Paul Volcker, a former Federal Reserve Board chairman and currently one of President Obama's economic advisors, was asked during a recent conference whether he thought the Big Four accounting firms were "too big to fail." He replied, "That's an obvious problem."
In general, being too big to fail is the notion that a company's economic reach is so vast and interconnected with the viability of so many other companies and individuals that allowing it to collapse would cause a crushing systemic financial blow to the economy. Over the past year, banks, auto makers, and financial service firms all were deemed too big to fail by the U.S. government, and as a result received federal aid to keep afloat.
Volcker, the keynote speaker at a conference sponsored by the AICPA and the IASB, noted that in its final report released last year, the U.S. Treasury Advisory Committee to the Auditing Profession questioned whether there was enough competition in the global auditing profession. He too wondered whether the PCAOB needed to have the same discussion about the auditing profession that bank regulators had had about their industry, namely that some type of "resolution process" might be needed that allowed the government to take control of bankruptcy proceedings if one of the Big Four folded.
Volcker said he didn't particularly like the idea of government intervention regarding a possible accounting firm meltdown. Yet he admitted that the auditing industry's "interdependence and consolidation" would likely require a solution of "extraordinary means."
From somewhere in the back of the room came the question: "Why are we all principles-based at conferences like this, and when we get back home, it's all rules. How do we break the cycle?"
The query momentarily stumped the otherwise highly engaged panel of experts who were assembled yesterday to speak at the AICPA's conference on international financial reporting standards. Then Deloitte CEO James Quigley broke the silence. Giving credit to the lone lawyer on the panel -- Michael Young of Willkie Farr & Gallagher -- Quigley said the answer was provided earlier in the session.
"I think Michael broke the cycle for us," said Quigley, noting that an obsession with rule compliance doesn't trump economic substance with respect to accounting treatments. "Conformity to rules doesn't necessarily get you off the hook if [the accounting treatment] doesn't have a lot of substance," opined Young.
Indeed, the panel admitted that professional judgment, which is more often used in applying so-called principles-based accounting standards than rules-based standards, can be second guessed by regulators. However, Young, who has spent 25-years litigating accounting cases, pointed out that in a case based on a principle, it's "really hard" to prove that executives or directors acted in bad faith.
Key to any good defense of an accounting judgment is documenting "good faith" attempts. If there's a tough judgment call, executives and boards should talk it out and document the discussion, advised both Young and Quigley.
"The law is, in its own slow, slow way, coming to appreciate the importance of judgments, and the law is going to have to come to grips with the fact that if it doesn't, it will stand as a significant impediment to the evolution of financial reporting," argued Young. "And I think that slowly but surely judges are starting to get that."
Why are principles-base standards considered more virtuous than a rule-based system, anyway? Young explained that rules have sharp edges that you can aim for. So companies can convolute deals and structures to stay within rule thresholds. Principles have fuzzy edges, so you have to aim for the center, and "there may be no better protection than that," mused Young.
One of the great things about this job is that we get a chance to see what our readers are thinking. Since we generally seem to attract readers of a very high intellectual caliber (there are a few exceptions), some of their off-the-cuff comments pierce through to the heart of the issue on which they're holding forth.
In a response to David McCann's article posted yesterday, which probed how much Credit Suisse's recent changes in executive compensation could revolutionize bank pay schemes overall, we received a response today from reader James McMonagle that amounts to all you'll ever need to know about the issue:
"Is Credit Suisse trying to take a pragmatic approach to pay? All banks should take a look at the pay packages of small businesses, which are always tied to performance of the whole company. If the company has a poor year, no one gets a bonus. However that ensures two things: (1) there is a company continuing next year and (2) there is a paycheck next year.
"I am amazed at the shortsightedness of these banks' compensation plans. If your bank has a bad year, your compensation plan may just bankrupt the whole thing.
"The primary goal of the small business's compensation plan is to share the wealth in good years and to get by in bad years in order to see another good year. The banks' compensation plans seems to miss the point of surviving to see another good year.
"The argument about losing skilled labor is not a valid argument because there are so many quality people currently available. If the people weren't considered a commodity by the banks, why would there be such large layoffs?
"Banks (and other groups) need a paradigm shift in their thinking about compensation to focus on surviving the hard years." Amen.
