fund’s “key man” to use Abraaj’s billions as his personal piggy bank.

This comes on top of another recent scandal, which accuses KPMG of improperly advising a client to file for bankruptcy so that another firm, whose business KPMG was simultaneously courting, could then acquire it for pennies on the dollar.

These episodes of gross negligence and malfeasance are especially pernicious because of the important role that firms like KPMG play in an advanced economy. When KPMG — an organization entrusted with validating and presenting as honest the business activities and operations of publicly traded companies — is itself engaging in major conflicts of interest, it is easy to understand why the entire system appears flimsy at best.

A recent Morning Consult poll that tracks trust in institutions reveals that while “the news media and government are the most polarizing institutions” in the U.S., “less than half of Americans trust America’s major corporate institutions.” It is hard to blame them.

Amid continued slow growth, dampened by the Delta variant and major gaps in the labor market, the U.S. can ill-afford more headlines that implicate its national business and governmental institutions if we are to break free of Covid’s economic doldrums.

I have served in government at the local, state, and federal level and worked with a variety of important stakeholders across both the public and the private sector, each of whom had a critical role to play in the efficient functioning of our society and markets. This was especially true in the wake of 9/11, the last major event before Covid that truly and dramatically shifted how we as Americans live our day-to-day lives.

When I served as the Secretary of State and Consumer Services Agency, I oversaw the California State Board of Accountancy, and I would often remind our boards and commissions members of the old adage that trust, like integrity, is easier kept than recovered. Trust in our institutions remains an absolutely essential ingredient toward economic resurgence after Covid-19. Firms like KPMG should consider their duty of care to American society — their actions have consequences that will reverberate well beyond their clients’ balance sheets.

Rosario Marin served in the George W. Bush administration as Treasurer of the United States from 2001 to 2003.