PBS's FRONTLINE: The Harvey Pitt Interview: Part 2 of 2
Why wouldn't it be an advantage to have subpoena power?
It won't be an advantage if the entity becomes a government body, because then if people testify and are taking the Fifth Amendment when they are called upon to testify -- which you can do when you testify before the government -- what happens is the government cannot punish anyone who doesn't give them information. Whereas a private-sector body will be able to say to anyone, and this would be part of the rules, "If you don't cooperate, if you don't give us all of the information we need to make a determination and to discipline you, then you are out of the profession, you cannot practice as an accountant ever again for a public company." That's pretty powerful.
It also depends upon when it is exercised. It sounds powerful, but the experience of the past has been, look at all the settlements. There's a slew of settlements that are neither-admit-nor-deny settlements, because the process of getting to the point of an actual judgment or a conviction is so prolonged that the SEC is, by lots of people's accounts, outgunned, outmanned, doesn't have enough staff, doesn't have enough money to carry those out. That disciplinary action taken by the accounting industry only comes after there's been an absolute resolution of the criminal charge. Are you going to change that?
Absolutely.
How?
We're changing it a number of ways. First of all, there is no discipline by the accounting profession. That's out. That's the system that we had in the past that we have dismantled. We do not want the accounting profession to discipline itself. We want an independent board that will mete out discipline in the interests of investors. The other changes that will be made will be to have cases brought when they are ready to be brought. ...
One of the things that we have introduced at the SEC is "real-time enforcement." The criticisms that you have just alluded to are perfectly on point. It doesn't do anyone any good if the SEC takes five or six years to investigate a financial fraud, and then when the company is already in bankruptcy it produces a consent injunction without admitting or denying anything. That was the practice in previous administrations.
What we have done is to say we want real-time enforcement. Instead of our enforcers asking the question, "How can we make the best case, what additional steps do we have to take which would, might prolong it?" -- the first question they are now required to ask in every case is, "Are investors being hurt?" And if they are, what steps should we be taking immediately to prevent that harm?
If you look at the statistics just from the first few months of this calendar year, we have brought more asset freezes, more temporary restraining orders. We have suspended trading in more shares of company stock, and we are bringing cases in record time to try and get investors the protection they were entitled to all along, but weren't receiving.
I think steps to enforce are to be applauded, but that's the thing that can fluctuate. What matters is the standards and the procedures over a period of time.
Absolutely right.
It can rise and fall depending upon events up there, depending upon personnel here -- the commissioners, the enforcement.
Well, look at the standards. As you know, we have a private-sector group, the Financial Accounting Standards Board, which sets standards. Again, this has been in place for 20, 30 years. Here is the problem. First of all, it's not independently funded. It is getting its funding from voluntary contributions, which makes it toothless, as you had previously suggested.
Second, it sometimes takes as long as ten years for it to promulgate a standard. On off-balance-sheet entities, which were so prominent in the Enron situation, it was asked 10, 15 years ago to do something about off-balance-sheet entities, and it still hadn't done anything. Since we've been in office, what we have done is we have insisted that they come up with a solution. They already have a proposal out, and before the end of the year, there will be concrete guidance.
The third problem it had was that whenever it rendered accounting principles, they were so voluminous, they were so verbose, that what it did was create a "check the box" accounting mentality for auditors. We have said that that takes too long, and it doesn't deal with what the real problems are. So we're insisting that it move to a principles-based standard. It tells the accounting profession and public companies, "Here's what the goal is. Here's what the purpose is. Don't tell me if this complies with GAAP [generally accepted accounting principles]. Tell me whether we're meeting the goals of this."
The best evidence of that is the Edison case that we brought just a few weeks ago. Edison had a significant problem in terms of how it was reporting its revenues. We concluded, as they had argued, that what they did was in accordance with GAAP, but we sued them anyway. We sued them anyway, because we said it's not enough to comply with generally accepted accounting principles. It's critical that investors be told what really needs to be done. That's the first time the commission has done anything like that in decades.
One place where FASB was clear and managed to make a rule was the rule on expensing stock options -- in corporations, putting them on the bottom line. Where do you come down on that? [Levitt] backed off, and it was rejected back in 1994. But there are still people -- again, Sen. Levin and a number of others up on Capitol Hill -- saying we've got to have options expensed on the bottom line, the same way they are on the tax return.
Here's the problem. You have a lot of people who think that if they come up with a simplistic solution to a complex problem, they've done their job. But the investors wind up with no protection. The first problem is, why are senior managers getting the options in the first place? Our view is they should only get them for true performance. The second is, is it possible for management to profit from options when shareholders are losing a bundle? We saw that happen in Enron. We say that's not appropriate. That has to be prevented.
The third issue becomes, how do options get awarded? We say that they must have shareholder approval. For years, people have been begging the commission to require that shareholders get to vote on all options. We have now gotten all of the self-regulatory securities bodies to agree that shareholders will get to vote on every single option. That's the first time that's ever happened.
