TOPICS > Economy

Newsmaker: Paul Volcker

March 12, 2002 at 12:00 AM EDT

JIM LEHRER: There were more reports today that the accounting firm Arthur Andersen could soon face criminal indictments for its role in the collapse of Enron.

That collapse raised many questions about Andersen and the accounting industry, generally.

Last month, Andersen asked former Federal Reserve Chairman Paul Volcker to lead an internal review of the company’s problems, and to recommend ways to fix them.

Yesterday, Volcker issued his report, and he joins us now from New York.

JIM LEHRER: Mr. Volcker, welcome.

PAUL VOLCKER: Thank you. Nice to be here.

JIM LEHRER: In general terms, sir, did you find that Arthur Andersen pretty much deserves what is happening to it now?

PAUL VOLCKER: Well, there are obviously lots of problems. We did not conduct an independent internal investigation.

We are aware of many of the problems that exist but we wanted to look forward and we have made recommendations, more than recommendations, our understanding with Andersen is what I and other members of my board indicate they will follow.

It reflects I think their concern that they reestablish a reputation and clean up the problems that they have and restore some credibility in their operations.

We would like to see them lead the accounting profession in good solid quality accounting.

JIM LEHRER: What did you find to be the most serious flaw that needed to be corrected.

PAUL VOLCKER: Well, I think there are systemic flaws that are revealed by the Enron situation and other situations.

Accounting firms in recent years have become more and more consulting firms in Europe and the European branches they also do law in many cases.

There’s a real question whether the emphasis on consulting as a… relatively high revenue area is consistent with their… what I think is their core responsibilities to vouch for and certificate the accuracy and understandability of financial reporting of companies in the United States and around the world.

That is a function, which is absolutely essential to an effective operation of the money markets, the capital markets and particularly the stock market.

We’re a nation of stockholders and they need accurate information; they need reliable information. If there’s a loss of confidence in that area, there’s serious repercussions for the economy.

JIM LEHRER: So you believe that Arthur Andersen cannot do both at the same time, cannot counsel a company and also audit the company?

PAUL VOLCKER: Maybe theoretically you can but in fact there is both the appearance and I think in many cases the reality of a conflict that at this stage dictates for Andersen those functions should be separated.

JIM LEHRER: And has Andersen agreed to do that? Is Andersen going to do that?

PAUL VOLCKER: I think the understanding is that they will do what we say.

JIM LEHRER: Now is the problem — it isn’t a problem of bad people doing bad things, the system caused them to do bad things, the conflict of interest is there?

PAUL VOLCKER: I think this is not a question of Arthur Andersen alone. It’s not a question of auditing firms alone. There are enormous pressures to cut corners, to show performance in a most favorable light.

And sometimes the temptation is to overstep the bounds of accurate accounting, to create instruments around the edge of doubtful validity, or at least those that don’t disclose the real extent of indebtedness, or hide profit or hide glosses, so the profits are overstated.

All of this can take place not by Andersen alone or by auditing firms alone. But the pressures are enormous.

JIM LEHRER: Sure. But why does it take rules, Mr. Volcker, to keep people from doing these awful things you just said?

PAUL VOLCKER: I suppose we’re just human beings.

And the question is there are rules; there are very detailed rules in many of these areas. The rules themselves undoubtedly need review and reform, but there’s a whole profession of people who try to find the way around the rules when there is money to be made.

JIM LEHRER: Now you said you hope that this could — that Arthur Andersen can regain its footing, et cetera.

But there are huge suggestions today all through the newspapers that it was too late, that your report, whatever it’s merit, it’s too late; Arthur Andersen has had it. How do you feel about that?

PAUL VOLCKER: Well, I think there is a very real threat. There’s a threat of indictment that you mentioned. They have had obviously some discussions of whether they could merge with other firms. You have the alternative of the kind of reform that we proposed.

I think it is very important that whatever happens, we seize… this is a real opportunity to repair difficulties, repair problems that have been growing in evidence in recent years, climaxed by Enron, reflected in Global Crossing, billions of dollars being lost, lots of the questions about the accuracy of corporate reports, this is the time and opportunity to do something about it.

And I hope that the indictment, the merger, does not cause us to lose sight of the kind of reforms that we proposed.

JIM LEHRER: Many of Arthur Andersen’s major clients seldom a day goes by that two or three of them don’t fire Arthur Andersen as their auditors.

PAUL VOLCKER: I understand.

JIM LEHRER: Why shouldn’t they fire Arthur Andersen right now?

