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Can you tell something about your career?
I had the good fun over my fifty years of active professional life in experiencing the exciting intricacies of the accountancy profession in its broadest sense, at the coalface first: as a public accountant, controller, internal auditor, in both client management and practice & people management positions; from a junior, transaction testing box ticking role till oversight roles, both in the private sector as well as the public sector. I had the good luck about every five years to be able to change focus, to do something new, challenging. All this happened for most part with the enabling-winds in the sails of a post-war fifty years roller coaster boom in demand for accountancy services.
The last twenty years of my career also gave me the opportunity to add a new dimension to my predominantly micro optic of accountancy, and merge it with macro-prudential issues, systemic risk and governance issues, internal and external, facing the World Bank and when working for the European Commission.
Luck has been a major and indispensable ingredient in my career path.
What about your education?
My formal education has been totally unremarkable. I almost failed high school if it had not been for the few truly sterling teachers everyone runs into during his or her early life. I am mainly referring to those who go beyond the curriculum, instill curiosity and give you perspective.
My professional training was equally unremarkable but solid: vocational training via the evening study for ‘registered accountant’ (NIVRA). The NIVRA study’s academic grounding was paper-thin. But I did my studies by taking off three months a year, for 8 years in a row, worked from the University of Amsterdam library and took my NIVRA exams religiously. This arrangement allowed me to go beyond formal NIVRA package training, search on my own steam for the academic side of the profession, which, in the Netherlands, had a very instructive but one-sided hypothetico-deductive slant, borrowing from the German and Austrian school economic tradition.
This I complemented in 1971, just after qualifying as a ‘registered accountant’, with a year exposure to the American academic tradition at the University of Chicago. When doing my internship at Ernst & Young in Chicago, the university invited me to sit in on its bi-weekly workshops of Accounting
Research. This gave me crucial new angles on the very empirical tradition of American academia; all accountancy adjacent pastures that have helped me tremendously in problem analyses and problem solving during my professional life.
This happy mix of practical experience and informal academic training and interest has been invaluable in building and communicating my deep concerns about the sustainability of the financial system in 2004 and the following years.
You worked for a long period at EY. Thereafter you became vice-president and controller at the World Bank and in 2001 you were appointed by the European Commission as its first Director-General and Chief Internal Auditor. How did you experience these changes?
A fascinating experience, with many aspects they do not teach you at school. But I had the wind in the sails in that both 50+ jobs (the World Bank and the EU) were born out of serious financial scandals at both institutions. That helped my empowerment in pushing through much needed change, my prime mandate at both institutions. There were very ugly moments, but also times for cheer. In the end, I feel I made a solid net difference for the better, for the institutions and myself.
One of the first things I discovered was the crucial difference between ‘auditing’ and ‘controlling’ in applying your brains. As an auditor you use your brain ‘extraction’ muscles. You pull information; but whatever good you are at it, you can never be sure you are pulling the right ropes. It still depends whether they accept your advice or not. As a controller you use your brain push muscles. You are a change agent par excellence, the first line of defense, much better empowered to achieve real change, and certainly less budget vulnerable if you show results.
Secondly, these were moves from the private to the public sector. Both sectors have their unique internal politics, their own code of do’s and don’ts; and you have to learn how to negotiate that. The public sector also has a more ethereal bottom line, which means it is easy to surf the waves and avoid causing waves.
I was blessed in my last two big multilateral jobs with a superb staff, very professional, who gave me excellent cover in terms of expertise and institutional-cultural understanding. I returned the favor, to take the political heat myself, hence give them political protection in return.
Looking back, I see my Controllers job at the World Bank as having been the most interesting. Moreover, it had the added dimension of a few financial crises, crisis management, systemic and macro-prudential issues. During the 1997 East Asian crisis I saw legions of economists rediscovering proper accounting, auditing and governance as an economic fundamental.
You are at present one of the five members of the ESM Board of Auditors (BoA). What does that function entail?
The Eurozone not really having its own institutions such as a Court of Auditors, the BoA is basically designed as a hybrid of a mature Audit Committee in the traditional corporate sense. It has an oversight responsibility for the financial statements, audit and controls, but with an added responsibility for efficiency and effectiveness audits.
The Board has five members, appointed for three years on a rotating bases by the Board of Governors. Two are nominated by national supreme audit institutions, one by the European Court of Auditors and you have two ‘at-large’ members nominated by the Chairman of the Eurogroup- presently our Minister of Finance, Mr. Dijsselbloem.
The ESM manages €700 billion funded by Eurozone member states. Yet it is the Trojka (European Commission, ECB, IMF) that decides whether money will flow to a member state. Hence the other member states have lost sovereign decision power. Can this lead to problems?
