Banker: Volatility Is Reality

Newly appointed bank CEO Gerrit Zalm, who also chairs the trustees of the International Accounting Standards Board, says that the credit crisis is ...
Marie Leone and Tim ReasonDecember 5, 2008

Add another voice to the growing chorus of accounting faithful who are calling on banking regulators, not accounting standards setters, to address the credit crisis. Gerrit Zalm, who has just been named by the Dutch government to oversee the merger between nationalized banks Fortis Nederland and ABN Amro, insists that the illiquidity problem plaguing the capital markets is not an accounting issue, but a regulatory one.

The appointment of the former Dutch finance minister as CEO of the soon-to-be-merged Dutch banks creates an odd dichotomy, because Zalm is also the sitting chairman of the trustees that oversee the International Accounting Standards Board. While many bank CEOs on both sides of the Atlantic have been loudly denouncing fair value accounting rules, Zalm is a staunch defender.

Noting that he was not speaking for the IASB or its trustees, Zalm told that an accountant’s duty is to assess the “actual value” of corporate assets and liabilities and post those values to the balance sheet to reflect economic reality. “If reality is very volatile, then of course the balance sheet and income statement will be volatile, and how to cope with that in terms of capital requirements is the problem of the [banking] supervisor,” he said in an interview Friday.

“You cannot blame the thermometer for fever of the patient,” he added, contending that fair value accounting was simply a way of measuring assets that had lost their value in financial meltdown. Banking regulators, not accounting standard setters, said Zalm, should be made to play doctor. At the same time, he said, IASB is working with the Basel committee to help avoid “these vicious circles.”

Zalm also told that he intends to remain on the board of IASB’s trustees, despite recent articles in Accountancy Age and elsewhere suggesting that his new position as CEO of Fortis/ABN Amro poses a conflict of interest. “Conflict of interest was not an issue,” stated Zalm, who says that as a trustee he does not set accounting standards, but rather appoints IASB members and secures funding. “I’m certainly not going to lobby on behalf of banks or on behalf of the government,” said Zalm, who points out that he has long served as on the board of trustees while also holding a position as chief economist and acting CFO of DSB Bank.

Both IASB and the U.S.-based Financial Accounting Standards Board have been working since 2002 to converge U.S. GAAP and IFRS. In response to the financial crisis, IASB recently sidestepped its normal due process — a move approved by its trustees — to quickly adopt accounting rules that mirrored FASB standards for applying fair-value accounting to financial assets and liabilities. At the same time, FASB also sped up its due process to clarify fair-value rules regarding how illiquid assets are measured at fair value, a move some critics say was aimed at placating bankers.

Zalm admits that there was political pressure on IASB to respond to the financial crisis, but adds that “even a politician can make an intelligent remark. Independence doesn’t mean you don’t listen to anybody.” Indeed, argues Zalm, the credit crisis may help move countries — including the United States — away from local generally accepted accounting principles and toward adopting international financial reporting standards. “The financial crisis showed that it is extremely important to have a level playing field,” regarding comparability of financial statements. He points out that there is an “urgency” to wiping out the differences between local accounting standards since the credit crisis has worsened, particularly in the area of recognition and derecognition of financial assets, and consolidation of special purpose entities and other off-balance sheet vehicles.

Zalm also thinks that the road to IFRS in America will be a little less rocky in light of Paul Volcker’s appointment to president-elect Barack Obama’s economic advisory team. Volker, the first chairman of the IASB trustees and a former Federal Reserve chairman, “is certainly a friend of the international approach . . . he is a logical and sensible person and in that sense I am happy he is in the administration.

Obama will also have to name a new Securities and Exchange Commission chairman, as Christopher Cox, who heads up the commission now, has said publicly that he expects to leave when the new administration takes over in January. Some observers say that former SEC commissioner and current Columbia Law School professor Harvey Goldschmid is a top candidate for the job. Goldschmid would likely be a favored choice among IFRS proponents, as he is currently serving on a joint IASB/FASB advisory board to address critical accounting issues in the wake of the credit crisis.

“I think there is a general support from the SEC [and] FASB that it’s better to switch to a principles-based approach and get away from a rules based approach,” said Zalm, referring to the move away from U.S. GAAP toward IFRS. “I think that is a genuine intellectual conviction that will not go away.”

He also called the board members of FASB “brave” for pushing American companies to adopt IFRS, noting that their support of international standards is “undermining their own future.” Zalm expressed admiration for FASB’s position, noting that “All kinds of institutions have good arguments to stay alive, and there are very few that would say it is better to have an international approach that is superior to their own approach.”

As for his own new rule as CEO of a newly nationalized bank that must absorb portions of ABN Amro, he says his primary concern is to find top talent — including a CFO — to steer the Fortis and ABN/Amro through the merger and out of financial straits. “I’m like Obama, I have to put my team together.”