W&M's Gibbs Accounting Society President McKenzie Dodd Interviews Mr. Donald Young
McKenzie Dodd (MD): First I want to thank you for coming to the Mason School of Business at the College of William and Mary - and for agreeing to be interviewed. Here goes...
MD: Your background is in finance. What have been the biggest changes in the finance world during your career?
Donald Young (DY): I think a number of things stick out, notably globalization. You used to have geographic borders. The big issues with investors 10-15 years ago were only focused on the U.S markets-now they are global. I think the other change if I could pick one would probably be the change in ownership and involvement of investors. This is somewhat related to the other issues, but 10 years ago if you didn't like the accounting-you sold the stock. Today you are more likely to wage a proxy battle, to engage and get involved in governance issues as an investor. Today I think corporate governance attracts a much higher level of interest by investors, by the investment world.
MD: So the investors are more involved in what's going on in the corporation?
DY: Absolutely! Instead of voting with their feet, they will actually fill out a proxy and vote with it, and more often than ever will vote against management.
MD: How important is accounting knowledge to a finance professional?
DY: You know, I think it's almost too important. We have today so many different ways of accounting for similar transactions. We have things that should be recognized but aren't, and things that remain off the balance sheet. I think we have done a lot to address some of that with pensions, but we have a long way to go with leases. But I think there is still an awful lot we can do to make financial statements simpler and more transparent. I think at the end of the day you still have to deal with the issue that the transactions are more complicated and you have to do more, work harder to understand them, but I do think we could have made it easier, and we have to take some of the complexity out of the system.
MD: So is it the complexity that leads to the necessity for such an extensive accounting background?
DY: Yes, for example, it is a lot easier to know one methodology of accounting for financial instruments rather than three or four or five-just to pick one example.
MD: How have these two fields -i.e. finance and accounting - been integrated over the course of your career?
DY: My primary focus was finance, but I happened to go to an undergraduate that had some pretty strong accounting. I took a lot more than just basic accounting and so I had some pretty good skills in relative to the average finance person. During my MBA program, I also focused on finance, but I noticed a huge competitive edge I had with strong accounting skills. And then as an analyst, at that point in my career, I had a real advantage over my competition in understanding the accounting and looking at it in more detail, and I was luckily at a firm that valued in-depth research. I would say there is no question that my primary focus was on finance, but there was such a need and so many rewards for good accounting skills, that I don't think my career would have been the same if I hadn't had that accounting. With that said, the primary focus of the FASB has been on technical accounting skills, which are not my interest or focus at all.
MD: So do you feel the FASB would do better with more people with a finance backgrounds on the board?
DY: Yes. You will find at the members of the FASB are completely aligned on many topics, but those are pretty much the easy issues. I think it's naïve to argue that someone who has been an auditor all his or her life can somehow represent, or understand, or consider what an investor needs. I think we are human; and we are biased by what our own experiences. So I think, no group should have a majority or a super-majority as is the case with the auditor/preparer contingent of the Board today. And I think over time, part of it is that investors weren't in the process. But as investors become more involved and more engaged in standard setting, and in accounting, and in governance, and in proxies, I think it's inevitable that there will be more investor representation.
MD: Which of the positions in your early career did you enjoy the most?
DY: I enjoyed working in computer sales. I was there when the computer industry was relatively young, and there were so many opportunities to go into a client's business and make a huge impact by automating something that was done mechanically, and that was sort of fun because it felt like being an entrepreneur. For most of my professional career I have been an entrepreneur as a Wall Street analyst-I might have worked for Lehman Brothers but I had my reputation as an analyst and my rankings in the investor polls and all the rest was based on my performance. So it was sort of a neat-you are an entrepreneur but you also working with a large organization.
MD: If you were starting over right now, what would you think are some of the most exciting career opportunities out there for young people?
DY: There was a recent study that talked the about the importance of financial services to our economy. And if I were to focus on anything, it would be that. You know, you look at what's happened in London and England, the important contribution of financial services to the growth there and I think you'll agree it is exciting. But is your question what would I have done earlier? I went through and received my MBA and worked in an industry, the computer industry, for about 10 years. In hindsight, I would have probably only done it 5 years and gone to Wall Street sooner, knowing what I know today. But that is a very minor adjustment to a career that I have been very happy with.
MD: Now it it's ok to switch topics a little bit, how did you get appointed to the FASB?
DY: You know, I really don't really know the whole story. I can tell you that I was recommended, not by an investor group but by a rather significant preparer group. I think there was a frustration on the part of preparers that the FASB was not setting standards that investors really wanted or needed and that a guy like myself, with more of a mainstream investing experience, would provide better input to the Board on users' and investors' needs. I am different. I am not a CPA. And, though I have taken a relatively large amount of accounting courses and put a lot of effort into accounting as an investment analyst, I had no involvement in standard setting (other than understanding what was going on) until this assignment.
MD: And has it been going well? Is it interesting?
