The OPEC boycott had just demonstrated its power in the Fall and Winter of 1973-74. The long lines at the gas stations were a thing of the immediate past, but not the price of oil -- it had quadrupled. Talk about conservation had begun but nothing had been done -- voluntarily or by law.
Just at that time I happened to be standing in the Rockefeller Center offices of one of the world’s legendary financiers. It was 6:00 P.M. The office lights were blazing in all the skyscrapers. The skating rink was illuminated. Taxis, buses and autos struggled for advantage on the congested streets. We stood together, looking down on the scene below. He said to me: --
..."Look at them, Sargent. They have no idea of what has happened ... to themselves personally or the world...”
Within his own firm’s, large office space, the lighting had already been cut -- either dimmed or eliminated altogether -- to save energy. But outside the sky blazed with light. He shook his head and sighed.
Two weeks later I was in the office of the World Bank. The President estimated that the OPEC countries would soon be amassing $40 billion per annum in financial surpluses they could not spend within their own countries -- the greatest outflow, or inflow, of capital in the shortest time in the history of the world. And this flow would profoundly alter the world’s economy, and the economic position of the United States itself -- in ways we understand only dimly even now.
President Carter is trying to alert the American people to the unprecedented changes confronting us. The Administration’s experts estimate the U.S.A. will transfer $475 billion in capital to the OPEC countries by 1985, unless the U.S.A. changes its habits of consumption. Yet the words of the New York financier still apply:
”...They have no idea of what has happened ... to themselves or the world...”
I have not come before this impressive gathering of Arthur Andersen Partners to discuss the energy problem. Rather I use these anecdotes to illustrate a more general reality of equally profound significance, I believe, to the accounting profession: The world’s economy and the financial system which supports it have become so interdependent, national economies have become so intertwined, even entangled, that there is now no alternative to supra-national and independent accounting.
Without such accounting, it is impossible to know even the elementary facts concerning national debt structures; multi-national profit and loss statements or balance sheets; or the financial health of the world’s biggest banks. We are living today in an economic and commercial world where few have the facts to evaluate the creditworthiness of nations, -- or even of the world’s largest banks. Yet, increasingly, their credit-worthiness has immediate impact for all of us. Who can foresee the effect of a chain of defaults on loans made by U.S. banks to developing countries? What could that mean for the banks, their shareholders, their customers, the banking system, their OPEC depositors, the international economic order? How will governments respond to such a crisis, and what will that response mean for the banking industry and our domestic financial system? I can’t answer those questions. But I can assure you of one thing. No government will stand idly by, if major banks come under such financial pressure. Increased regulation -- possibly international regulation -- could be the response. Government operation would not be beyond the realm of possibility -- in Europe if not the U.S.
No wonder that OECD meetings, I.M.F. meetings, and other international gatherings have focused so much of their attention of these problems of interdependence. No wonder the Bank for International Settlements has recently been charged with the task of accumulating the facts -- on a confidential basis -- concerning the outstanding debt of a host of nations. If New York City did not know the size of its debt, and if it took the experts three months to get a reasonably accurate picture of New York’s true financial situation, it should surprise no one that ignorance of some basic financial facts about nations exists elsewhere, even everywhere. What surprises many is not the ignorance itself; rather, it is the threat that ignorance presents to the international -- and therefore national -- economic order. Note the difference! It’s now the international economic situation that threatens national prosperity, national security!
These conditions are not unlike the internal economic situation within the United States prior to the 1930’s. Then, the separation between ownership and management in American corporate enterprise was making necessary a system of accounting and disclosure which would enable investors to understand and evaluate the true corporate condition, even though they were not owners privy to the inside information previously available to the owners. Yet, it took the debacle of Samuel Insull and, ultimately, the great stock market crash to usher in a new period of responsibility, and accountability --(disclosure to eliminate distrust) to restore the credibility of the free private enterprise system within our own land. Today, and tomorrow, nothing less than accountability and disclosure will be necessary to substantiate faith, to support confidence, to justify trust in the multi-national, supra-national economy within which all of us now exist.
Lest it be thought that my words are mere rhetoric unsupported by hard facts; consider these realities:
- The total external debt owed to private creditors in rich countries by debtors in poor, not-OPEC, countries has zoomed upward from $16 billions in 1972 to $72 billions in 1976, and it will reach $90 billions this year! This debt is increasing annually by an amount equal to the total debt in 1972! And don’t forget much of this debt is owed to private American creditors.
- The trade deficit of these same poor non-OPEC countries now runs at $30 billions per annum. Formerly the figure was only $4-8 billions. So we are witnessing a five-to seven-fold increase in debt which must be financed with OPEC and other resources deposited in American, English, German, French, Japanese banks and financial institutions. Our big banks annually become more and more entangled with debtors about whom they know very little indeed.