Big Sis, as some of us here at CFO like to call our sister publication, The Economist, has been mostly on the money in its coverage of the financial crisis. Until now, she's shunned the demagoguery that's clouded the coverage on many of the major networks and not a few newspapers.
Instead, Sis has held to her beat and looked closely at the current crisis through the lenses of facts and reason. But in this week's issue, she's begun to dip her toe in the muddy waters of the income-equality debate so beloved of the far left and far right.
The equality game began on the political left. Evoking dim memories of Marxism, the likes of filmmaker Michael Moore have long cited huge discrepancies in compensation that exist between the average CEO and the worker on the line. Their solution would be to narrow the wage gap by fiat. What they neglect, however, is the way such arbitrary pay guidelines could freeze the motivational fuel that feeds the growth that in turn enables Average Joe and Jane to prosper.
Lately, right wingers have joined the game. In their version, Big Government has enabled a takeover of our economy by Wall Street and the banks. And look how much these lousy bankers and traders who led the country to ruin are making, they are arguing, while people who "work hard and play by the rules" (as Bill Clinton used to say) lose their jobs and their houses.
Neither fringe is letting up on this pseudo-populist drivel. Unfortunately, in this week's "Lexington" column, Big Sis appears to have begun trafficking in the equality game. Citing Arthur Brooks, the head of the American Enterprise Institute, Lexington appears to approve of Brooks's notion that the nation's new culture war is about the size of the national debt and the size of government.
"Everyone agrees that Wall Street messed up last year, but many are disturbed by the expansion of government that followed the crash," the columnist writes. "Voters particularly dislike the way the state is using their money to reward deadbeats, says Mr Brooks. They themselves work hard and live within their means. They see their neighbour, who borrowed more than he could afford to buy a fancy house, getting a bail-out to save him from the consequences of his own poor judgment."
Acknowledging that the media critics of big government are "a bit hysterical," the columnist nevertheless seems to say that the resentment does have a basis in reality. To that, I say, so what? If we are to truly emerge from the economic mire we're in, it will be through clear thinking and reasoned debate about the effectiveness of our attempts to spur sustainable growth, not through the politics of resentment. We should all stop playing the equality game.
Sometimes, just when you think the coast is clear, it isn't. The slow fade of the chief operating officer role from corporate C-suites may have left some CFOs with less competition as heir apparent to the chief executive, but a faster-moving trend is threatening to spoil the party.
According to a new white paper by recruiting firm Heidrick & Struggles, more than 200 companies worldwide have appointed a "chief commercial officer" since the title first appeared a decade ago. And the pace is really picking up: At least 56 of those jobs were created in 2008 and 36 more followed in the first half of this year, says John Abele, global managing partner of the firm's marketing and sales officers practice. The vast majority are split evenly between North America and Europe, and they're also found at both start-ups and well-known companies like Coca-Cola, MillerCoors, Hasbro, JetBlue, Cadence Pharmaceuticals, Ball Corp., and Calpine.
The position, often filled by someone with both general-manager and functional (such as marketing) experience, generally forms a bridge between the product-innovation and customer-facing sides of the business. The goal is to make sure that companies turn their best ideas into products that actually make money. Historically, the CEO has been that integrator.
As such, the CCO is a logical successor to the chief executive, often more so than the CFO, at least according to Abele. "In my experience, CCOs with that broad skill set are brought in partly as a succession-planning option," he says. "Now you've got someone else in the C-suite with a broad set of responsibilities who is looking at the P&L. Depending on your point of view and on the company, that person might be more strongly positioned, given their exposure in and knowledge of the marketplace."
On the other hand, the financial crisis has buttressed CFOs' claim to the status of most-important C-suiter, and their stature frankly isn't likely to diminish much when the economy is humming again.
Still, should CFOs who want to move up to the top slot consider campaigning for an interim tenure as a CCO? Maybe, but it's a rare occurrence. Among the CCO appointments Heidrick has identified, just 3% were filled by a finance chief. It apparently happens even less often in the United States. On a list of such people that Heidrick provided, only one ý Kevin Mooney of Blackbaud Inc., now in his second commercial chief job since leaving the finance chair at Worldspan in 2006 ý was at an American company.
Sadly, I couldn't learn what makes Mooney tick, as he declined my request for an interview. A couple of the overseas folks that I contacted did, too. Now, I'm assuming there's nothing inherently cloak-and-dagger about this job, so could one of you CFOs-turned-CCOs please give me a call?
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