DY: When I came to the Board, I heard from a number of Board members that they felt that investors don't care, and don't want to get involved in standard setting. I think today, after some of the initiatives we've put in place, we know what investors generally want. This makes it harder because when you are not hearing from investors, you can make trade-offs without a lot of pain -- it seems that no one really is suffering. But when you set standards like Statement 159 on Fair Value Options, regardless of the fact that almost every user asked us not to go forward...I think the question now in front of the board is do they need, do we need to think about its composition? Is it right that preparers and auditors have 5 out of the 7 seats when there is essentially an economic conflict between that group and investors? Isn't that relatively naïve to believe that such an environment could lead to optimal solutions for financial reporting? I hope that over time we will get more investor involvement, more investor representation, and that no one group has a majority-let alone a super-majority-of board or trustee positions
MD: What is a typical day like as a FASB member?
DY: Preparation for meetings, reading technical documents. I also try to get investor input as much as technical input. I think research has been driven at the FASB by the technical accounting establishment. We need to complement that process with input from the capital markets and investors, and we need to have empirical data to support positions we take or decisions we make. I think that makes the process better. So I try to do all that, but with the level of activity, the first and foremost thing is to read a lot of technical documents and go into meetings and discuss them.
MD: Can you describe what you wanted to accomplish as a member of the FASB?
DY: I thought first and foremost that the input of investors was at dire levels and that the quality of the inputs, the organization of the information, and the input to the board were all in need of major improvement. And that really led me to work on an upgrade of the user advisory council by forming the Investor Task Force and the Investors Technical Accounting Committee (ITAC). To me, if I were to pick just one goal it is that the Board would become more knowledgeable about investor needs and start the process of thinking about some changes to allow the Board to become more responsive to those needs.
MD: And what do you want to be remembered for 50 years from now after you have left the FASB?
DY: I don't think there is any question that my focus is more on being well regarded as an investor and someone who made a little bit of a detour to try and make the financial reporting system better. That's what I'd like to be noted for. I have benefited immensely from participating in the financial markets and in the end, working on the FASB is a way of giving something back and hopefully making the system better.
MD: In your opinion, what are the most pressing financial reporting issues for the FASB, the IASB, and SEC?
DY: Financial instruments. I think the multiple ways of accounting for the same transaction results in a level of complexity that we're being asked to address by the SEC's Sarbanes Oxley report on Off-balance Sheet Arrangements. We have been asked by most of our user groups including ITEC to do that, and I would put that as a really high priority. We can make a dramatic impact on the understandability and the transparency of financial reports particularly for financial institutions.
I think the financial statement presentation project-a process of completely rethinking how the financial statements are organized-is also really important. The idea of breaking off business from financing-and of introducing a consistent categorization that flows from the income statement through the balance sheet and the cash flow statement-and explaining a change in an item that came from accrual adjustments vs. impairments vs. mark-to-market vs. cash realization-have the potential to implement a sea change in financial reporting.
And finally, falling back on my technology background, I would actually say the technology interplay here-where we end up with XBRL and the codification project-could really empower a new era of interactive data management that really enriches the communication between management and investors, really helps the capital markets in execution, and really helps investors and analysts in their jobs.
MD: Do you still think there is a crisis of confidence in the accounting profession and if so, what can someone like me who is just starting do about it?
DY: I guess I look at this issue from the point of view that we have been through a sad era that has been resolved in many ways through the PCAOB and some of the monitoring that goes on. But on the other hand, I sort of think of that as wasteful. We're throwing $300 million in regulatory activity at the market and I wish we could come up with a way that the financial statements would be more transparent. If what's going on in financial reporting were more obvious, there would be more ability for the market to regulate itself rather than regulating the auditors. I think the economic interests of auditors will become more aligned with investors. Today, auditors are pretty much aligned with preparers, even though they are supposed to be serving the investors. But I think that is going to shift over time. I actually think the bottom was quite some time ago. Is it over yet completely? I think the best way to fix this is to make the markets more efficient, to make the financial reporting more transparent. We are nowhere near ready to exist without the PCAOB. I view that as a signal that, as a standard setter, I've still got a lot of work to do!
MD: Do you have any predictions about what changes will be important for those of us going into the work force in finance and accounting?
DY: It's almost, like, if you are going to be an accountant you would be crazy not to put more focus on financial instruments and financial markets and financial services and other related areas. And when you think about it, it is not unrealistic because those areas create a lot more need for judgment, measurement and estimation than the more traditional areas. And I think the financial markets have been a key growth engine of the economy. I think financial services simply must get your attention.
MD: One last question-What is the most important advice you have for students in my position, either about education, or personally, before embark on our careers?
DY: It's funny you ask that because, McKenzie, most often I tell people to take more accounting courses! I really think that the industry is going through a fundamental change. The value creation, the function of accounting is going to be more challenging, more demanding, and provide greater opportunity for value creation. To me, it's going to become a much more dynamic job than it has been historically. There are going to be those who will want the good old days of how we used to do accounting, where we didn't deal much with things that were hard to measure or, you know, where there was great uncertainty, but the truth is that these areas are where the value is in accounting. So I really think if I were to advise on a second area to focus on, it would be economics and finance.
MD: Well thank you so much and we look forward to hearing your remarks tonight!
