Former Fed Chief Paul Volcker: Accountants Are Different from You and Me.
Accountants and auditors have a special responsibility and a special role in public life, and that role has been too frequently compromised in recent years, Paul A. Volcker, former chairman of the Federal Reserve Board, told a packed house at Baruch College recently [May 2].
In discussing accountants and accountancy, Volcker, the head of an oversight board that is supervising Arthur Andersen, drew a pointed comparison with investment bankers, who, he said, have no special public responsibility...and maybe no ethics. He also took aim at chief executives who take little responsibility for whats going on in their companies and Congress and Wall Street for politicizing decision-making on certain accounting standards, such as the expensing of stock options.
Accounting and auditing firms are now in a crisis, Volcker warnedpresciently, as it happens, in remarks last October. Turns out that was an understatement, he noted on May 2, as he discussed Accounting Reform in the Post-Enron Era, one of a series of discussions conducted by Baruch Colleges Center for Integrity in Financial Reporting, directed by Prof. Doug Carmichael.
Volcker returned several times to the idea that good, tough audits could be the backbone of an accounting firms reputation, and he expressed the hope that, in the post-Enron era, corporations eager to boost their credibility with investors will seek out tough auditors and be willing to pay for them.
Arthur Andersen was indicted in March by the Federal Government on charges of obstructing justice after its Houston office destroyed many documents sought by Government investigators looking into the collapse of the Enron Corporation, for which Andersen served as auditor. Top Andersen executives have denied any knowledge of the destruction, and a criminal trial into the charges opened in May [wk of May 6] in Federal District Court in Houston. Enron filed for Chapter 11 bankruptcy protection on Dec. 2 after it revealed it hid millions of dollars in liabilities in off-the-books partnerships. The Governments investigation into Enron and its management continues.
Volcker was asked in February to serve as head of an oversight board at Andersen that has the power to implement reforms at the Big Five accounting firm. Among the other members of the board are Charles A. Bowsher, former Comptroller General of the U.S., and Ned Regan, president of Baruch College and former New York State Comptroller.
During a spirited question-and-answer session at Baruch that was moderated by Bethany McLean of Fortune magazine, one accountant in the audience asked Volcker what qualified him to oversee an accounting firm and whether Andersen and the public would not be better served by an overseer who was a CPA.
Im old, unconflicted and on the outside, Volcker responded, drawing laughter. It was not my lifes ambition to run an accounting firm, and now that Ive seen it up close, I want it even less. I never had any illusions about running the firm on a day-to-day basis. Theyve got corporate management to run the firm, Im just here for six months to a year; make sure they get headed in the right direction.
A major problem in accounting, he asserted several times, was the industry had resisted outside oversight and preferred to police itself with a variety of alphabet-soup peer-review boards that have no teeth and do nothing. That is no longer adequate, Volcker insisted, saying the profession urgently needs an oversight body with investigative and disciplinary powers similar to the Securities and Exchange Commissions role in the securities industry.
An alternative solution was proposed by Larry Zicklin, chairman of the Baruch College Funds board of trustees who asked whether accounting partnerships might appoint their own boards of directors who would take responsibility for standards and integrity.
Can you have a board of directors for a partnership? Volcker asked. But these partnerships are so big, theyre not masters of decision-making when you have 1,000 partners. He called Zicklins suggestion revolutionary but seemed skeptical that the profession would accept it.
Since taking his position on the Andersen oversight board, Volcker has expressed disappointment with the firms leadership, saying it has lacked the will to create an audit-only firm, shedding its consulting services. And if Andersen doesnt go that route, he said, it may be difficult to get other firms to do so.
Volcker said the red-hot economy of the late 90s led Andersen and other accounting firms astray, turning them toward lucrative consulting services that they marketed heavily. As they competed for consulting clients, accounting firms feared that tough audits might alienate potential clients.
One phase of the discussion involved whether American accounting firms had become obsessed with rules and how to comply with themor work around themrather than with underlying principles and standards. Volcker, as a former central banker, has been prominently involved in international discussions and negotiations about banking and accounting standards and he suggested that international accounting may be more prepared to embrace standards that the American firms.
Shawn Turner is a graduate student in the Masters Program in Business Journalism at Baruch College.