The ESM effectively manages the paid in capital (€ 80 billion) as well as funds and debts raised on the financial markets through a host of debt instruments for its lending activity. The Trojka plays an important part in decision preparation as well as conditionality setting and compliance monitoring for lending programs, but the ultimate decision is that of the ESM Board of Governors.
There, each Eurozone member state is represented by its Minister of Finance. In some countries it also can mean prior approval of a lending package by the National Parliament. Obviously, one can argue there is some loss of sovereignty compared to bilateral arrangements. This is the price for any EU collegiate decision making. The construct as is, has been blessed by National Parliaments when founding the ESM. But yes, a robust EU(rozone) architecture inevitably will lead to some dilution (‘upward delegation’ I prefer to say) in national decision-making power.
The ESM is authorized to invest in sovereign debt. Should that be the task of the ESM? Would it not be wiser to leave that function to the ECB?
Under pressure everything becomes fluid, especially in times of economic stress. Hence, we have seen exotic monetary policies and tool kits developed by the ECB, including the suggestion to buy sovereign debt. The barrier to any such move is predicated on a doctrine that a central bank should not (be seen to) engage in monetary financing of national budgets. Moreover, at the national level, it could be seen as conducive to further mutualizing Eurozone debt, striking a raw nerve in privileged Euroland. Add to that that too much co-mingling of monetary and fiscal policies is seen as a threat to central banks independence. This will lead to having a basket of legitimate and not so legitimate concerns about maintaining a clear and pure central bank mandate-driven focus. The topics inevitably lead to a much needed healthy debate.
The ESM, supported by the fact it is not a central bank and that it has its own equity base, has a wide array of lending and investment constructs, including sovereign debt. The rest is all a test of democratic control, macro-prudential navigation, and keeping a close, not a closed, eye on avoiding building slippery slopes on top of slippery slopes.
But even more importantly, remember the principle so little taught at school: that money, however packaged, is substitutable. And one of the things that I discovered in the blogosphere, post crisis, is that the man in the street understands that better than politicians might think. Hence, healthy but also a lot of unhealthy skepticism arises.
Do you agree that the first and second EU stress tests where not particularly a success? Which guarantees can you give that this third bank stress test will do the trick?
Yes, the first two stress tests were not a success, and that fact alone means they may have done more harm (false confidence) than good (having a positive effect on the economy). One shall never know the net effect, or costs, of usefully preparing banks to look at themselves critically, and the loss of credibility when proven wrong once too often.
Do I have guarantees it will go better the third time around? Guarantees no, hope yes. As an interested outsider one would hope the ECB this time has its act together. Remember that the other two stress tests where not done under aegis of the newly empowered ECB, but that of the European Banking Authority.
The first question I would have, and have publicly aired, relates to the term ‘asset quality review’. It may be a misnomer (“net asset quality review” might have been better) in that it suggests that this exercise limits itself to screening only the asset side of the balance sheet, which would be folly and conflicting with the overall ECB’s terms of reference that speak about a ‘balance sheet’ review.
I do not think a demi body scan will instill much confidence. So, I am waiting and will be looking also for what has been done with the credit side of the balance sheet: liabilities, contingencies, (pension) provisioning and all key differentiating factors within EU accounting.
Equally, I would like to see a stress test scenario under normalized monetary policy assumptions, i.e. roll back of excessive and exotic ECB financing arrangements beyond the normal times boom/bust policies and normalized interest rates. Unless we want to suggest that today’s extraordinary circumstances will be or become the new normal. And what are the consequences of that?
Finally, I have argued for a long time for the inclusion of a balance sheet also on an unadulterated fair value basis, in the notes to the accounts. I simply do not know how one can do a robust deficit/gap analyses without it.
Have you got any further advice for the students of Tilburg University?
Well, that is a question that really makes me really feel old! A lot depends of how we, as individuals, are cut: what you want to do with your life, how you want to use your expertise (or allow it to be misused), what your value system is and whether or not you realize life is a constant learning experience.
One of the most interesting parts of professional life is that each new day will see new challenges to also your personal convictions, whatever reputation you might have built for yourself or in the eyes of your peers. Resting on one’s laurels, capitalizing on old victories, freewheeling, is not of this world. And the higher you get on the corporate or social ladder (with ever increasing responsibilities) the more challenging it will become to stick to your convictions.
Same applies to the accounting profession, which is today still struggling with regaining confidence lost.
Needless to remind you that, in particular with the KPMG affairs, it seems the profession could not fall lower. Eventually we will also climb out of this abyss. The question is whether that will happen through structural solutions or through the department optical effects.
So, ‘never a boring day’ is more than a convenient throw-away for an interview. It is a sometimes exciting, sometimes annoying, but always hard ongoing reality.
The views expressed in this interview are purely personal and are not necessarily shared by the organizations, past and present, he is associated with.