Question

How closely should rating agencies work with the firms they are reviewing? I.e., what level of independence is appropriate?

Should financial analysts be held liable for their opinions regarding the financial health of firms?

Answer 1

Rating Agency is a company that assesses the financial strength of companies and government entities, especially their ability to meet principal and interest payments on their debts.

CRAs have enjoyed operating in an unfettered manner, and are free to independently report their findings. This is true of sovereign ratings as well as other instruments including those issued by state governments, local governments, corporate entities, financial institutions and special investment vehicles. A rating exercise, by itself, is a complex process and is a mix of objective and subjective judgment.

CRAs need to undergo thorough Operational Audits in order to tone up their systems. This is in addition to the financial audits they undergo for balance sheet purposes. There is also a need for the general public to know the Ownership Structure of the CRAs to reduce the possibility of conflict of interest.

Rating is an outcome of judgement and could be based on inputs of Analyst, thus depending on the composition of the teams and the pattern of the discussions, ratings could change, based on perception of inputs.