If you catch the midnight flight from Hong Kong to Heathrow, it’s a good eight hours in the air. Just enough time for Paul Pacter to get a decent night’s sleep before arriving in London for a morning meeting.
The 67-year-old is unfazed by the tedium of air travel. He’ll tell you that a flat bed and a bit of darkness is all he needs to get some shut eye these days. And it’s a lucky thing for 95% of businesses across the world. One day they’ll come to rely on him.
With his thick glasses and grey hair, he seems a grandfatherly figure. And, like most grandfathers, he has a seemingly endless supply of stories infused with the sort of detail you only get from someone who was ‘there’.
Pacter is a professional standard setter, perhaps one of the first truly global accountants. Even now the idea of home seems strange to him. The closest thing to it, he says, is Hong Kong, where he is currently based, rather than his native US.
Pacter is regarded as an accounting elder. The first to clearly define the terms asset and liability, and the man who helped transform accounting from a numbers game to a profession built on fundamental economic concepts. But perhaps the bookish Pacter gained his greatest notoriety for being the author of one of the most contentious accounting rules of our time – IAS 39.
It all could have turned out so differently. “While I was in high school, in the early sixties, I planned to be an attorney,” he says.
“My parents said why don’t you take some career aptitude tests… It came out and said absolutely not lawyer. Definitely accountant. So I said alright.”
Looking back, he wonders whether he was fated down this path. After all, his parents met during an accounting class at the City University of New York.
After he finished a PhD in December 1967, he took a teaching position at New York University. “But immediately I said to myself how can you teach accounting without practicing.”
At the time there was a Big Eight. His firm, which was later absorbed into KPMG, was number nine.
He began as a “bag carrier” for a member of the Accounting Principles Board before it evolved into the Financial Accounting Standards Board (FASB) – the world’s first independent standard setter. “It was a brand new board with seven people making mega bucks with nothing to do,” he says.
It proved a turning point in international accounting. Standard setters would soon realise they could no longer pump out rules, blind to how they were being used. The issue was borne out in the airline industry. Airplane manufacturers McDonnell Douglas, Lockheed and Boeing each were competing for the best long range passenger airliner. But, while Boeing put its research costs under expenses, Lockheed capitalised them and McDonnell Douglas used a combination of the two. Companies in identical situations were accounting differently.
It was time to begin talking about accounting rules as concepts with immutable, underlying principles. “There was no other conceptual framework… the phrase ‘conceptual framework’, well, one of the board members and I coined that phrase,” he says.
But it was one thing to agree on concepts, and another to articulate them in plain English. “When it came time to write the first standards they found the technical advisers were not very good writers… They decided right at the beginning that I would write the standard,” he says.
The language of accounting standards seems to have a vocabulary and syntax all to itself. It must be at once precise and clear, leaving little space for varying interpretations, and not be too technical, so as not to cause confusion.
Entire industries and institutions have risen around their interpretation. Full-time committees are assigned to do little else but provide guidance. And many of these fundamental rules began at the tip of Pacter’s pen.
Then and now
The year was 1973 and Pacter was bored. His car was inching towards a gas station in the distance, as part of a snaking, winding queue. The previous year the Organization of the Petroleum Exporting Countries (OPEC) had joined Egypt, Syria and Tunisia, in restricting the flow of oil to Western nations which supported Israel during the 1973 Yom Kippur war.
The effect was immediate. The price of oil climbed from $3 a barrel to about $12. The US introduced “odd-even rationing” so cars with license plates ending in an odd number could only fill up on odd dates of a month. Stations were asked to close on weekends.
Oil had become a national security issue. By 1977 oil companies and politicians were looking for ways to promote oil exploration, but accounting standards stood in the way.
Companies had to drill roughly nine dry holes before they struck oil and used different ways to account for failed oil explorations. Not for the last time, accounting would become a political issue. Oil companies said if they had to record their failed attempts as an expense, they would stop exploring for oil.
“They ran to Washington and said if we have to charge the cost of exploring to expense, we are going to be running losses so we are going to stop exploring,” Pacter recalls.
The accountants lost the argument.
“Here was a standard I wrote and I believed in, within a year of its issuance, struck down.”
The situation has echoes of a different age, thirty years later, and another accounting rule and another crisis.
