With Enron Corp.’s meltdown as the backdrop and his own willingness to crack down on the accounting industry questioned, the chairman of the Securities and Exchange Commission on Thursday proposed the creation of a private-sector watchdog group to discipline auditors who fail to produce accurate financial reports.
Harvey Pitt, whose agency oversees the nation’s financial markets and corporate reporting, said regulators, the accounting industry and Congress need to address auditing weaknesses revealed by the Enron debacle and other financial disasters to restore investor confidence.
Pitt said he envisioned an independent, “tough, no-nonsense” panel with real enforcement powers and the weight of the SEC behind it as a major step in that direction.
“We simply cannot afford a system like the current one that facilitates failure rather than success,” Pitt said.
“Accounting firms have important and critical public responsibilities. We’ve had far too many financial and accounting failures.”
The accounting industry in the past has successfully fought outside efforts to get it to put real teeth into its self-regulatory practices. It also thwarted attempts to increase governmental oversight of the industry.
But the world has changed in the wake of the scandal engulfing Enron and its auditor, the Chicago-based Andersen accounting firm.
Questionable off-balance-sheet transactions with a series of outside partnerships hid hundreds of millions of dollars in Enron debt, forcing the company to revise its past earnings reports drastically lower and leading to the company’s bankruptcy filing last month.
And Andersen has been bruised by a series of revelations about its handling of Enron’s auditing, including the explosive disclosure that the company destroyed thousands of records related to Enron. Andersen said it would fire its senior partner responsible for its Enron audits and has suspended other employees.
Accounting firm ties
Pitt has come in for criticism as well. His prior work as a lawyer for Andersen and other big accounting firms, and his pre-scandal public remarks suggesting a gentler SEC approach to accounting issues, raised eyebrows among advocates of tough SEC regulation.
On Thursday, however, Pitt appeared to be warning his former accounting firm clients that their days of defeating efforts to beef up oversight of their industry were over, thanks to the outrage and loss of faith among investors in the current scandal.
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“This commission cannot and, in any event, it will not tolerate this pattern of growing [financial] restatements, audit failures, corporate failures and then massive investor losses,” Pitt said. “Somehow, we have got to put a stop to a vicious cycle that has now been in evidence for far too many years.”
Although his proposal lacked many details, Pitt sketched an outline for an independent panel whose members mainly would be unconnected to the accounting industry, though there would be some accounting expertise on the panel.
Unlike the Public Oversight Board, another attempt at self-regulation created in 1977 following earlier problems in the accounting industry, Pitt’s panel would have the power to conduct investigations, launch disciplinary actions and bar individuals from practicing accounting either temporarily or permanently for either incompetence or unethical conduct.
Pitt said a private-sector approach would be more likely to succeed than one by the federal government since the SEC could investigate only possible violations of law and would require significant increases in resources allocated to the SEC. Self-regulation, on the other hand, could go after ethical breaches.
Mark Cheffers, chief executive of AccountingMalpractice.com, an educational Web site for accountants, said if anyone else had proposed what Pitt had, he probably would not have considered it sufficient.
“But Pitt has the clout within the industry to make it happen and to make it believable. It’s like Nixon going to China,” Cheffers said.
Not everyone is as sanguine about Pitt’s stewardship of the SEC.
In a speech to accountants in October, Pitt said that the SEC “has not, of late, always been a kinder and gentler place for accountants. … Somewhere along the way, accountants became afraid to talk to the SEC, and the SEC appeared to be unwilling to listen to the profession. … Those days are ended.”
Proposal rebuked
That brought a rebuke from the senior Democrat on the House Commerce Committee, which oversees the SEC.
“I am deeply troubled by the tone and tenor of your remarks,” said Rep. John Dingell of Michigan. “Your choice of words sends the wrong message to auditors, to the SEC staff and to the investing public.
“Your message appears to be that the rules will not be implemented as vigorously as they should be.”
Following Pitt’s announcement on Tuesday, Dingell seemed willing to give him the benefit of the doubt. “To the extent Mr. Pitt’s proposal would assure auditor independence, quality control and tough enforcement, it is useful,” he said in a statement. “He should anticipate vigorous congressional assistance with the all-important details.”
Pitt has made no bones about taking a different tack from his predecessor, Arthur Levitt, who has been described as the most aggressive SEC chairman in years in terms of enforcement and scrutiny of the financial and accounting industries.
Opposed limitations
As a lawyer for the industry, Pitt battled Levitt over the former leader’s plan to limit the services that accounting firms could provide and to force corporations to disclose fees paid to the firms. The SEC adopted the rule in November, though accounting industry opposition forced the SEC to ditch another Levitt proposal to prohibit accounting firms from providing technology consulting services.
The Enron-Andersen case “is a classic example of why Pitt was so wrong in his fight against the stricter accounting standards,” said Mercer Bullard, a former SEC attorney who runs an advocacy group for mutual fund investors.
In an interview, Levitt, suggested that the Enron-Andersen scandal demonstrated weak vigilance all around, but he did not criticize his successor.
“The gatekeepers weren’t doing the job they were supposed to do…” Levitt said.
Before becoming SEC head, the Brooklyn-born Pitt’s claim to fame was as Ivan Boesky’s defense lawyer during the Wall Street insider-trading scandals in the late 1980s and early ’90s. In negotiations with the SEC, Pitt won a deal that resulted in the infamous trader serving two years instead of the 30 years he faced and allowed him to keep most of his fortune.
The breadth and quality of Pitt’s industry experience made him a prime candidate for the SEC chairmanship, while at the same time his lengthy client list raised questions for some about how he would weigh the sometimes contradictory concerns of the industry and investors.
Pitt’s formal nomination was delayed two months to allow investigators more time to complete a background check into Pitt’s varied business and investment activities. Pitt’s prior clients include virtually every major Wall Street firm.