The real problem is that the Ratings Agencies are paid by the companies that they are meant to be rating. Far too often, a company’s rating will remain unchanged until mere days before it files for bankruptcy.
Is this always the Ratings Agency’s fault? Possibly not. Maybe things were cool at the last ratings’ review. But still – there should be some safeguards in place. Auditors, for example, face a similar independence issue. And their safeguards include:
- Companies are required by most countries’ laws to disclose the full amount of their audit fee.
- Auditors are heavily regulated by legislation.
- Audit firms are punished by the public when they get it wrong. When Enron happened, Arthur Anderson dissolved. There is limited room for audit error.