SEC is redrafting Audit Rules? They used to work just fine when there was a code of ethics, when men had honor.
SEC, Accounting Firms Redrafting Audit Rules
Agency Chairman Draws Fire for Role in Effort
By Kathleen Day and Albert B. Crenshaw
Washington Post Staff Writers
Wednesday, January 16, 2002; Page A01
Securities and Exchange Commission Chairman Harvey L. Pitt and the accounting industry are scrambling to craft a new system for policing auditors in an effort to shore up confidence in the financial reports of publicly traded companies.
The new plan, which could be unveiled within days, is designed to head off criticism in the wake of the Enron Corp. fiasco that the current system of self-regulation does not work. The effort is being driven by Pitt, who faces complaints from some lawmakers that he should distance himself from the SEC's investigation.
Pitt represented the five major accounting firms as a private lawyer before he was appointed by President Bush to take over the SEC on Aug. 4.
Sens. Jon S. Corzine (D-N.J.) and Byron L. Dorgan (D-N.D.) have said Pitt's previous ties to the industry should require him to declare a hands-off policy. "I think Harvey Pitt has a high degree of integrity," said Corzine, a former partner with Goldman Sachs Group Inc. "But I do believe for appearance' sake . . . Pitt ought to do what Attorney General John Ashcroft has done and clearly step aside from the process."
But Pitt disagreed. "To talk about recusals at this point misperceives how this agency operates," he said in an interview.
Pitt said he has done and will continue to do his job in accordance with ethics rules, which forbid -- but with some exceptions -- the SEC chairman from taking any action concerning a former client for a year after taking office.
The SEC, which regulates financial markets, is also responsible for the oversight of accounting firms, which are supposed to certify that financial records give a fair portrait of a company's finances.
With the Enron collapse focusing criticism on accounting firms, the SEC is facing conflict-of-interest questions, not only because of Pitt's former ties to the industry, but also because Bush's two nominations for vacant seats on the five-member SEC come from big accounting firms.
Pitt yesterday would not comment on how he voted last fall, when the commission agreed to launch an investigation into the Enron affair. That investigation is examining the role played by Enron officials and the company's outside auditor, Arthur Andersen.
Pitt also would not specify what he would do if the SEC staff were to come before the commission again, at the conclusion of its investigation, with recommendations that actions be taken against companies or accounting firms.
"Enforcement inquiries are conducted by our staff and the SEC commissioners do not have any involvement in the myriad decisions that our enforcement staff will be called upon to make," Pitt said.
"It is not the function of the chairman of the SEC or any commissioner to manage any investigations. If and when I am asked to do anything on this matter, I will follow both the letter and the spirit of the ethical requirements of this office. Any suggestion that I would do otherwise is an attempt to politicize the workings of an independent agency."
Pitt also would not comment on the negotiations he is having with the top five accounting firms and the industry trade group, the American Institute of Certified Public Accountants -- all of them former clients -- on how to revamp oversight of the profession. An SEC spokesman said those discussions are permitted by ethics rules and are appropriate.
Industry sources said that talk about a regulatory overhaul, a topic that has been kicked around for years, was given new impetus after Enron's failure. Enron filed for bankruptcy Dec. 2 after being forced to restate earnings. The industry wants to unveil its proposal before Congress reconvenes next Wednesday and begins hearings into what caused the energy company's problems, sources said.
The new framework would create a private-sector regulatory organization, similar to those that the SEC now permits the securities markets to use to discipline members and establish guidelines for what is accepted and unacceptable behavior, industry sources said.
But the organization would not be controlled by accounting firms, the sources said, because it would be governed by boards whose members would come largely from outside the accounting industry. Accounting industry officials acknowledge that the reforms may not go far enough to quell criticism from consumer groups and some lawmakers, who say self-regulation is at the root of the accounting profession's problems.
The five major accounting firms declined to comment on the proposal.
The major accounting firms, in the past, have fought such a proposal, insisting that the current system, which includes industry self-regulating groups and state licensing boards, are sufficient. But in missing seemingly egregious misstatements and incorrect reports at Enron, the Arthur Andersen team raised anew questions about how well the nation's system of private accountants, paid by their audit clients, serves the nation's investors.
The federal government gave the accounting industry the valuable franchise to audit companies that sell shares to the public after the stock market crash of 1929. In return, auditors are supposed to serve the public interest, and maintain independence from their clients.
"The true client is society in an audit -- yet the client that is paying your fee is the corporation," said Stephen Loeb, professor of accounting and business ethics at the University of Maryland. With this system, "you have a conflict of interest. It's always going to be there," he said.
In addition, many accounting firms earn large sums by selling consulting services to their clients. For instance, Andersen was paid $52 million last year by Enron -- $25 million for auditing and $27 million for consulting services.
Accountants argue that they are professionals who can and do stand up to their clients when that is necessary. And, they add, ultimately their livelihood depends on retaining the public's trust. Otherwise, they say, audits would lose their value.
That, though, is exactly what is happening, some critics charge.
Arthur Levitt Jr., chairman of the SEC during the Clinton administration, proposed prohibiting accounting firms from selling certain consulting services to corporations whose books they audit in 2000. But that proposal was beaten back by the accounting industry and was opposed by several members of Congress.
In addition, generally accepted accounting principles, the rules that accountants must follow in auditing public companies, allow considerable flexibility in evaluating what a business has done. Some lawmakers question whether those rules give accounting firms too much latitude.
"Does the Enron debacle (and cases like it) rest on activity that is allowable under generally accepted accounting principles and standards, or that constitutes clear violations of those principles and standards, or some combination thereof?" Rep. John D. Dingell (D-Mich.), ranking minority member of the House Commerce Committee, asked the SEC last month.
Auditing problems are not new. The late 1990s saw a wave of "restatements," in which many major companies, including Rite-Aid Corp., Sunbeam Corp., Waste Management Inc. and Cendant Corp., were forced to admit that profits reported earlier had been vastly overstated.
Some cases involved fraud, which auditors said they are ill-prepared to detect. Critics have said that auditors should do more extensive checks of contracts, deliveries and other aspects of a company's operation. But accountants warn that would make routine audits far more expensive. They say that in fierce competition for clients, the lowest cost auditor often wins. |
