Pitt Proposes Accounting Rules
The nation’s top securities regulator forcefully defended himself Thursday from critics who question his impartiality in the probe of Enron Corp.’s collapse and outlined a plan to bolster oversight of the accounting profession in an effort to prevent similar disasters.
Harvey L. Pitt, the new chairman of the Securities and Exchange Commission, said a new private-sector organization, dominated by executives and experts from outside the accounting industry, should be created to enforce ethical and professional standards. The disciplinary body would be overseen by the SEC, which would retain jurisdiction over potential legal violations, he said.
Now, most disciplinary matters in the accounting profession are handled by the American Institute of Certified Public Accountants, a private professional association.
Pitt also called for reform of the current practice of peer review of accounting firms, with stronger and more frequent monitoring of professional standards. He stressed that his ideas were in an “early” stage.
Pitt’s news conference underscored the steep challenges he faces. His agency is leading the investigation into alleged accounting and auditing irregularities in the startling fall of the energy-trading company from Wall Street titan to bankruptcy.
But before Pitt was nominated to the SEC post by President Bush, he was a high-powered lawyer for many accounting firms and institutions with a deep stake in any new regulations the SEC may propose.
Earlier this month, Atty. Gen. John Ashcroft pulled himself out of the Justice Department’s probe out of concern that Enron’s political contributions to his failed 2000 Senate campaign would create the appearance of a conflict.
On Thursday, Pitt dismissed critics who say he, too, should recuse himself from the Enron-Andersen probe, depicting himself as--first and foremost--a public advocate.
“When I left the private sector and came to the government I traded a group of wonderful clients for the most wonderful client of all--public investors,” Pitt said.
He insisted that he has participated only once in the SEC probe--voting to authorize it--and that any questions about his future actions in the case were “hypothetical.” Without commenting directly on the case, he also said that the SEC would look harshly on anyone who attempted to obstruct its inquiries. Andersen has acknowledged destroying documents pertaining to Enron--an action that has drawn the wrath of congressional investigators.
But critics continued to call on Pitt to step aside.
“This is pretty obvious,” said Sen. Byron L. Dorgan (D-N.D.). “He has to recuse himself. I don’t know how he can do anything else.”
Dorgan, the chairman of the Senate Commerce subcommittee on consumer affairs, is leading one of many congressional inquiries into Enron. Sen. Jon Corzine (D-N.J.), a former Wall Street executive and member of the Senate Banking Committee, also has called for Pitt’s recusal. So has the government watchdog group Common Cause.
Despite the criticism, Pitt has broad backing in Congress. The Democrat-led Senate confirmed him on a voice vote in August after a hearing that yielded little controversy. But that was before the scandal broke, and Enron sought protection from creditors on Dec. 2.
Given the new questions raised about Enron and its auditors, the Senate is likely to give close scrutiny to two more Bush nominees to the SEC, both executives in Big Five accounting firms. Last month Bush tapped Paul Atkins of PricewaterhouseCoopers and Cynthia Glassman of Ernst & Young to fill vacancies on the commission.
Now, with the administration on many levels--from the White House on down--facing questions about its close ties to corporate America, Pitt is seeking to seize the offensive.
The bearded, bespectacled chairman, 56, noted Thursday that he began his career at the SEC as general counsel in the 1970s, and said he may well end it there.
In between he was a partner in Fried, Frank, Harris, Shriver & Jacobson, a New York law firm. He has represented the country’s largest accounting firms and argued successfully against proposals to tighten industry controls.
Although he acknowledged that action to boost confidence in public accounting and auditing is “immediate goal No. 1,” Pitt said, “It is meaningless to try to brand an entire profession, when what we really need to do is focus on the substance.”
Recent embarrassments involving Big Five firms have led to calls for reform of the accounting profession. In addition to involvement in the Enron collapse, Andersen agreed to pay $110 million to settle an accounting fraud lawsuit involving appliance maker Sunbeam Corp. last May. A month later, it agreed to pay $7 million to settle a lawsuit over audits of Houston-based Waste Management Inc.
On Monday, the SEC censured another Big Five firm, KPMG, for investing in one of its clients while working as an auditor--a violation of auditor independence rules.
On Capitol Hill, Pitt’s proposal drew criticism from some quarters and cautious approval from others.
“At the end of the day, a private-sector organization will be largely dependent on the accounting industry for its survival,” Corzine said. “That is unacceptable. We shouldn’t rely on the fox to guard the henhouse. It’s time for the SEC to assume this responsibility.”
Rep. John J. LaFalce of New York, top Democrat on the House Financial Services Committee, called Pitt’s proposal “a first incremental step.” LaFalce warned that further action would be necessary to restore confidence in the financial disclosure system, “which rests heavily on the professional integrity and accountability of accountants and auditors.”
But Rep. Michael G. Oxley (R-Ohio), the committee’s chairman, said Pitt was “right to begin his own efforts to reevaluate the regulatory structure of the accounting industry.” Oxley promised more talks with Pitt on the issue.
