With President George W. Bush set to deliver a televised lecture on good corporate citizenship Tuesday night, sentiment is growing among both Democrats and Republicans on Capitol Hill that reform of the accounting industry in the aftermath of Enron and WorldCom may require the administration to replace Harvey Pitt, chairman of the U.S. Securities and Exchange Commission.
Before being tapped by Bush last year to head the SEC, Pitt was a high-powered attorney and lobbyist whose clients included Arthur Andersen, Merrill Lynch, Charles Schwab and America Online. While at the firm, Pitt lobbied hard against a proposal by his predecessor, Arthur Levitt, to prohibit auditing firms from serving as consultants for their auditing clients.
Now, Pitt has gone from an advocate for self-regulation in the accounting industry to the man in charge of the government agency that is supposed to regulate publicly traded businesses. But after a series of highly public corporate meltdowns in recent months -- many related to dubious bookkeeping practices -- critics say Pitts' ties to the industry appear to be so close that he cannot lead the reform effort needed to restore the trust of investors and the public.
Pitt has been "a huge disappointment," Senate Majority Leader Tom Daschle, D-S.D., said on CBS's "Face The Nation" Sunday. "I have to say at this point that we could do a lot better than Harvey Pitt in that position today. That cozy, permissive relationship [between the SEC and big business] has to end, and he in large measure has orchestrated that over the last 18 months."
Sen. John McCain, R-Ariz., the ranking Republican on the Senate Commerce Committee, chimed in with a New York Times Op-Ed piece Monday. "Congress and the president ... should ask for the resignation of Harvey Pitt," McCain wrote. "While Mr. Pitt may be a fine man, he has appeared slow and tepid in addressing accounting abuses, and concerns remain that he has not distanced himself enough from former clients."
But Daschle and McCain are not exactly high on the White House's list of political advisors, and the administration has continued to defend him even as the political risks have escalated. At a White House news conference Monday, Bush noted that Pitt had been approved unanimously in the Senate last year.
"I support Harvey Pitt," Bush said. "Harvey Pitt has been fast to act ... In a quick period of time, he has taken 30 CEOs and directors to task by not allowing them to serve again on a board or serve in a CEO capacity of a company."
The controversy seemed certain to reach a higher pitch this week. WorldCom executives on Monday exercised their Fifth Amendment rights against self-incrimination before a House committee. Bush will make his speech in New York, even as questions persist about his own lack of compliance with SEC laws while he was a board member of Harken Energy in 1990, and Harken's own questionable accounting practices. In Washington, the Senate begins debate on a bill by Sen. Paul Sarbanes, D-Md., which would introduce sweeping reforms for the accounting industry in the wake of the Enron/Arthur Andersen debacle, including the creation of a new oversight board to oversee the audits of publicly traded companies.
In Washington's never-ending search for a fall guy, the focus has turned to Pitt, whose resignation has now been called for by everybody from the editorial board of the Wall Street Journal to former Vice President Al Gore. But while it may be good politics to go after Pitt, some consumer advocates take a more nuanced view of the embattled chairman.
"You could say there is a before Enron/after Enron division with Harvey Pitt," says Barbara Roper, director of investor protection at the Consumer Federation of America. "It's really an enforcement vs. policy division. When Pitt was nominated, frankly, I viewed it as the best deal we were going to get out of a Republican administration. Everybody who I talked to who knew him better than I did said he would be tough on enforcement and not a deregulation ideologue."
In fact, Roper says she was pleasantly surprised when, soon after taking office last August, Pitt called for corporate leaders to fully and quickly disclose when they made stock purchases or sales, for example, and picked up the call from Levitt for "having filing reports be in plain English," Roper says.
But after Enron's dramatic fall later that year, the focus of the SEC became its regulation of the accounting industry, and a new push from corporate reformers to end the practice that allows auditors who are supposed to be impartial analysts of a company's ledgers from serving as paid consultants to the same company. Pitt, who had served as a lobbyist for the Big Five auditing firms before becoming SEC chairman, had pushed hard against such regulations in 2000, and he was finding support from Democrats and Republicans in Congress.
