A Failure to Account
"Mr. Pitt was a prominent Washington litigator who represented
Arthur Andersen and other major accounting firms before being
appointed to the S.E.C. by President Bush."
Editorial
The New York Times
January 14, 2002
Harvey Pitt was recently
quoted in Barron's as saying
that "there is nothing rotten with
the accounting profession." What
makes the assessment alarming, instead of just
laughable, is that Mr. Pitt is the chairman of the
Securities and Exchange Commission.
Mr. Pitt was a prominent Washington litigator who represented
Arthur Andersen and other major accounting firms before being
appointed to the S.E.C. by President Bush. We can only
hope that the latest revelations in the Enron saga will
prompt him to change his view and to take on a forceful
role in regulating his former clients and protecting the
integrity of financial markets.
Even within the context of the Enron story, the disclosure
by Arthur Andersen that it had destroyed "a significant
but undetermined number" of documents relating to its
work for Enron was breathtaking. Yet it was only the latest
in a series of betrayals of the public trust by major
accounting firms.
Enron may have been deceitful in recent years, using
off-the-books partnerships to exaggerate revenues and
hide debt. It was Arthur Andersen, however, that signed
off on the energy trading company's deceptive financial
reports. Andersen's relationship with Enron has long
been cozy, and its eagerness to peddle profitable
consulting services may have been another reason why it
went easy on the audits. It is awkward enough for auditors
to get paid by the companies whose books they must
review without creating additional conflicts of interest.
Arthur Levitt, the former S.E.C. chairman, sought
unsuccessfully to ban such conflicts. The industry
resisted.
Disturbingly, Mr. Pitt prefers to be less confrontational
and believes accounting firms should be given more
freedom to regulate themselves. But the industry has
proved unable or unwilling to discipline its own members
to any meaningful degree, despite frequent promises to
undertake tougher self-regulation and tighter peer review.
The Enron debacle is exceptional only in its scale. Other
former Wall Street favorites have engaged in creative
accounting to pump up their stock prices. Lucent,
Sunbeam, Waste Management, Xerox and Cendant are
only some of the more notorious cases of companies
forced to restate previously reported earnings, causing
their stock prices to crater. People lost billions of dollars,
misled by phony numbers ratified by the accountants.
The public's trust in the integrity of markets, and in the
reliability of companies' disclosed financial data, has been
one of America's competitive advantages since the
adoption of its security laws in the 1930's. The danger in
the wake of Enron and similar scandals is that investors,
understandably wary about the safeguards they once
relied on, may decide to avoid buying company shares
altogether. A majority of Americans are now invested in
the stock market, but they will not long participate in a
game they know to be rigged against them.
Justice demands no less than a full accounting in the
Enron case. But the nation's economic well- being also
demands a broader response from Mr. Pitt and Congress
to shore up the credibility of financial markets. Investors,
as absentee owners, must be able to trust the information
public companies report about their businesses. Buying
shares in a company cannot simply be an act of faith.
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