PAUL VOLCKER: Well, it’s kind of like a run on the bank. If you think other people are going do it, there’s a lack of confidence, you want to get out I suppose. Like a bank run sometimes is not justified and the fact of the run creates the problem.

I would like to see, it’s no secret, I said it repeatedly, would like to see Arthur Andersen able to survive as an example of the way that a firm can survive and give priority and primacy to the auditing function and not to the other functions. Whether or not they can survive is obviously in question.

JIM LEHRER: Sure. Is it your position or your feeling, based on your 30 days looking at this that there’s essentially no place to go from Arthur Andersen — in other words that Arthur Andersen symbolized all of goodness and also all of the badness in American accounting right now? Is this it?

PAUL VOLCKER: The irony is that I think ten or fifteen years ago Arthur Andersen was considered the class of accounting, the gold standard, how to do it, how to organize an accounting firm.

For whatever reason, that feeling has been lost. There have been obviously lapses of effective accounting here. Can we restore it in this company? I think that would be… the best possible outcome of this situation. If that’s not possible, I hope we don’t lose sight of the need for reform in auditing and in other areas of financial markets.

JIM LEHRER: What besides the specific thing…now you have talked about Arthur Andersen, but just generally speaking now about accounting generally and auditing generally, beyond separating it off from counseling, what else to restore confidence needs to be done?

PAUL VOLCKER: We have made two areas of general recommendation. One is a kind of structural area, what an accounting firm… what kind of functions should it perform.

And our plea is that it perform the auditing function and closely related services and keep their eye on that ball.

In the Arthur Andersen case we feel that there are a lot of things that could be done within the firm to make sure that the discipline is maintained, that not just the letter but the spirit of accounting standards are maintained — the revolving door between clients and auditors be monitored at least and slowed down, that people… there be some rotation of the people working on particular accounts, so that the auditor doesn’t get too close to the client when they are in a role of in a sense a policeman of the reports.

So there are a variety of things that need to be done internally certainly in Andersen. Some of them may be applicable to other accounting firms as well. I don’t want to speak to that directly. We have not looked at those.

But I think the pressures on the accounting and auditing industry are well known and there are problems in other firms and other accountants.

JIM LEHRER: Where does the pressure come from, Mr. Volcker?

PAUL VOLCKER: The pressure comes from wanting to make money, I think. We’ve been —

JIM LEHRER: You mean make money for whom — make money for the accounting firm or make money for everybody?

PAUL VOLCKER: Make money for the companies who you know are very sensitive to their earnings performance, whether they are meeting the objectives they set out, whether they can maximize away the appearances to investors, because we have been through an enormous bubble in the stock market as you know, a great boom in investment.

Millions, tens of millions, hundreds of millions of money have been made, billions of dollars of value in particular companies rest upon some sense that the information that is given out is reliable.

JIM LEHRER: Rather than cook backs.

PAUL VOLCKER: Rather than cook books. Now, that’s a strong term.


PAUL VOLCKER: And, you know, it comes to shading around the edges.

Can we push the envelope a little bit? Can we interpret this particular accounting rule or that particular accounting rule that permits us to hide some debt or hide some losses for a while, and some of them may be technically valid, some of them not, when do they cross the line?

We need some, I think greater discipline in this area, respect for the intent of the accounting standards, and not the temptation to cut the corners, which started in the business firms and their investment banks and elsewhere but the defense against that is the auditing firm.

JIM LEHRER: You know, to the average lay person you have been around this all your adult life but what you just said sounds appalling — that — what was going on.

PAUL VOLCKER: Let me put this in perspective.

JIM LEHRER: All right.

PAUL VOLCKER: We have bragged to all the world of the effectiveness of our accounting, the transparency of our companies, the accuracy of our financial reporting, the accounting standards we have, the auditing. I think most people think it is still in the best in the world.

I believe it’s the best in the world, but what this incident has shown or a succession of incidents has shown, it’s not as good as we brag about.

We have had a certain amount of hubris… we have clear difficulties. And the good news out of all is this I think it’s a signal it’s time make our performance as good as our assumption as to what the performance was.

JIM LEHRER: All right. Paul Volcker, thank you very much.

PAUL VOLCKER: And I think that can be done.

JIM LEHRER: Okay. You’re confident — you come away from this experience….

PAUL VOLCKER: I think if we take this lesson to heart, I think we can repair the thing.

JIM LEHRER: And the alternative is a lack of complete confidence in our market system…

PAUL VOLCKER: Exactly. Which would have adverse market consequences.

JIM LEHRER: Sure. Paul Volcker, thank you, sir.

PAUL VOLCKER: Thank you.