In June 2000, Pitt's predecessor Levitt argued such reforms were needed to avoid clear conflicts of interest. Pitt disagreed. The "regulatory focus on the performance of non-audit services obscures independence issues and disserves the public interest," he wrote at the time.
The industry paid big bucks to kill Levitt's reform proposals. According to figures from financial watchdog Common Cause, the Big Five accounting firms and the American Institute of Certified Public Accountants gave more than $4.2 million in political contributions in 2000. From June through December 2000, AICPA spent more than $7.2 million on lobbying.
And it paid off. Members of Congress, including Democrats Charles Schumer, D-N.Y., and Robert Torricelli, D-N.J., joined Republican colleagues like Sen. Richard Shelby, R-Ala., and Phil Gramm, R-Texas, in threatening to cut the SEC's budget if those reforms were adopted. "We're worrying about a train wreck and the first bolt hasn't flown out of the train," said Sen. Mike Enzi, R-Wyo.
Of course, less than a year later, all sorts of bolts were flying. Enron filed for bankruptcy after top executives revealed they had kept billions in debt off the books by stashing it away in subsidiaries. And the government won a guilty verdict, against Enron's auditor, Arthur Andersen, for obstructing justice in the government's investigation of energy giant. Enron was Arthur Andersen's second largest American client, paying $25 million in audit fees. Andersen made another $25 million from Enron as a corporate consultant.
By the fall of 2001, the Enron-Andersen train wreck had not only led to the crash of one of the country's largest energy companies and its Big Five auditor, but threatened to derail American confidence in Wall Street. Even then, Pitt was unconvinced that a late embrace of Levitt's earlier proposal was the right answer, though he had changed his tune slightly.
"Auditor independence is a very critical part of the integrity of the audit process, and anyone who doubts that makes an enormous mistake," Pitt said at a Jan. 17 news conference. "But auditor independence is not the cause of the problems that we are witnessing ... It would be easy for some people to convince you that the entire problem is a question of auditor independence and ignore the much bigger issues," such as prompt, clear financial disclosures.
Pitt reiterated his position to the Senate Banking Committee in March, saying that while allowing accounting firms to do both auditing and consulting for the same corporate clients "can, and in a number of situations clearly does, create conflicts" of interest, the problem "cannot be resolved by simplistic solutions."
At that committee hearing, Pitt got into a pointed exchange with Sarbanes, who questioned Pitt about his private meeting in December with representatives of the accounting industry before introducing his plan for reforming the industry. Sarbanes raised concerns that consumer groups were left out of the consultation process as Pitt formulated his proposals.
"It was perceived as having been a proposal that emanated from a discussion between the SEC and the five accounting firms, and not extended beyond that," Sarbanes said.
Pitt responded that he was "really not going to get down in the muck" with his critics. "I represented a lot of people when I was in private practice, and I don't believe in guilt by occupation," he said. "When I came here, and I took an oath of office, and you had me under oath at my confirmation hearings, I told you I had only one client now, and that was the public investor. I meant it, and anybody who knows how I performed will tell you that's exactly what happened. When I saw things deteriorating in the accounting profession, I asked the CEOs of the major firms in the AICPA to come to a meeting. And at that meeting it was very simple: Nobody negotiated. Nobody talked about what kind of a deal we could make. I basically laid down the law to them."
Gramm, one of Pitt's staunchest defenders, blasted critics for using what the senator called "an old tactic of Nazi Germany of guilt by association."
But weeks later, Pitt came under fire again for an April 26 meeting he held with the new chief executive of Big Five auditor KPMG, a former client of Pitt's. Initial news reports indicated KPMG's Eugene O'Kelly had said he and Pitt discussed possible SEC action against Xerox, a KPMG audit client. KPMG later sent out a press release to "set the record straight," saying the reports had been "out of context."