It was Thursday, March 12, 2009, when FASB chairman Robert Herz appeared before the US committee on financial services. “Mr Herz, you have a difficult job, You have a really difficult job” congresswoman Marcy Kaptur, said, looking down from the bench.
“But what I can tell you is that in communities like mine, I have told my people to squat in their houses, to get a lawyer because we have had 10% of our homes foreclosed and if something does not happen, it will be 20%.
And now people are losing their jobs by the score because whole credit markets are frozen and now they are losing their homes because they do not have jobs. So this thing is just snowballing to a point that none of us want to happen. For the life of me, I cannot understand why last year, [the US Treasury] did not suspend mark-to-market.”
Mark-to-market, the accounting principle which compels companies to value their assets at market prices, was being squeezed in the wake of the crisis. In Europe, also, the International Accounting Standards Board, was pressured to carve out part of its mark-to-market rule known as IAS 39.
IAS 39 forced banks to value their financial assets at market prices. As asset values dived, so too did the banks’. Some banks openly hated IAS 39 and Pacter was its author.
Fair value took a winding road until being enshrined in an international accounting rule. The project had failed three times by 1997 when Pacter was told to take it on.
By September that year he had a draft. “I literally cut and pasted and presented our board with a 500-page draft of a standard on financial instruments – literally taken word for word from the US standard,” he said. “Not surprisingly all hell broke loose… But there was unanimity in the board. We should develop our own standard.”
Only in hindsight did he see this as a key moment. The international standard setter had started on a road which would end up with IAS 39. “I realised at the Paris meeting that our secretary general was a wonderful politician. He had set up this exposure draft to fail, but what he really wanted was the IASC board to commit to getting a standard done by the end of 1998 and they did.”
In a fix
Pacter has earned a reputation as a Mr Fix It. He’s a pragmatist, recognised for his ability to navigate politically contentious areas, and emerge with a result. It was this reputation that led him to take on another ambitious project in the summer of 2003.
“[IASB chairman Sir] David Tweedie called and said he was nearing completion on his improvements program and would I have an interest in coming back to the IASB and taking on an SME standard. I said yes,” he says.
SMEs comprise about 99% of the world’s businesses. In Britain alone, 99.95% of businesses have less than 50 employees.
Countries use a variety of distinct codes to govern their accounting systems and they are wary of handing over power to a foreign body. Europe, for example, is yet to make a decision on whether to adopt the standards amid speculation they are holding up the adoption process for political reasons.
“David knew – and he’s been proved quite right – that the SME standard would be a very political. It would be divisive,” Pacter says.
But Pacter’s decision to take on the standard was a return to fundamentals. He traveled to about 50 nations, mostly developing economies, over five years and was alarmed with what he found. Pacter, who helped pen some of the core principles in the accounting world, discovered that the ideas he championed were being poorly applied across the world.
So, when he sat down to write his new accounting code for small businesses, he wrote them with users in mind.
“These are tiny companies where the accountant is a bookkeeper with a high school education.”
On 9 July a new accounting code was released; a concise 230-page booklet of rules for small and medium sized businesses. If successful, the book will bring capital into emerging economies across the world, as investors and banks easily pick up and understand a trusted set of figures.
He says that 59 countries have already indicated they will pick up the code, but concedes hard adoption figures are difficult to come by.
It may be the last hurrah for Pacter. There is no next project and he says he is happy to spend his days promoting the SME standard.
“I’m over 67 years old. This is it, for the IASB. I have got to retire.
Your body can only do this for so long. Right now I’m a marketing guy and a trainer. I’m selling the product I’ve produced and that I’m proud of.”
He remembers back to the early days. When he first began writing technical standards for the Accounting Principles Board. When things seemed simpler.
“In those days, in my head, I thought there was some sort of accounting truth. Just as in medical science or the natural physical sciences, where someone can bubble a test tube and come up with scientific truth, I thought there is also a right answer to every accounting question,” he says. “Now after 40 years of doing this I am absolutely convinced, there is no such thing.”
Name Paul Pacter
2000-present – A variety of roles including director of standards for small and medium-sized entities at the International Accounting Standards Board and director at the global IFRS office for Deloitte in Hong Kong.
1996-2000 – Staff member at the International Accounting Standards Committee working on projects including financial instruments, interim financial reporting, segment reporting, discontinuing operations, extractive industries, agriculture, and electronic financial reporting.
1984-1989 – vice chairman of the advisory council to the US Governmental Accounting Standards Board.
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