- Outside of the U.S.A., the Euro-Dollar system, a completely new development since W.W. II, has become the third largest financial market in the world. Dollars being created in Europe are larger than all demand deposits in the U.S.A. itself. Many politicians worry night and day about Euro- Communism. They should be devoting attention to the positive aspects of Euro-Dollarism.
- U.S. foreign trade now ($250 billions per annum) is larger than our entire G.N.P. in 1946! In constant dollars foreign trade now exceeds in size the entire U.S. economy in the 1920’s and early 1930’s. Its proportion of our G.N.P. is more than double what it was a decade ago!
- One out of every six manufacturing jobs in this country produces for the export market!
- One out of every three acres of American farmland produces for the export market!
- Almost one out of every three dollars of U.S. corporate profits now derives from the international activities of those, firms, including their foreign investments as well as their exports.
- External forces (oil price rises, crop failures, and the exchange rate adjustment to previous levels of domestic inflation) propelled the U.S. rate of inflation into double digits in 1973-1974!
- The U.S.A. depends on imports for more than one- fourth of our consumption of twelve of the fifteen key industrial raw materials.
- The share of trade in our Gross National Product has doubled over the last decade or so; when investment is included, our engagement in the world economy is probably at least as great as that of Japan or of the European Common Market taken as a group.
Not just the poor countries are involved, therefore, in this new symbiotic relationship. With relatively few exceptions, virtually every nation state in the world, both developed and developing, now seeks to attract capital from outside their own borders. They all -- we all -- need “external capital” to finance our oil purchases, trade and other international activities.
Multinational corporations, by definition, borrow throughout the world, assume liabilities in different currencies and seek resources from a variety of sources. While nations and corporations must borrow, the world’s financial surpluses must be kept in institutions, usually banks, which must lend those resources. The imbalance of those who have and those who have not and the necessity to invest those financial surpluses, make intermediation, or more fashionably, recycling, inevitable.
But the choice of borrowers and, even more important, the requirements which borrowers must meet are not foreordained. Here lies an opportunity. Specifically, Arthur Andersen in the years ahead could position itself to act for banks and borrowers, nations as well as corporations. That might mean analyzing the financial accounts of a borrowing nation and reporting to the lender. It might mean working with developing countries to install modern recordkeeping and financial management systems. It will mean informing yourselves about the realities behind the figures. And, since we’re talking about nations, not just companies, that will mean expanding the very concept of education for accountants. To analyze and report on the financial information of a country requires an understanding of its economy, of its history, of its culture, of its language, and of its role in the world. So, your impressive professional education program will be under heavy challenge: To take on these new jobs, you’re going to have to take on a new and enlarged view of professional education --and, ultimately, of the profession itself.
I know I don’t have to tell you about the rewards. The energy dollars I’m discussing are enormous, and so are the potential financial opportunities and opportunities for a valuable social service by Arthur Andersen.
Beyond that, intermediating between public borrowers and private lenders is, perhaps, the only alternative to greatly increased government regulation or substitution for the private sector. Accountability and disclosure can achieve responsible decision-making in the public interest, worldwide as well as in our domestic capital market.
There couldn’t be a better time for Arthur Andersen to expand in to these new areas. Since those who have deficits are likely to need more, rather than less, capital, it is in their best interest to satisfy the requirements of those with money to lend, those who want objective, factual, reliable financial information.
If that information is unavailable, or not publicly disseminated, those who seek capital will be faced with declining growth and declining standards of living. And, that will mean more political instability, in case of governments, and less profit in the case of private corporations. As. an alternative, some governments will seek bilateral aid from the more affluent nation states who will, not unexpectedly, extract political concessions in return for the aid, whether in the form of grant or loan. But there are other -- better -- options, for the borrowers.
Deficit states and private institutions instead of becoming dependent on political money, so to speak, could come to an open, free market, whether formally recognized as such or not, and seek resources as many have done before them, -- but only if the private markets are assured that the borrowers’ accounts, their projections, the status of their trade, their current and prospective debt are honestly and accurately stated and projected. And, to do that, they will need you-- your skills, your independence, your experience.
The time is long past where needed resources were acquired or deficits financed from those with whom the borrower was a familiar and comfortable name. The United States of America borrowed its capital in the 18th and 19th centuries from its friends in England and France. Jefferson borrowed the money from England for the Louisiana Purchase. But today, borrowers and lenders know each other barely, have little in common and, indeed, play quite different roles in the world economic order. Under such conditions, the potential provider of funds must know, at the minimum, what the potential debtor is all about. Those who have wealth, or, control the wealth of others, have historically made these resources available to their own -- not to strangers. But strangers now seek those resources; and to get them, they will have to provide, not familiarity, but hard, useful and reliable information.