"The memo was on another subject, describing the firm's work in dealing with former client Xerox Corp. and the positions that the firm had taken publicly with regard to Xerox," said KPMG's statement. "The meeting at the SEC was referenced by Mr. O'Kelly in the concluding sentences of that relatively lengthy memo."
Chuck Lewis, director of the Center for Public Integrity, says that, at best, Pitt's decision to meet with O'Kelly showed poor political judgment, sending a signal that he was more concerned about the future of the accounting industry than about embracing new regulations to prevent future conflicts like the one that led to Andersen's mishandling of Enron's books. Lewis says the issues facing corporate America are ones of perception and faith, and that they may call for a new person at the helm of the SEC without some of Pitt's "divided loyalties."
Pitt has tried to address his critics. He recused himself from the Andersen case, and has said he is abiding by ethics standards that required him, when he took office, to step back from any case involving former clients for one year. That yearlong ban ends next month, but the expiration of the legal limit has done little to erase the perception among corporate reform advocates that Pitt has continuing conflicts of interest. And those doubts have been exacerbated by the discovery of nearly $4 billion in accounting irregularities at WorldCom.
"I will say that there is now some question over whether he is the right person and this is the right time for him to be chairman of the Securities and Exchange Commission," said Rep. Spencer Bachus, R-Ala. "I say that as a supporter of the Bush administration, as a supporter of the job he's done, but we have to have someone heading up that agency that does not have to recuse himself in over half the cases at the Securities and Exchange Commission."
Pitt's critics say the subject of auditor reform remains Pitt's blind spot, the result of his history as a lobbyist for the largest auditing firms. "On the single most important issue they need to address, he has actively opposed those proposals that have been put forward," says Roper. "His past really undermines his credibility as a reformer."
"It's someone in the wrong place at the wrong time," adds Lewis. "There may be a school of thought that loves self-regulation, but given the current deep level of distrust toward major corporations and their forthrightness, the public is looking to government for someone to trust and protect the broad public interest. In Pitt, we have a person from the industry who appears to have a tin ear when it comes to the public's concerns."
Pitt's future will certainly be a subtext of the ongoing fight to regulate the accounting industry on Capitol Hill, but the larger fight is likely to focus on the conflicting reform plans currently wending their way through Congress. Momentum is clearly building for the Sarbanes bill, but many Republicans support a House bill by Rep. Michael Oxley, R-Ohio. Pitt recently put forward his own plan for new accounting industry oversight.
The Oxley, Sarbanes and Pitt proposals all address the need for some sort of new regulatory mechanism for the accounting industry. Sarbanes' bill calls for the SEC to appoint a five-member board, with three members coming from outside the accounting industry. Pitt's proposal stops short of mandating that a board be appointed, but sets up guidelines for such a board, with as many as nine members, and up to three spots reserved for accountants. Oxley's bill calls for a five-member board, including at least two and as many as four accountants, Roper says.
"Oxley is a disaster," says Roper. "Basically, it takes the worst parts of both proposals."
Bush spokesman Ari Fleischer said last week that "the president shares the goal of the Sarbanes bill," an Orwellian construction that did little to lessen the deep skepticism among the more aggressive reform advocates. Roper says Bush will probably push for "some kind of Sarbanes-lite."
The Sarbanes bill is expected to move easily through the Senate, but must still be reconciled with the Oxley bill in a joint House-Senate conference committee. Roper is cautiously optimistic that the recent disclosures by WorldCom increase the odds that the final legislation will more closely resemble Sarbanes' bill than Oxley's.
"WorldCom has changed the dynamics on the issue, no question," she says. Republicans had been proposing amendments to weaken the Sarbanes bill on the Senate floor, and it seems like they're backing off now. Part of what's changed is the willingness of the Republicans to do their dirty work in public. That has made prospects of passage much better."
But the most important reform, some Democrats say, is sacking Pitt. "The president of the United States needs to ask for Mr. Pitt's resignation," said Rep. Jay Inslee, D-Wash. "He needs to do that because this country right now needs an agent of change, not someone you to have drag kicking and screaming every time you want to regulate, in the most modest way, one of his former clients."
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