The Bruce Column — Interview with Paul Volcker

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02 Oct 2012

Robert Bruce interviews Paul Volcker, the most influential central banker of our era, about the state of global financial reporting.

Paul Volcker (118x110)Paul Volcker has been arguably the most influential central banker of our era. As Chairman of the US Federal Reserve from 1979 to 1987 he was the architect of the great economic buoyancy which led to the prolonged growth curve of financial services across the following twenty years. And now, with the ‘Volcker Rule’ plan to curb banks’ proprietary trading almost up and running, he is still at the heart of efforts to bring stability to the markets. Back in 2001 he also found time, and enthusiasm, to chair the trustees at the inception of the IASB and to strongly influence the development of IFRS across the following five years. In the words of the New York Times: ‘In what would have been retirement years for anyone else he became Chairman of the group overseeing the IASB and guided it to a level of independence that outraged French bankers.’ Having supported the endeavours of Sir David Tweedie, the IASB Chairman throughout those years, he returned this September to speak at the annual conference of the Institute of Chartered Accountants of Scotland, where Tweedie is currently President.

Talking with him after he had delivered his speech it was obvious that his efforts and hopes, even at the age of 85, are undimmed. His view of the achievement of the IASB and IFRS remains unchanged and resolutely determined. ‘The IASB has done a terrific job developing credible international standards’, he says. And he reiterated the fundamentals. ‘The enormous complexity and range of the economic and financial world in the twenty-first century only reinforces the need for common accounting standards around the globe, for strong professional discipline in applying those standards, and for a framework of professional independence amid conflicting financial and political pressures’.

The arguments are, he suggests, unarguable. ‘If we really believe in open international markets and the benefits of global finance, then it can’t make sense to have different accounting rules and practices for companies and investors operating across national borders’, he said.

The remaining sticking point is, of course, the attitude of Volcker’s own country, the United States. The momentum which was created in the early days of the IASB, post the Enron collapse and scandal, has become dissipated by politics, and the feeling that America in general is drawing in its horns. The political will, despite the exhortations of the G20, is seen to be lacking. Volcker shares this view. ‘It is a little bit disappointing that the US in contrast has adopted a standoffish approach’, he says. ‘I’m a little puzzled’.

He points to ‘the enthusiasm of American international companies’. For some there is no desire for the status quo. And he sees it as damaging to American businesses to be on the outside of a global system. ‘Why create another problem for ourselves?’ he asks. ‘In the long-term they would be better off’.

It is not just about the long-term prospects for American multi-nationals. It is about reform within the United States itself. He draws the lessons of the last decade and sets them in context. ‘Substantial progress has been made with most countries, beginning in Europe, pledging allegiance to IFRS. But as disappointing to me as to the standard-setters, it is now the United States that, contrary to earlier indications appears to be a reluctant dragon. That can’t make sense’, he says. ‘The United States outside a broader international consensus would be an anomaly, counter to the basic interest of businesses, of investors, or of disciplined enforcement of consistent standards’.

He thinks that sticking to the status quo will only damage American business. ‘The day has long since gone when the United States could claim, with some justice, that it alone, with its long established GAAP, had “best practices” characterised by strong, comprehensive, and well enforced standards’, he says. The balance has changed. Joining in would bring America advantages. Continuing to stay out would not. ‘By now a great deal of progress has been made to achieve agreement on consistent, high quality and enforceable standards’, he says. ‘That convergence will help both the US and other standard setters in withstanding the pressures that inevitably arise to meet particular national or financial interests’.

He has long memories of the amount of cash spent by companies lobbying to stop changes in accounting rules for stock options, for example. ‘People argue wrongly that standards are above politics’, he says. ‘There is plenty of evidence that politicians bring pressure to bear’.

And he also feels that being part of the wider world would shake up the standard-setting process in America for the better. He thinks it is time for change. ‘Within the United States itself there is also much restiveness about the inscrutable detail of GAAP’, he says. ‘There have been too many incidents of weak and negligent practices, of conflicts of interest and political pressure, to any longer justify claims that “made in America” has exclusive superiority’.

He suggested that central bankers tend to be pessimists by nature. But he did express a degree of guarded optimism about the outcome for truly global IFRS. ‘I can only hope that the clear interest repeatedly expressed by the G20 itself in common accounting standards can be made operational in practice’, he said, ‘resolving the few issues that remain open and overcoming the recent hesitation in the United States itself’.

He applies his long experience and accumulated wisdom to the issue. ‘The basic argument is strong enough that if the rest of the world stick to IFRS the US will look odd’, he said. ‘Ultimately it will get done’.

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