The Securities and Exchange Commission yesterday unanimously selected Federal Reserve Board executive William J. McDonough to lead the new panel designed to reform the accounting industry after two years of scandals that devastated the stock market.
McDonough, 68, has served as president of the New York Federal Reserve Bank for the past decade, a position that afforded him close contact with Wall Street and the international investment community. He has long dealt with difficult economic issues, and has been mentioned as a possible successor to Fed Chairman Alan Greenspan.
SEC Chairman William H. Donaldson, who called the appointment his top priority, said that he had talked McDonough into the job during a phone conversation about a week ago.
"America's markets, business community and entire economy are at a critical crossroads," Donaldson said. "We have weathered the storm of scandal and continue to seek justice and pursue wrongdoing."
The appointment was heralded by regulators and members of Congress as a crucial step in the life of the fledgling Public Company Accounting Oversight Board, which was created by Congress as a way to fix accounting problems that led to the fall of Enron Corp. and WorldCom Inc. The board got off to a rocky start last fall when its first chairman, William H. Webster, a former FBI and CIA director, resigned amid questions about his role as a board and audit committee member at a troubled Washington Internet firm. The controversy also led to the resignation of then SEC chairman Harvey L. Pitt. Investor advocates said it was too soon to tell whether McDonough would follow through on key reform initiatives that will come before the board, including whether foreign audit firms should be subject to inspections and disciplinary action by U.S. officials and whether the board, not the accounting industry, should rewrite professional standards for auditors.
"The task before us is to restore the confidence of the American people and others around the world that the accounting statements issued by public companies . . . present a complete, true and timely report that can be relied upon," McDonough said at a Washington news conference.
He said he would not back down from a fight. "I believe that it is important [that accounting firms] be aware we are capable of being tough," McDonough said. "I am not a believer in being tough in order to demonstrate my manhood or prove anything to anybody."
McDonough, who is not an accountant, has yet to undergo a complete background check. He said he expects to join the board in late May. He announced in January that he would be leaving the Fed this summer.
McDonough earned $313,300 in 2002, according to a Federal Reserve spokesman. He will make $560,000 per year as chairman of the audit board and his term will expire in October 2007.
Described by friends as witty and cultured, a speaker of French and Spanish, and early in his career a State Department staffer, McDonough has sat on the boards of various charities, including the New York Philharmonic and the Carnegie Corporation of New York. He has not served as a director of a public company.
McDonough worked for First Chicago Corp. and its bank, First National Bank of Chicago, for 22 years before joining the Federal Reserve. His supporters said McDonough had firmly established his financial acumen in his work as chief financial officer at First Chicago and in his time at the New York Fed. There he led an effort to protect the financial system from the threatened collapse of the Long-Term Capital Management hedge fund, and to develop new international rules related to how much capital banks need to have as a cushion against possible loss.
Even though he doesn't have an accounting license, "he has been exposed to and involved with major accounting issues throughout his career," SEC Commissioner Cynthia A. Glassman said in an interview. "We think we have chosen a man with great integrity who's well respected both here and internationally and has a good, balanced view of when you need to be tough and when you need to negotiate."
Barbara Roper, director of investor protection for the Consumer Federation of America, said McDonough's resume is impeccable but that his commitment to reform is less clear.
"He's pragmatic rather than an ideologue, with a real talent for getting things done," Roper said. "The question is, will he push hard enough to reform the system? He was not one of the vocal reform advocates in the last year and a half."
McDonough has spoken out in the past year on issues including excessive executive compensation and the need to account for stock options as an expense. But he has mostly been silent on issues on the new board's agenda.
One official who has spoken to McDonough recently about those issues said he is convinced he will want to wrest control over audit standards from the accounting industry -- an idea that has drawn flack from the industry, but won support from a broad coalition of consumer groups and accounting experts.
In two speeches last year, McDonough stressed the importance of clear disclosures to help investors understand a company's financial health, citing the need for firms to provide more information about off-balance-sheet partnerships -- which sank Enron -- and financial guarantees and loans to customers -- the downfall of several telecommunications companies.
"Progress on the disclosure front would be limited until accounting standards are enhanced to ensure proper valuation and to reflect innovations over the past decade," McDonough said last September. "Accounting systems serve a variety of purposes but none is more important than helping creditors and investors make rigorous and clear-eyed decisions."
The American Institute of Certified Public Accountants yesterday called the McDonough appointment "a critical step in moving the process forward."
McDonough has had little direct experience with the kinds of corporate scandals he will ultimately police, though his longtime employer, First Chicago, agreed to restate its financial results for 1983 and 1984 after the SEC investigated how the bank handled loan reserves.
The SEC ultimately decided the bank should have set aside millions in reserves to cover losses on seven bad loans. The agency said that First Chicago had filed misleading financial statements and failed "to devise and maintain a system of internal accounting controls" to ensure its loans were handled in accordance with accounting rules.
McDonough was chief financial officer when the decisions were made. He told the Chicago Tribune in 1987 that the issue was a judgment call and that "reasonable people can have different views." First Chicago did not admit or deny wrongdoing as part of a settlement. A spokesman for McDonough declined to comment on the case.
Staff writers Kathleen Day and David S. Hilzenrath and researcher Richard S. Drezen contributed to this report.