Executive Summary

For over a century, financial markets have relied on audits and credit ratings that suffer from a fatal structural conflict of interest: the entity being evaluated selects and pays its own evaluator. From the 2008 financial crisis to corporate collapses like Enron, Wirecard, and Carillion, this "subject-pays" model has repeatedly compromised objective evaluation. Regulators compound the issue by hard-wiring these labels into capital rules and investment mandates as mandatory permission slips.

Audits and Ratings: Structural Gaps and Fixes by Genie Capital Ltd presents an actionable blueprint to separate the evaluator's paycheck from the subject. By shifting funding to investors via automated micro-levies, establishing cooperative governance, and enforcing strict audit-consulting firewalls, the report outlines a viable path to put investors back in control of the information they rely on.

Core Insights

• The Root Cause is Commercial Alignment: Ten distinct market gaps—including rating shopping, audit capture, weak liability, and retail exclusion—all trace back to a single structural flaw: the subject of the evaluation is also the client.
• The Two-Pool Funding Mechanism: Post-decision verification (audits) and pre-decision evaluations (ratings) should be funded through two independent pools supported by a small mandatory trade or asset levy, eliminating corporate and issuer checkbooks.
• Cooperative Investor Governance: Each pool is governed by an Investor Information Board operating under a strict "one institution, one vote" cooperative model, preventing capture by massive asset managers and incorporating a dedicated seat for retail investors.
• The Absolute Audit Firewall: Evaluation firms are permanently barred from providing consulting, tax, or advisory services to any entity they audit, removing commercial pressure to keep clients happy.
• Regulatory De-coupling: Regulators must phase out the use of ratings and audits as legal permission slips or capital rule triggers, turning them back into pure, uncompromised investor information.

Value to Key Stakeholders

• Investors (Institutional & Retail): Regains true control over evaluation standards, eliminates free-rider problems through automated micro-levies, and ensures retail savers have an independent, democratic voice on governing boards.
• Regulators & Policymakers: Provides a practical, four-phase transition strategy—from voluntary pilots to cross-border mutual recognition—backed by independent regulatory oversight to eliminate systematic conflicts without destabilizing markets.
• Corporate Executives & Issuers: Removes the coercive pressure of rating shopping and non-audit fee expectations, replacing subjective management-evaluator negotiations with objective, fixed-fee assignments.

Access the Full Report

Ready to explore the complete analysis, examine the mechanics of the Two Pools, and review the step-by-step transition roadmap?

[ Download th Full Report ]

Published by Genie Capital Ltd under Creative Commons (CC-BY-NC-SA 4.0). Re-use and distribution are permitted with proper attribution for non-commercial purposes.