The Spirit of Accounting: A tribute to Walter Schuetze

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We regretted getting the news that Walter Schuetze passed away in October. On one hand, he excelled through his service to our profession as a charter member of the Financial Accounting Standards Board and the Securities and Exchange Commission’s chief accountant. On the other, his genuine integrity and gentleman’s demeanor made him a friend and mentor to many. He was truly a giant among us.

Paul Miller’s special privilege included working with him as a consultant for a very large company affected by fraud. Paul Bahnson’s up-close experience came through their conversation during a meal at an academic conference. Our respect and admiration for him are unmatched.

The following tribute was written by Dr. Tom Selling, a visiting clinical professor at Southern Methodist University who, as you will see, had an extraordinary relationship with Walter.

After reading this eulogy on Tom’s widely read blog, The Accounting Onion, we received his permission to reprint it.

I marvel at how much mere happenstance can play in a career. I might not have become a teacher, or attended graduate school, but for one meeting with an administrator when I was a senior at Cornell. Twenty years later, I was privileged to serve as the academic fellow in the SEC’s Office of the Chief Accountant (known as OCA). The other lucky part of my own story is that Walter Schuetze was the chief accountant.

Walter became chief accountant in January 1992. I was hired the previous summer after being interviewed by his predecessor, George Diacont (also a dedicated public servant who it was my privilege to work with at the SEC). So, I didn’t meet Walter until my first day on the job.

In June 1991, Accounting Horizons published his plea to the FASB to simplify its accounting standards, and in August 1992, days before I was to show up for my first day at work, he gave a bombshell of a speech at the annual meeting of the American Accounting Association:

“Meanwhile [in the aftermath of the S&L government bailouts], the profession, with a few exceptions, is not doing anything about the underlying causes of litigation against itself. It will not pull up on its own bootstraps. The profession will not go to its clients and tell its clients that their balance sheets have to have realism in order to elicit unqualified opinions. Why not? Well, that could involve being tough with a client. …

"The profession, again with an exception or two, will not go to the FASB and support realism in financial accounting and reporting. The profession will not reach tough, unpopular decisions. Why is that? Is it because the profession has become so beholden to its clients that it will not speak to them about realism and relevance and credibility in financial accounting and reporting? …

"I think that instead of thinking simply of its clients and itself, the profession needs to give some thought to the public that it serves, to the investors and creditors and employees who put up their money and their labor to make investments in the profession’s clients.

"I suggest that the profession go to the FASB and ask it to issue accounting standards that produce more relevant, more understandable, more useful, and more credible financial statements than what we now have.”

The above may sound like the rantings of a cranky academic (e.g., yours truly). Far from it. Walter was many things, but definitely not a crank. He was an excellent student who remembered and honored his mentors — from the young teacher in the one-room school he attended through seventh grade, to two formative high school teachers, to accounting thought leaders who happened to be on the faculty at the University of Texas at Austin, and to the audit partners who mentored and promoted him to top technical partner at what is now KPMG.

But Walter was also an autodidact who, like an academic, loved learning and searching for answers. Perhaps the habit came from early years as the child of subsistence farmers of German descent in a sparsely populated and underserved area in the vicinity of San Antonio. (His first language was actually German.)

Those non-mainstream views, expressed in the AAA speech above and many times later, that the complexity of financial reporting was a disservice to the investing public — and that a large part of the blame rested with the auditing profession — were products of his own contemplations. Academics in particular have published similar views about the nature of accounting and auditing, but Walter would claim, and I would believe him 100 percent, that these were ideas he had been harboring and developing since his days auditing the inexplicable cost allocations by Texas oil and gas companies. Witnessing first-hand the first waves of accounting standards-setters — essentially his betters at the accounting firms — debate the esoterica of highly questionable accounting treatments such as pooling of interests only reinforced his thinking that accounting was not serving investors.

I would like to share just a few of the memories of working with Walter at the SEC, along with some further observations. At the time, and it may still be true, the heartbeat of OCA was to be found with the professional accounting fellows, who spend two years there, and then generally depart to become partners with the Big Four firm that helped place them in OCA.

The PAFs who came through OCA while I was there all knew and admired Walter’s quest to make a significant dent in accounting standards (especially financial instruments). At the same time, the job of enforcing and providing guidance on the application of current standards could not be given short shrift. It was invigorating to know that your boss was there to fight the good fight on all fronts.

Walter served under two SEC chairs: Richard Breeden and Arthur Levitt. Both had well-formed and similar visions for the role of accounting standards in financial reporting by public companies. If that had not been the case, Walter would have left in a flash. The prestige of his position meant very little to him. I mention this because I believe the successors to Breeden and Levitt have had varying degrees of interest in accounting standards, ranging from misguided (Christopher Cox) to detachment (Mary Schapiro and Mary Jo White). As a result, their choices for chief accountant are mere footnotes by comparison.

In an interview for the SEC Historical Society, Walter alluded to the difficulties he encountered when sticking to his own view of accounting principles when he was an auditor:

“I’ve got scars on my back from when I … told my clients that they could not manage their earnings. My clients went to the Board of Directors of the firm and said, ‘Get Walter off my account — just get him off.’”

He added: “Earnings management was rampant … it was like dirt; it was everywhere and I think it’s still everywhere because the accounting standards that we have today still allow management to have control of the numbers.”

While at the SEC, I learned from my colleagues that some of those scars he refers to were courtesy of his fellow partners at KPMG. They might have respected him, but not all wanted to hear what he had to say. The firm lost a lot of business because Walter insisted that they could not bless inflated revenues and loan balances of thrifts (KPMG was a market leader in that industry) in the years leading up to the S&L crisis and ensuing government bailout. Walter became a pariah among many partners and their clients, but he ended up being their prophet and savior. The same unbending adherence to principle and fair dealing that are reflected in his vision for better accounting spared KPMG from the litigation losses that affected, and sometimes bankrupted, every other major accounting firm.

It was also my good fortune to stay in touch with Walter. My two sons were just babies at the time, but years later they both attended Trinity University; because the younger one was on the basketball team, I often traveled to San Antonio and got to have breakfast with Walter about 20 times, and we often talked about accounting. He would always do the drive from his home in Comfort so I wouldn’t have to be away from my family for too long. I don’t remember the context, but this is one thing he said that I felt was so important that I wrote it down:

“Accounting cannot stop management from doing dumb things. But we can report it as soon as possible so the world can see the results.”

By then, Walter had stopped keeping up with the detailed developments in accounting standards. When I would fill him in, he would roll his eyes a lot. To be sure, he would still express his unvarnished views in his later years periodically to the SEC, the American Institute of CPAs, FASB, The Wall Street Journal, et. al. with a style and artfulness that I have never approached no matter how much I have tried. We talked on the phone a few times in the last few years, and for the past six months, ‘I need to call Walter’ crossed my mind many times. For all kinds of reasons, I wish I had.

Walter took to the grave his abiding commitment to the public interest, and opposition to the special interests who would tilt financial reporting in their favor. In my opinion, he was the foremost accountant of his generation. Yet, his passing has gone largely unremarked by his former firm who owes him much, or the accounting establishment in general.

Maybe that’s because Walter excelled at telling people what they didn’t want to hear.

In closing, we concur with all of the above. We also note that the German word “schütze” can be translated as a “skilled sharpshooter,” often in the context of “one who protects.” Surely, Walter lived up to that heritage. We will miss him, but his impact on us, Tom, and many others will last a very, very long time.

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