The politically tone deaf Harvey Pitt needs to resign:
SEC Chief Losing White House Favor
Vote on Audit Board Preceded Checks
By David S. Hilzenrath and Mike Allen
Washington Post Staff Writers
Saturday, November 2, 2002; Page A01
As the Securities and Exchange Commission yesterday broadened its investigation into the controversial selection process for members of a new accounting oversight board, White House support for SEC Chairman Harvey L. Pitt was deteriorating, Republican sources said.
White House officials were said to be exasperated that Pitt's handling of the appointments had created a political crisis for President Bush days before midterm elections that could determine which party controls Congress. These sources said the White House is considering asking Pitt to step down, or allowing him to resign, after the elections.
The president cannot force Pitt to leave the commission, but he can strip him of the chairmanship of the independent agency. Pitt has few, if any, friends among Democrats in Congress to come to his aid. Many of them have already called on him to quit. Publicly, a White House spokesman expressed continued confidence in Pitt's leadership. An SEC spokeswoman declined to comment.
SEC officials said yesterday that the search for accounting board members was so rushed and sprawling that the agency did not begin formal background checks on the candidates before its commissioners voted on the appointments last week. Only after the vote did the full commission learn that the newly appointed chairman of the oversight board, former CIA and FBI director William H. Webster, had chaired the audit committee of an Internet company that had been accused of fraud.
Webster had privately told Pitt before the vote that officials at the company, U.S. Technologies Inc., were being questioned about possible fraud. But Pitt failed to relay that information to the other four SEC commissioners. The SEC announced Thursday that its inspector general would investigate how Webster's selection was handled, and yesterday the agency said it was launching a second investigation into Webster and his actions at U.S. Technologies (see story, page E1). U.S. Technologies allegedly fired its outside audit firm after the auditor highlighted problems with the company's accounting controls.
"We've got to know how much, if any, this disqualifies [Webster] to serve as chair of the oversight board," an SEC official said yesterday.
The creation last summer of the oversight board, which was given significant powers to reform the accounting process, wasintended to restore faith in corporate financial reports after investors lost billions of dollars in alleged accounting frauds at companies such as Enron Corp. and WorldCom Inc.
But the board has been marred by accusations that the process of selecting its members was politicized, secretive and heavily influenced by the accounting industry, which opposed the earlier nomination of retirement fund executive John H. Biggs as chairman. Biggs advocated fundamental changes in the way auditors do business. Pitt and SEC Chief Accountant Robert K. Herdman, a former vice chairman of the Ernst & Young accounting firm, drove the selection process.
SEC sources said Pitt asked Herdman to look into the U.S. Technologies matter. It is unclear what Herdman did to investigate. Webster said yesterday that he didn't know what the SEC looked at before he was told they found nothing that would impede his appointment.
FBI background checks are routine before candidates are appointed to senior and sensitive government jobs, including positions at the SEC, but the accounting board is, by law, a nonprofit corporation.
In a memo to the commissioners Oct. 25, the morning of the vote, Herdman wrote, "Because the board is not a government agency, there has not been a background investigation of these individuals by the FBI or by any other official government organization," Commissioner Paul S. Atkins said, quoting from the memo.
According to Atkins, the memo said the SEC had contracted with a private firm to conduct a background investigation of each of the appointees, "subject to the availability of funds." The memo added that SEC staff would ask each appointee to complete a detailed questionnaire, Atkins said.
"We do not anticipate any information will be forthcoming from the investigations or in the responses to the questionnaire that should affect your decision about any board member," Herdman's memo said, according to Atkins.
Herdman and Pitt did not respond to requests for comment yesterday, and an SEC spokesman declined to comment on the process or to say whether the background checks by the private firm have started.
The 90 days the law gave the SEC to choose the board left little time for the FBI, stretched by other responsibilities, to do a standard background check, an SEC official said. An FBI spokesman referred questions to the SEC but said, speaking generally, that background checks can be done "in a matter of weeks."
"The snafu was probably not of ill intent, is what I have to believe, although it would have been nice to have the dossier of everybody that we were voting on," Atkins said.
