'I Want It Crystal-Clear Who's to Blame'

In a Sept. 8 interview in his Washington office, where the word "accounting" floats in a 3-D rendering on his computer screen, Securities & Exchange Commission Chairman Arthur Levitt Jr. spoke to Business Week News Editor Paula Dwyer about his proposal to bar accounting firms from consulting for the companies they audit.
Note: This is an extended, online-only version of the Q&A that appears in the Sept. 25, 2000, issue of Business Week:

Q: Why are you so intent on changing the accounting industry?
The accounting profession, and particularly the AICPA [American Institute of Certified Public Accountants], have been almost oblivious to the words "public interest." Independence, full disclosure, and public perceptions -- which the accounting industry dismisses as irrelevant -- are the cornerstones that have made our markets the best in the world. When the public loses confidence in our markets or in their governance, or when the reliability of the numbers is diminished, the whole system is jeopardized. And I've always felt the best way to protect the system from a practical and a perception standpoint is to have strong representation by the public in the governance of our major institutions. This has been resisted most strenuously by the AICPA. I've learned that resistance to public representation is an indication of an attitude close to contempt in an organization.

Q: Has industry reaction surprised you?
This has been a long, arduous, and frustrating journey. It started almost from the day I came here. Sadly, the accounting profession has had to be dragged, cajoled, pulled, and pushed to take even the most modest steps. Some leaders have been helpful, but they are burdened by a trade organization that has a fortress mentality that places the public interest at the bottom of the ladder.

A very frustrating incident occurred when [the AICPA] cut off funding for [the Public Oversight Board (POB), charged with overseeing the AICPA's peer-review program]. In the midst of enormous public interest in the independence issue and a new chairman being appointed to the POB, the AICPA cuts off funding. Because of that, I believe it is mandatory the POB must change if it's to take on a quasi-regulatory function. It has to have the symbols and the reality of power. Now it's inadequate.

I plan to ask Congress to review the POB's charter and its makeup. There's going to be a scandal sometime soon, and I want it crystal-clear who's to blame. I want the blame to go to those who have stonewalled constructive change. I'm going to put a marker down.

Q: Some say you're doing this because you want to leave a legacy. True?
From the day I came to the commission, I've been obsessional about the importance of placing the interests of investors above all others.

Q: Is there any room for compromise?
With any proposal, there are public hearings and an enormous number of comment letters that must be taken into account in a final rule. I realize certain changes should be made. The treatment of broad principles [for example, that auditors cannot be an advocate for their clients] many felt would have unintended consequences. We have to deal with that.

Q: By walling off consulting, aren't you making it harder for accountants to understand their clients' business and thus provide the real-time information that today's investors need?
The standards of public trust are the same today as they were 50 years ago. The sanctity of the numbers and of their reliability must be there. The perception of reliability of the numbers is a factor we can't turn away from. They're not prevented from doing anything -- just not for the clients they audit.

Q: Won't your rule devalue the firms' consulting-arm spin-offs? And isn't this fight really about the details and timing of their restructurings?
I don't think accounting firms will do less consulting, and I don't think they'll perform fewer audits. I think the business will be as good as it is now. They'll do just as much consulting, but they won't give up their independence to do it.

Q: There's no smoking-gun case to prove that the auditors have lost independence because of consulting relationships. Doesn't this weaken your hand?
How can you have a smoking gun? It's an impossible task. But the coincidence of audit failure and the ascendancy of consulting are too close to dismiss as happenstance.

Q: But you're left with this vague idea that the perception of independence is lost. Is that enough to base a rule on?
Our markets are based on perceptions. That's what fuels public confidence, that's what moves the markets. The number of accounting misdeeds and the high-profile failures and managed-earnings cases are what have eroded public confidence. It's the commission's job to provide for full disclosure and reporting that is as accurate as possible. And with self-regulation, perception is doubly important.

Q: Why not let the various accounting blue-ribbon panels and commissions, formed at your behest, work their way?
None of them really focused on independence of the auditing process. And even if [an audit-effectiveness panel chaired by former Price Waterhouse Chairman Shaun F. O'Malley] voted in favor of our rule, nothing would've happened because the industry is so resistant. There are times when government intervention is called for. I don't consider myself a knee-jerk regulator. I've never seen a problem more resistant to change than this one.

Q: Because the firms needed SEC approval for their consulting spin-offs, did you think this would be a slam dunk?
I never thought that. We're dealing with serious business entities and peoples' lives here.

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