SEC Accounting Focus to Be on Disclosure, Not
Fraud, Pitt Says
By Neil Roland - 10/23/01
Washington, Oct. 23 (Bloomberg) -- The Securities and Exchange Commission
will shift its main accounting focus more toward improving financial disclosure
than prosecuting corporate financial fraud, SEC Chairman Harvey Pitt said.
``I believe violations of law, if they occurred, have to be pursued with vigor,'' Pitt, a
Republican who has headed the SEC for two months, said in an interview. ``But,
I'm more concerned about protecting investors before violations occur.''
Pitt's accounting plan would change the emphasis from that of his predecessor,
Arthur Levitt. Levitt, a Democrat who resigned last February, called accounting
fraud the agency's top enforcement priority. His staff opened investigations of
dozens of large companies, including Xerox Corp., ConAgra Foods Inc. and
Lucent Technologies Inc., that are still pending.
Pitt, 56, said in the interview that the SEC's ``first obligation'' is to make
companies' quarterly and annual reports of profits and revenue ``more relevant
and timely and understandable for investors.'' In a speech yesterday, Pitt also
said the agency is considering revamping its 67-year-old disclosure rules by
requiring more frequent company financial statements on the Internet.
Before becoming SEC chairman, Pitt was a lawyer who represented the largest
U.S. accounting firms in dealings with the commission.
An investor advocate expressed concern that the changes Pitt is pursuing might
invite corporate abuse.
``There's a real danger that companies will interpret Mr. Pitt's remarks as a wink
and a nod and that they'll start testing where the legal line is,'' said Barbara
Roper of the Consumer Federation of America.
Another investor advocate said, though, that Pitt's efforts could have long-term
benefits for investors.
``Going one step back in the process and opening the door to firms is smart
because it will short-circuit bad decisions in the accounting process,'' said John
Markese of the American Association of Individual Investors.
Balancing Interests
Former Levitt aides said Pitt is likely to encounter business resistance if he tries
to make many pro-investor changes in SEC disclosure policy.
``He will find it very difficult to balance the interests of investors with those of
companies and their auditors with regard to disclosure rules and practices,'' said
Lynn Turner, who resigned in July as the SEC's top accountant under Levitt.
Business and accounting groups endorsed Pitt's plans.
``Mr. Pitt's approach will be welcomed by reporting companies, who have
perceived a `gotcha' approach at the SEC on accounting issues over the last few
years,'' said Brian Borders of the Association of Publicly Traded Companies,
which represents small and mid-sized companies, including Outback
Steakhouse Inc. and Biomet Inc.
Olive Branch
Pitt, in the interview, also extended an olive branch to the accounting sector,
which had been locked in debate with Levitt over a host of rules and enforcement
actions. The new chairman said he wants firms to come to the SEC for ``help
and guidance, and not just a punitive reaction.''
Some senators have questioned whether Pitt could distance himself from his
former clients. Pitt told Congress he would be motivated by the public interest,
adding later that he would recuse himself for a year from decisions involving his
former clients.
During Levitt's tenure, the SEC launched numerous accounting investigations
that led to charges against companies such as Sunbeam Corp., Arthur Andersen
LLP, and Microstrategy Inc. Andersen agreed in June to pay $7 million, the most
ever by a Big- Five accounting firm, to settle charges it issued false audit reports
about Waste Management Inc.
Among the executives charged by the SEC were former Sunbeam Chairman
Albert ``Chainsaw Al'' Dunlap, who is contesting the allegations, and
MicroStrategy Chairman Michael Saylor, who agreed to pay $8.6 million to settle
SEC charges.
Different Emphasis
``I don't think you'll see a dramatic shrinking of inventory of these cases under
Harvey Pitt,'' said former SEC enforcement director William McLucas, who
worked for Levitt. ``You may just not have as high a profile or priority on these
cases versus others.''
Georgetown University Law Professor Donald Langevoort said, ``It sounds like
enforcement will be less of a priority to the commission when companies engage
in aggressive earnings management that's not clearly over the line.''
The SEC under Levitt also toughened a number of accounting standards, moves
that were criticized by many firms. The agency adopted a rule earlier this year,
for example, that seeks to prevent conflicts of interest among accounting firms
that consult for companies they audit.
Pitt's review of the SEC's 67-year-old disclosure system could affect the debate
about the agency's year-old Regulation Fair Disclosure, which bars companies
from giving important news to a limited number of stock analysts. Many
companies have been pushing for more explicit guidance on when they have to
announce news to the public.
Broad Support
The new SEC chairman took office in late August with support from both parties
in Congress. He had earned a reputation as one of the nation's leading securities
lawyers while representing clients such as the New York Stock Exchange and
Merrill Lynch & Co.
Pitt's long-term program has been slowed by the Sept. 11 terrorist attacks and
the need to get U.S. securities markets back on their feet. The SEC helped the
New York Stock Exchange and the Nasdaq Stock Market resume trading Sept.
17 after a four-day suspension. It also adopted temporary rules that eased
companies' ability to buy back their own stock. |