Financial intermediaries will lend -- to those whom they trust; to those they perceive to be creditworthy; to those who supply continual, accurate information which permits an assessment of the borrower’s credit position and future requirements. Given the liquidity in the world today and the state of economic activity, there is no better time for a borrower to establish its reputation, and no better opportunity for those, such as you, to act as an honest broker.
You have filled that role admirably in national and private terms. More than that, you have foreseen, through your commitment to uniform world standards and internal internationalization, the importance of international accounting to the international economy and the international capital markets. The next step lies in moving into the public sector. And here, too, you’ve been first -- with your analysis of U.S. governmental accounting; with your recommendations for governmental financial statements; with your work in New York, the District of Columbia, and with governments throughout the world. What I’m talking about now is not a change in direction: -- it’s a change in dimension!
And this has much to do with your proposed reorganization and your potential move to Switzerland. There are many reasons to move. You are familiar with many of them. But one of the farsighted reasons is this: the presence of your top leadership in Switzerland, a neutral country, puts Arthur Andersen into a position to take advantage of this enormous new opportunity to serve the firm and, ultimately the world economy.
I mentioned earlier the anecdote of the world financier who saw instantly the implications of the boycott and OPEC’s pricing actions. He is a visionary, but he is also a tough, resourceful, enormously successful, professional, financier!
As a firm, Arthur Andersen has always managed to anticipate trends and position itself to respond to the challenges and opportunities that others rarely perceive and barely turn to advantage. You have been blessed by leaders who are, if I may say so, “realistic visionaries”. And that’s the quality that beckons you to Switzerland.
Situated in Switzerland, a neutral country renowned for its financial management skills, your leadership will be able to evaluate sensitively and respond effectively to opportunities worldwide. To work for lenders and borrowers in such a politically- charged atmosphere, you must have a reputation for political neutrality, technical excellence, and professional independence. Your move to Switzerland will enhance your reputation in all of these areas. And, of course, it will facilitate your working with the concerned international agencies domiciled throughout Europe!
But, you may well ask, why undertake this complex reorganization scheme. This potential new business may never develop, and maybe we could do it -- or get it – without going to Switzerland. As Harvey Kapnick and others have explained in detail, the move is going to cost money -- your money. It will mean that the leadership of Arthur Andersen will be based, at least part of the time, thousands of miles from the Illinois firm, the leading profit center of the Arthur Andersen Worldwide organization.
The move may also be said to diffuse the focus of an organization which has been nationally based, private sector oriented, and concerned, in the main, with technical proficiency. So, why assume these risks, take on these burdens?
Perhaps my perspective, as an intimate outsider, may be of interest to you as you consider your decision.
First, as others have said, this whole plan fulfills legally your commitment to equality among all partners, At last, all Arthur Andersen partners, wherever located, or whatever nationality, and of whatever unit participation, will have an equal vote in the affairs of the organization.
Second, we believe that moving from the present vertical structure of relationships to a horizontal configuration, with the Société Coopérative as the hub, improves substantially your position with respect to the laws governing the practice of your profession in the countries in which you operate. That is so because this legal structure recognizes the legally-mandated autonomy of the national practice entities, while at the same time providing the contractual connections -- the veins and arteries -- which link all persons practicing as part of the Worldwide organization in a cooperative venture. In short, we have tried to accommodate the independence which the profession and the…
[Page Missing]
Third, apart from the public sector business opportunities I have mentioned, the internationalization of Arthur Andersen, which this plan envisions, should help you do better what you do now – serve multinational business. As a truly international organization -- centralized for standard setting and compliance -- de-centralized for management and implementation -- Arthur Andersen should be able to work even better for multinationals based in all countries: In other words, Arthur Andersen will be at home in every country -- including the Soviet Union. That can only help -- as you confront the conflicting imperatives of nationalism and interdependence.
Finally, as an organization devoted to the principle of disclosure in the public interest, Arthur Andersen must be able to disclose what it is -- legally and in practice. Frankly, that’s difficult in the context of the present structure of relationships. Our hope is the new arrangements will allow you to tell even more about yourselves—and do so in ways which do justice to your concepts and commitments, while conforming to the requirements of local law. Whether we have succeeded will take much time, experience and, perhaps, struggle to determine.
For my part - and for my firm - let me say that we are grateful to have had the mission of working with you in developing this plan to this point.
Now is not the time to slacken your efforts to serve more and more clients with greater and greater ability and insight. It is not the time to pull back into a shell! Arthur Andersen, Leonard Spacek, Harvey Kapnick and all the other far-sighted men who have made Arthur Andersen, & Co. what it is today have never been self-satisfied nor company-satisfied. They have always wanted more for Arthur Andersen and from Arthur Andersen. More income, yes, but also more service!
Arthur Andersen has succeeded dramatically because of that philosophy. Your future growth and success will be guaranteed by following that same philosophy and practice. I am deeply honored to have participated, even in a small way, in opening up for Arthur Andersen new opportunities for more’ service and more profit.
