A Bitter Breakfast with Paul Volcker
By Richard S. Dunham
Former Federal Reserve Chairman Paul Volcker tried and failed to reform Arthur Andersen. Having gone through that emotionally wrenching experience, the veteran economist is now speaking out on the problems of the former accounting giant -- as well as and the financial scandals that are embarrassing corporations across the country.
Volcker, who was brought in by Andersen's former management team to overhaul the firm, believes financial manipulation is "widespread," saying that the extent depends largely on the type of industry. Old-line manufacturing enterprises are less likely -- and less able -- to cook the books than financial and energy companies, which are involved in complex transactions every day. How can Volcker tell which outfit is at risk of engaging in funny business? "If it's got more than two offshore tax havens involved, it's aggressive tax planning," he told reporters at a recent breakfast meeting in Washington.
The former Fed boss was appointed by President Carter but annoyed both Carter and Ronald Reagan with his independence. He's now disappointed that President George W. Bush and Harvey Pitt, the Securities & Exchange Commission chief, are not stronger reformers. "I know there is a lot of resistance," he says. "Harvey...has not been a great cheerleader for it. If you ever had a clear-cut case for more effective oversight, it is in the accounting business."
"VERGES ON ILLEGAL."
Volcker sees the roots of the current troubles in the go-go '90s: The record profits. The historic increases in the stock indexes. Executive compensation tied to stock performance. At corporations across America, financial reality took a back seat to pumping up public perceptions of profits -- even if that sometimes meant manipulating the bottom line. The mood, says Volcker, "created some temptation to press the envelope."
He reserves a particular disdain for the relatively new profession of "financial engineering." Put simply, he says, it is designed to teach executives "how to get around accounting rules and IRS rules. Some of it verges on being illegal." Yet Volcker is uncomfortable calling the people he's worked with and regulated for decades by the name many Americans are using: crooks.
Volcker acknowledges there have been "a lot of sins" in the accounting industry. Part of it, he says, is due to pressures on auditors to rubber-stamp the financial records of companies that are paying them a lot of money. Another temptation stems from the accounting industry's desire to pursue more profitable consulting work. He also says that accounting standards are more suited to the world of the 1950s than the Information Age. Says Volcker: "We have a problem getting the standards in line with reality."
TOO FAR GONE.
Though Volcker has been familiar with the political game in Washington for decades, he admits to being surprised by the resistance -- and the clout -- of the big accounting firms. Those firms steadfastly resisted legislation separating accounting from consulting and the creation of an independent oversight board with investigative powers. Volcker is surprised at the vociferousness of the industry. "I did not realize they were such a potent political force," he says. "They have successfully resisted reform." He called Republican reform efforts "weak" and "window dressing."
Volcker says that he had hoped to reform Andersen and make it a model company. Now, he believes what remains of Andersen appears to be "beyond the point" of surviving as a major company. While Volcker will continue to speak out on the accounting industry, he has little more to offer the company he tried to rescue. "I don't have any obligation to Andersen," he says. As Volcker sees it, his obligation is to speak about the sins of Corporate America.
Dunham is a White House correspondent for BusinessWeek's Washington bureau. Follow his views every Monday in Washington Watch, only on BusinessWeek Online
Edited by Beth Belton