SEC’s Oversight Proposal Derided

NEW YORK -- Government regulators formally proposed the creation of a new accounting oversight board Thursday, but were immediately attacked by investor groups that called the plan too lax and accounting firms that derided it as overbearing.

The plan by Securities and Exchange Commission Chairman Harvey Pitt calls for a nine-member panel to conduct regular exams of the industry and to impose broad sanctions for wrongdoing.

The current oversight system--in which the industry largely monitors itself--has been castigated in the aftermath of Enron Corp.’s collapse as letting firms bend the rules to satisfy audit clients.

The proposal to create a Public Accountability Board also is a vital political test for Pitt, who is battling an image that he is too close to the industry and unwilling to enact meaningful reforms.

The sudden opposition to Pitt’s plan may boost the odds that Congress will have the final say on the issue. The House passed a bill in April calling for an oversight board, and a key Senate committee passed a competing measure sponsored by Sen. Paul S. Sarbanes (D-Md.) this week that is considerably tougher.

Pitt has said he is moving forward in the event that legislation stalls. Nevertheless, he is lobbying hard, making the rounds of television business shows Thursday night in search of support.

“It is a milestone in our agency’s history,” Pitt said of his plan at the SEC’s meeting in Washington. The PAB would be “powerfully able to address accountants’ ethical lapses or competence deficiencies.”

The SEC’s vote puts the plan out for public comment for 60 days.

Pitt’s proposal was generally lauded by investor groups early this week when its elements first became public. They called it a vast improvement over Pitt’s original proposal in January.

But investor advocates said Thursday that a reading of the fine print now makes them worry the politically powerful accounting industry would still wield substantial influence over how it is regulated.

“While he’s billing it as something very tough, when we look at the details we see he’s sticking to his word [in a speech last year] about being ‘kindler and gentler’ to the accounting industry,” said Frank Torres, legislative counsel at Consumers Union in Washington.

The accounting industry took the opposite position, complaining that the non-accountants on the board would have too much clout, while professionals would be relegated to a minor role.

“This proposal seems to suggest that we are becoming bystanders in the process,” said Alan Anderson, senior vice president of the American Institute of Certified Public Accountants, an industry trade group.

Some business groups, such as Financial Executives International, praised Pitt’s plan. However, the U.S. Chamber of Commerce expressed concern that the plan might be too costly and that its reforms might be excessive.

“If that is an absolute necessity in order to get investors back, then it’s a necessary cost,” said Marty Regalia, the chamber’s chief economist. But it could be “just a pure wasted tax on business.”

Pitt’s plan has some elements that appeal to investor advocates. It calls for six of the nine board members to be independent--that is, not associated with the accounting industry. Consumer groups fear that a board top-heavy with insiders would defer to industry wishes.

The board also could compel accounting firms to produce documents and provide testimony in disciplinary cases, and it could mete out penalties ranging from fines to suspensions. Only the six independent members would vote on such sanctions.

The board would be financed by fees paid by accounting firms and public companies.

The PAB would replace the Public Oversight Board, which had few disciplinary powers, among other shortcomings, and recently voted to disband.

The biggest point of contention, however, is whether the SEC plan would give the industry a backdoor through which it could wield excessive influence on the board.

That debate is being waged most sharply over who would set the standards that auditors follow when reviewing public companies. This is a key issue because it would dictate the precise guidelines by which audits are conducted.

Pitt’s plan would let the PAB devise its own procedures or accept those written by the AICPA, as is the case today. Critics say that leaves intact the current system that led to financial abuses at Enron and other companies.

Conversely, the industry says the Pitt plan would exclude accountants from having any input in setting standards, and would leave it to the six independent board members who might be less familiar with accounting’s complexities.

Likewise, opponents worry that Pitt’s plan would institutionalize another problem with the current system: Today, firms review each other--a system that critics vilify as rife with problems because of the incentive for accountants to go lightly on one another. Under the SEC proposal, annual reviews would be led by a PAB staff member. But the board could hire accounting firms to assist in reviews.

“Why doesn’t [the board] hire [in-house] people to do it, and eliminate the appearance of back-scratching?” asked Barbara Roper of the Consumer Federation of America.

Critics also chafe at a provision in which all board members other than the chairman or vice chairman would work only part time. They say that gives the industry additional leeway to exert influence.

Investor groups say they favor the plan put forth in the Sarbanes bill. Though similar to Pitt’s proposal in key respects, some of its provisions are tougher, they say. For example, it would mandate that accounting firms rotate lead auditors for individual clients every five years.

Congressional critics lashed out at Pitt’s plan Thursday. Senate Majority Leader Tom Daschle (D-S.D.) called it “a toothless tiger that has no real merit....This is almost a guarantee that you’re going to get another Enron.”

However, Robert Herdman, the SEC’s chief accountant, said the diametrically opposing views of the two sides boded well for Pitt’s idea. “We must have the right formula [because accountants] think they’re being shut out and that it’s too tough, and everybody [else] thinks it’s too easy,” Herdman said.