The fourth thing is, it's not a question of whether options are expensed; the question is, how and when? Because if options are truly long term, and, by the way, if they cannot be re-priced if the market tanks -- many companies just re-price the options and in effect reward senior management for a lack of performance -- we have said that should not be done without an independent compensation committee making certain that it serves the public interest. But if in fact you cannot achieve the benefits of an option unless you show long-term fundamental growth and gains, then the question will be, at which point along the line should you expense the option and what should be the formula?
Those, we think, are open to legitimate suggestions. But it's not a question of whether they should be expensed. It's a question of when and how.
Another issue that came up, and it has come up again during this last decade, is the question of the Securities Litigation Reform Act passed in 1995. Sen. Shelby feels as though the deterrent in private securities litigation has been weakened. What do you think? He's recommending that that law be reversed, and that it be revisited and reformed. Where do you come down on that?
First of all, I've said that in light of Enron, nothing is off the table. So if there are statistical and empirical data that establish that problem, then I think we all have an obligation to fix it.
What I think the statistics will show, however, is that since the passage of the Securities Litigation Reform Act, there have actually been more litigations filed. There have been more settlements, and the settlements have been for larger dollar amounts.
There have also been hundreds more corporate restatements, which might say something about corporate behavior that underlies the number of--
There's absolutely [what] seems like [a] clear question and problem with respect to the number of restatements. But the fact is if the PSLRA was creating a haven for people, there wouldn't be more litigation, and the recoveries wouldn't be exponentially higher than they were before the legislation. The only thing that's occurred has been to get rid of frivolous litigation, not to get rid of well-intended and well-balanced litigation.
It's also been an effort to get the most responsible institutional representatives of the individual investor to take a role in making sure that the litigation protects the investors, not the plaintiffs' lawyers who seek to recover. The plaintiffs' lawyers have a very, very effective political lobby, and they are very upset with anything that will challenge their ability to make fees. What we need is appropriate legislation like the PSLRA to make sure that investors are the ones who benefit from any litigation, not their lawyers.
Mr. Pitt, it seems that whether you're talking about expensing options, whether you're talking about the tort reform, whether you're talking about separating auditing and consulting, your basic message seems to be, "Go slow, don't be too radical and hasty on reform." Isn't this a time to be tough? Why do you say "Go slow?"
I don't say "Go slow." There are people who want you to believe that that's what we're saying. That is not what we are saying. We're saying it's not a question of more regulation.
On one of these issues, you said, "Well, this is complicated. We can't really do it that way." If you look into the expensing of options, it's not whether you do it, it's when you do it and how you do it, and we kind of get lost in that. We get into the separation of auditing and consulting, and you say, "Well, it's complicated. You need to take a look at all the different kinds of consulting that could be connected and you need to have certain skills across the board if you're going to do an effective audit." In issue after issue, what you're saying is, "It's too complicated. Just trust us to get it done, pretty much within the private sector."
Oh, no, that's absolutely not what we're saying. We are not saying it's too complicated. We don't think it's too complicated for us, and we're not saying it should be done in the private sector. We're saying we need to do it. We're saying that the problems that we are seeing today -- which all exploded fortuitously when I walked in the front door, and I don't believe it was my fault -- but the problems that we're seeing have been building for five, eight, ten years, and nobody in government did a thing about them. What we're now saying is--
But people were trying to do something about it.
No they weren't, there were people--
Are you saying that Arthur Levitt's efforts to make reforms were not sincere efforts?
Well, let me ask you this. I believe that Arthur Levitt was very well-motivated and wanted to serve the public interest. The question is, what did he achieve? What got done? In my view--
But Congress threatened to cut off the SEC's funding on the auditor independence thing. It wasn't whether or not Arthur Levitt was going to proceed with it.
Congress threatens many things. I'm getting threats every single day. The function of an SEC chairman is to do what's right, not what's expedient or politically acceptable or what will play well in the press. That's the critical issue, and what we're trying to do is what is in the interest of investors. ...
There are people who want to put words in our mouth. They may even want to put words in your mouth. But the truth of the matter is, we're not saying the problems are too complicated. We're saying, don't be gulled by these simplistic solutions, when the problems that have been allowed to fester for years weren't handled. The people who didn't solve these problems are now the ones who are critical of any effort to try and solve the problems. They're worried that the problems may actually get solved. That's an incredible situation for us to be in. ...
I guess where I'm having my trouble is, I'm picking up publications like BusinessWeek and The Wall Street Journal and USA Today, and one publication after another with financial commentators, and people are saying that the reforms you're proposing are half-hearted; [that] they don't have the teeth to do the job.
If you look at what we are doing and what we have put out and what we will be putting out, what you will understand is that the proposals we have advocated have incredible teeth and will solve problems that should have been solved years ago. I cannot account for the reasons why some publications prefer to talk about criticisms of proposals that aren't even in print. But they are criticisms from people who don't want the SEC to succeed. We are going to succeed. This is going to be done, and it's going to be done for the benefit of investors and be done the right way.
I hope you're right.
I know I am. |
