It's Time For Him to Go
The Securities and Exchange Commission is desperate for strong leadership--and Harvey Pitt isn't providing it.
fortune.com
FORTUNE
Monday, October 28, 2002
By Jeffrey H. Birnbaum For a while there, it was starting to look as if Harvey Pitt finally got it. After nearly a year of being a day late and a dollar short as corporate scandals mounted and investor confidence eroded, the Securities and Exchange Commission chairman seemed to be getting tough on the bad guys. He dispatched teams of SEC staffers to ferret out major-company frauds. He stopped trading verbal jabs with New York attorney general Eliot Spitzer--who has been far ahead of the SEC in exposing Wall Street conflicts--and instead joined forces with Spitzer to crack down on the deceptions of securities analysts. Perhaps the most promising sign of all: Pitt had decided to back John Biggs, a reform-minded pension fund CEO, to become head of an important new board to oversee the accounting profession. He'd even said as much to Biggs.
So much for the new Harvey Pitt.
Buckling to pressure from the accounting lobby and some Republican members of Congress--who feared that Biggs would be too rough on the industry--Pitt did an about-face and withdrew his support. When the New York Times broke this story in early October, it set off a firestorm, with calls from key Democrats for Pitt's resignation. His SEC colleagues were embarrassed and appalled. A fellow commissioner puts it this way: "This was the single most important decision the chairman had to make, and he's made a total mess of it."
Pitt's reversion to type could not have come at a worse time. With the stock market still in a deep swoon and the scandals continuing to attract headlines, investors desperately need to see that the SEC is serious about correcting the current problem. But Pitt has consistently given the opposite signal--and his reversal on Biggs, who was supported by such heavyweights as Warren Buffett and Alan Greenspan, only reinforces the mounting view, both inside and outside Washington, that the chairman of the SEC is simply not up to the job.
Few agencies are in greater need of strong leadership than the SEC, and not just because of all the corporate misconduct. Pitt's predecessor, Arthur Levitt, was an outspoken reformer but wielded little political clout. His efforts to reform Wall Street and the accounting industry were swatted down by Congress. At the same time, the commission was starved for resources, its staff turnover was twice the rate of other agencies, and it was often comically outgunned by the companies it was supposed to police. Even basic tasks proved too difficult. It barely managed to review the financial statements of major companies once every six years, a lapse that had disastrous consequences--as we now know. A bipartisan congressional report has called the SEC's failure to examine Enron's filings since 1997 "catastrophic."
Pitt came into office in 2001 as the anti-Levitt. A lawyer who had represented accounting firms, among other companies, Pitt opposed heavy-handed government intervention and promised a "kinder and gentler" SEC. But fate conspired to give him a mandate for market regulation that Arthur Levitt could only dream of. The corporate malfeasance over the past year has put Pitt in an uncomfortable position: He is a diehard deregulator at a time when more regulation is widely viewed as necessary to prevent future scandals. And he has refused to adjust.
The Biggs controversy has demoralized the upper echelon of Pitt's work-weary staff. They've concluded that they can't change his autocratic style or deregulatory bent. Over coffee a senior SEC lawyer shakes his head and muses, "The political types [like Pitt] come and go, and the agency still does its job. But it is unpleasant sometimes." And the unpleasantness will probably get worse. Congress has mandated that the SEC name all the accounting board members by Oct. 28, but with the commissioners at odds over who should lead the panel, it may be too divided to meet the deadline.
That's not the only problem the agency faces. Congress has finally agreed to up the SEC's 2003 budget by an eye-popping 75%, from $438 million to $766 million. But the SEC was underfunded for so long that that's probably not enough. Former SEC chairman Richard Breeden has testified that $1 billion would be closer to the right amount. Still, despite the obvious need, the SEC won't see an extra penny for months. Congress hasn't passed any of the bills that actually appropriate additional funds; spending could be stalled at current levels until next March.
Meanwhile, the Sarbanes-Oxley legislation, which was enacted in July and is aimed at enhancing government's ability to root out and punish corporate chicanery, makes more demands than the agency can currently shoulder. In addition to creating an accounting regulator from scratch, the SEC must review the filings of the nation's largest companies twice as often as it does now, extract from corporate executives a mountain of new disclosure forms, and devise a system for disciplining corporate lawyers who fail to report financial wrongdoing to their companies. And that's a partial list. "To deal with the most serious financial scandals in my professional lifetime, the SEC has been given a vast amount of new responsibilities," says commissioner Harvey Goldschmid. "We're going to be spread very thin even with extra budget resources."
Reporter Associate: Andrew Kosow |