One newly appointed member of the oversight board, former Republican congressman-turned-lobbyist Willis D. Gradison Jr., said this week that, apart from interviews with SEC officials, the only information he provided to the SEC while he was being considered was biographical data of the kind included in an SEC press release last week announcing the appointments.
Gradison noted that he serves on the audit committee of a not-for-profit group, Project Hope. Asked who chairs that audit committee, Gradison said, "I could look it up. . . . I've got it in a file somewhere."
He later called back with the name. He said Project Hope "just went through a process of changing auditors." Asked why it replaced its auditor, Gradison said, "That is a really good question . . . but I don't recall the specifics without looking it up."
Gradison said he also served on the audit committee of Concentra Managed Care Inc. and chaired a committee of the board that oversaw a buyout of the company.
Gradison added that when he decided he wanted to serve on the board, he contacted Rep. Michael G. Oxley (R-Ohio), chairman of the House Financial Services Committee, which oversees the SECMembers of the SEC staff made at least some inquiries into candidates' backgrounds. A source familiar with one appointee's experience said the SEC's general counsel questioned the appointee by telephone about personal finances, organizational affiliations and other matters, and said a written questionnaire would be required before the appointee started work . A variety of the appointee's associates were interviewed, including a parent, the source said. One person who was interviewed but not chosen said Herdman spent more time arguing Herdman's views than questioning the candidate. Herdman argued that companies should not be required to rotate audit firms, and that foreign auditors should be exempt from the board's oversight, at least temporarily, the candidate said.
Republican strategists said they fear that the controversy over Pitt's handling of the Webster appointment will remind voters of the close relationship between Bush and business, which Democrats see as one of his biggest vulnerabilities.
Yesterday, Bush used a campaign appearance in Portsmouth, N.H., to emphasize his commitment to cracking down on corporate fraud. "Our message, loud and clear, to the corporate wrongdoers is: There isn't any easy money in America, there's only jail time when we catch you fudging the books," he said.
Publicly, White House aides issued rote, somewhat limited statements of support for Pitt. "The president continues to support him in his efforts to crack down on corporate wrongdoing," White House spokesman Scott McClellan told reporters on Air Force One. But he suggested that could change after the SEC's investigation. "We don't know the facts," he said.
Behind the scenes, administration officials made no effort to conceal their exasperation, both at Pitt's actions and at the timing. The Republican sources explained that Pitt made a twofold error.
First, they said, Chief of Staff Andrew H. Card Jr. believes Pitt embarrassed him by allowing him to call Webster and urge him to serve, without knowing about the potential vulnerability of his former service on the audit committee.
Second, Bush has a history of standing by embattled appointees that goes back to his years as Texas governor. But the sources said that in return for that loyalty, Bush's inner circle expects to know about problems in advance. In this case, the White House was not warned by Pitt that Webster's position on the U.S. Technologies board could cause problems.
"No one can understand why Harvey would not have come forward with something like this, which was bound to come up later," said a business source close to the White House.
Several White House officials said they had sympathized with Pitt until this episode, although irritation with him began in July, when he asked Congress to raise his pay and elevate his position to Cabinet rank. White House Press Secretary Ari Fleischer took the rare step of publicly slapping Pitt by saying the president did not support the idea and had not been told about it in advance. Congress rejected the idea. One top official said Pitt's request was seen in the White House as "goofy."
Scott Reed, a Republican political consultant, said, "Right after the midterm elections is a great time to make personnel changes." He added, "Harvey Pitt is clearly at the top of everyone's list."
Democrats rejoiced, with one official calling Pitt "the gift that keeps on giving." Michael P. Meehan, the Democratic National Committee's message-development director, said the controversy might help persuade some voters in the final weekend that they need to elect Democrats as a check and balance on Republicans
Sen. Patty Murray (D-Wash.), chair of the Democratic Senatorial Campaign Committee, plans to add criticism of Pitt to her final round of appearances on television and on the stump, as a way of illustrating Bush's stewardship of the economy. "It's another point where people are feeling this White House does things in secret," she said.
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