Google Paul Volcker, and most of the results will focus on the former Fed chairman’s role as a hardnosed inflation fighter. In the late 1970s, Volcker jacked up interest rates, successfully taming runaway inflation, but also sparking the severe 1981-82 recession.
In a news conference today, President-elect Barack Obama named Volcker, now 81, as head of a special Economic Recovery Advisory board that will regularly brief the President.
At first blush, given the macroeconomic crisis facing the United States, it seems unlikely that the board would be dealing with seemingly esoteric issues such as accounting standards and auditing procedures. But biographical sketches of Volcker frequently overlook his deep background in accounting issues in favor of his roles at Treasury, at the Federal Reserve, and, more recently, as the lead investigator into corruption in the Iraqi Oil for Food program.
Impressive as those accomplishments are, such biographies ignore much of what has made Volcker, in the words of the press release from the Obama transition team, “one of the world’s foremost economic policy practitioners.”
For example, in 2000, Volcker chaired the oversight board that created the International Accounting Standards Board, and then served as head of the IASB’s trustees for two years.
In 2002, he was also brought in to try to reform Arthur Andersen in the immediate aftermath of the Enron scandal. And although Andersen fell apart too quickly for Volcker to accomplish much, the episode only enhanced his sterling reputation. Indeed, shortly thereafter, SEC-chairman Harvey Pitt to ask Volcker to head up the newly created Public Company Accounting Oversight Board — which Volcker declined, citing the time demands of the job.
Those experiences are all highly relevant in the midst of a financial collapse that has been widely blamed on accounting rules that, depending on your point of view, were either faulty or misapplied.
Just this week, for example, the American Bankers Association sent a letter to Treasury Secretary Henry Paulson, complaining that all of the recent efforts to bolster bank capital could be undone if year-end financial reports have to follow current fair-value accounting rules. Those rules require banks to mark their assets to market. Critics have said the rules exacerbated the crisis by forcing banks to drastically mark down securities for which no market existed. Defenders argue that the rules actually exposed the extent of toxic assets on banks’ books. A third school of thought says that banks actually failed to use the flexibility built into fair-value measurement rules and harmed themselves by applying prices from markets that were all but frozen.
That’s just one of many accounting issues at the forefront of the current economic crisis. Another: Should the United States adopt International Financial Reporting Standards, bringing its listed companies closer in line those of Europe and others around the globe? Or are recent efforts in that direction too quick to abandon U.S. GAAP, putting at risk the reputation of the U.S. capital markets as well policed?