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Paul Volcker and Dean Emeritus Don Jacobs
© Nathan Mandell
Dean Emeritus Don Jacobs (right) introduces Paul Volcker, former chairman of the Federal Reserve. Volcker delivered the keynote address to begin the two-day conference.

After Enron
Historic Kellogg School conference offers accounting crisis insight; Experts say latest scandals demand reform
By Matt Golosinski

Conference Information
Paul Volcker's Remarks
Full Text

Video: 33 minutes

Questions & Answers
Video: 26 minutes
This video requires RealPlayer
As if to slam an exclamation point on the urgency of the topic of financial disclosures, news about the latest in a series of accounting scandals broke just as the Kellogg School’s “Credible Financial Disclosures” conference got underway June 25-26 in Evanston.

Telecommunications firm WorldCom Inc. joined a growing list of companies that have experienced recent serious accounting discrepancies, and shocked an already reeling investment world by reporting nearly $4 billion in disguised expenses. The news broke while Paul Volcker, former chairman of the U.S. Federal Reserve, delivered a keynote address to start the Kellogg conference.
Volcker was one of more than a dozen prestigious legal, financial and accounting experts — including incoming Financial Accounting Standards Board chairman Robert Herz and former Securities and Exchange Commission chairman David Ruder — providing insights into the recent events in the financial industry, and suggesting necessary reforms to restore investor confidence.

“The concerns extend far beyond the profession of auditing itself,” said Volcker, an advocate for significant reforms in such areas as accounting standards, auditing practices and institutional frameworks to provide and maintain financial discipline. “There are important questions of corporate governance…I think we are seeing the bitter fruit of broader erosion of standards of business and market conduct related to the financial boom and bubble of the 1990s.”

Volcker stated that accounting discipline is “fundamental to the effective functioning of our market system.” In his address, he highlighted the need for reform within both the accounting industry and corporate governance, calling for more rigorous standards and urging the industry’s lobbyists to work seriously with federal legislators to restore investor confidence. Historically, Volcker said, accounting lobbyists have opposed legislation that would eliminate certain financial incentives.

“There cannot be any point in resisting change now, not at the expense of further undermining market confidence,” he said.

Volcker also noted the need for serious review of CEO compensation, including stock option abuses that he said “represented a good idea originally but now favor management, not stockholders” and are frequently used to reward even poor performance.

“Our goal is not just to devise consistent accounting standards, but better standards,” said Volcker. “Without rules, at the end of the day, there can’t really be a game.”

The two-day conference was sponsored by the Kellogg School’s Zell Center for Risk Research, the Kellogg School Accounting Research Center and faculty from the Kellogg Department of Accounting Information and Management, including Ronald Dye, department chair and the Leonard Spacek Professor of Accounting.

Panel discussions addressed such issues as the role of analysts, corporate governance and legal counsel in producing credible financial disclosures. Experts also discussed accounting standards and the role of auditing firms and ratings agencies.

Panelists, including Lynn Turner, former chief accountant for the Securities and Exchange Commission, called for sweeping accounting reforms that produce independent auditors, analysts and corporate boards. He noted that the accounting crisis was an international problem and one that has cost the American public some $5 trillion.

Nell Minow, shareholder activist and former attorney at the Environmental Protection Agency and Department of Justice, discussed the importance and proper role of a firm’s audit committee, and said that these committees are often filled with people underqualified for the accounting responsibilities with which they are tasked.

“Auditors must be the first line of attack to safeguard against lies,” said Minow. “They need to win back the faith of the American investor, otherwise everyone will put their money into gold bars.”

Stephen Presser, the Raoul Berger Professor of Legal History at Northwestern University and the Kellogg School, offered his critique of the Arthur Andersen court ruling, suggesting that the government’s handling of the firm leaves much to be desired. The ruling gives a “new and terrifying meaning to guilt by association,” said Presser, who admitted the crisis in financial accounting presents dire challenges, but he remained suspicious of the efficacy of legal regulations.

“Exploding Andersen is not exactly a healthy way to promote healthy competition among the accounting industry,” Presser said. He suggested that focusing attention on CEO compensation might prove a more constructive way to engage the crisis. CEO pay has jumped 535 percent since 1990, while employee pay has increased only 32 percent during that time, he said.

“I’m no leveler, but something’s wrong here. These salaries are way out of line with world standards and may contribute to the argument of those who would regulate and redistribute wealth,” said Presser. “Accounting reforms are fine, but the other key is the behavior of executives and their pay. We no longer require our leaders to learn the classics or moral philosophy and history.”

Attorney and real estate entrepreneur Sam Zell offered a frank and more contrarian assessment at the conference. In a voice reminiscent of George Carlin’s acerbic delivery, the maverick business leader offered his historical perspective on the accounting scandals.

“Compared to the crooks involved in the S&L bailout, these guys [at Enron and WorldCom] are saints,” insisted Zell. “Admittedly, I’ve picked about the lowest standard you can…but we need to be careful about hindsight ethics. Yes, we have problems, but overall the situation is not so dramatically different than what we’ve seen in every post-boom era.”

Zell called for “clarity” and reform in the accounting industry, and defined that reform in a straightforward way: “Tell the truth!”

He also placed some of the responsibility for the current crisis with the public, who he said failed to exercise proper judgment with regard to their investments.

“The S&P 500 grew at nearly 20 percent per year for five years in the 1990s,” said Zell. “If you didn’t know the books were being cooked all you needed to do was look at the growth numbers.”

Citing the example of WorldCom, an incredulous Zell asked, “Who in their right mind would buy WorldCom stock when its CEO borrowed $400 million from the company?”

Zell summed up the accounting crisis by saying that the corporate world must return to disciplined financial practices. “To me, it’s simple: Either you’re in the game and you play it straight or you get out of the game.”

General consensus, however, called for more stern reform measures. That attitude was expressed by Turner.

“The American public is furious at the corporate world today,” said the former SEC accountant. “We need to find a rope and an oak tree and then hang those culpable until they ripen.”

©2002 Kellogg School of Management, Northwestern University