Berkeley Financial Reporting Award Honors Accounting Reformer Walter Schuetze
By Steven Bodzin
Accounting and finance experts named by the Haas accounting faculty as members of a selection committee picked investor advocate and accounting reformer Walter Schuetze as the inaugural recipient of the Berkeley Award for Distinguished Contributions to Financial Reporting at the School's Fifteenth Annual Conference on Financial Reporting in San Francisco on November 5.
Schuetze has "a very long history of standing up for users of financial reports," said Haas professor emeritus George Staubus. "There is no powerful interest group representing them in their struggle to obtain unbiased information from management. Schuetze supported investors many times in his long career in auditing and the regulation of financial reporting."
Staubus conceived of the Berkeley Award "to recognize courage, leadership, or other meritorious performance in the interest of providing financial information useful to stockholders and creditors in making investment decisions."
Discouraged by sub-par financial reporting by many corporate managements in recent years, he "felt that calling attention to outstanding performance would be helpful." The Berkeley accounting faculty organized a distinguished eight-member jury to consider a list of award nominees.
Schuetze, at 72, is officially retired. Still, his new book, Mark to Market Accounting: True North in Financial Reporting, was just published by Routledge. He retired as chief accountant of the Securities and Exchange Commission in 1995, then came out of retirement in 1997 to work another two years as chief accountant of that agency's enforcement division.
From the time he entered the accounting profession in 1957, he worked on important auditing and financial reporting projects. His resumé lists several organizations important in financial reporting, including the Securities and Exchange Commission, the Financial Accounting Standards Advisory Council, and the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants. He served as a charter member of the Financial Accounting Standards Board from 1973 to 1976. Although his resumé is impressive, what put him in line for the award was his passion for helping the economy run smoothly.
"It is positively thrilling," he said, "to watch participants in financial markets use financial statements to make capital allocation decisions." He described his five years at the Securities and Exchange Commission as "like going to the theater."
Courage might not be the trait most people associate with accountants, but Schuetze's career shows how important it is. Most recently, he joined the board of directors of Computer Associates, only to find that the company had been overstating earnings for years. He led the company's audit committee through the dangerous terrain of an investigation by the Securities and Exchange Commission, dismissing the company's top executives and reorienting the company to benefit shareholders.
Earlier in his career, he served for many years as accounting expert at Peat Marwick Mitchell & Co., now known as KPMG, which had several major savings and loan associations as clients At that time, many institutions were recording income that would materialize only if a real estate boom continued. He made some unpopular calls. Unlike many other auditors, he insisted on having Peat Marwick's clients delay recording income on real estate loans until the project's success and the developer's ability to repay were clearly demonstrated.
Professor Staubus called Schuetze "a hero of the resistance to savings and loans' loose accounting in the 1980s. Some believe he saved Peat Marwick, investors, and taxpayers lots of money when many S&Ls failed and were bailed out by the U.S. government."
That doesn't mean his auditing clients always appreciated the favor. Schuetze said he often faced business people who didn't want honest accounting. "I would very carefully explain to them how capital markets work," he said, speaking in a voice that could have belonged to a courtroom judge. "Market participants need quality information to make good decisions. If they are not given high-quality information, the cost of capital for all participants in the market goes up. We're trying to get to the point of optimal capital cost." This capitalist idealism didn't always pay off. "I certainly lost work by sticking to my guns," he said.
Schuetze, like Staubus, sees the current period as a tough time for the accounting field. "After Enron and WorldCom," Schuetze said, "the profession's credibility sank to the bottom of the barrel. Everyone in the profession and associated with it is trying to restore credibility." He says the reforms in the Sarbanes Oxley Act have helped, as has the increased emphasis on ethics at American college and university business programs.
"Investors in 1999 to 2003 paid a very high price for false and misleading statements," Schuetze said. "Everyone's pulling on their bootstraps to restore the profession."
Looking back, Schuetze can be critical of decisions he helped make in the early days of the FASB. In a recent memoir, he wrote, "We relied on our experiences, judgment, and intuition in writing the early Standards." In particular, he faults Statement 5, saying its two standards for loss contingencies "allow for so much judgment and leeway that in practice they amount to no standard at all."
Nonetheless, the FASB's early work laid the foundation for today's accounting standards.
As for the future, Schuetze said, "I hope standard-setters and regulators will continue to march to market-value accounting. That's what we need to do to get good reliable information to investors." He said market value is less precise but more relevant than historic cost. He is gratified by the gradual decline of historic cost accounting, calling the cost of assets purchased long ago "irrelevant" to shareholders.
Accepting the award at the Fifteenth Annual Conference on Financial Reporting, he told the 300 accountants and finance professionals in attendance to give mark-to-market accounting a try. "Try it, you'll like it," he said.
The Haas School of Business convened a panel of top accounting experts to decide who deserved the first Berkeley Award. The panel included Donald Kirk and Dennis Beresford, two former chairmen of the Financial Accounting Standards Board. Colleen Sayther Cunningham, CEO of Financial Executives International and Patricia Doran Walters, director of research at the CFA Institute also considered the seven award finalists. James Leisenring, a member of the International Accounting Standards Board and former vice chairman of the FASB took part, as did Michael Sutton, who succeeded Schuetze as chief accountant at the SEC. Professor Emeritus Staubus and Dean Tom Campbell rounded out the jury.
