After Enron: "Nothing Can Be Off the Table"


Superlawyer Harvey L. Pitt became chairman of the Securities & Exchange Commission in September, 2001, as a champion of self-policing and a conciliatory approach to corporations, accountants, and Wall Street. But Enron's collapse and rising public disgust over a wave of corporate bookkeeping scandals are forcing the 57-year-old conservative to beef up oversight, instead (see BW Cover Story, 3/25/02, "The Reluctant Reformer").

President George Bush is counting on Pitt and the SEC to clean up the mess and restore confidence in Corporate America's financial dealings. Pitt certainly knows a lot about the outfits he keeps a watch on. Early in his career, he spent a decade at the SEC and then practiced law at Fried Frank Harris Shriver & Jacobson, where he represented a slew of financial and corporate powerhouses, including all of the Big Five accounting firms. But some Democrats and investor groups question whether Pitt's background makes him the right choice to lead an ethics crusade.

On Mar. 8, Pitt spoke with BusinessWeek Washington Correspondents Mike McNamee and Amy Borrus about his efforts to crack down on corporate abuses. Here, in edited excerpts, is an extended version of the conversation that appears in the Mar. 25 issue of BusinessWeek:

Q: Has Enron changed your thinking about the need for new rules?

A: There's always a danger that people overreact. But notwithstanding that, I can't look at the disclosure-and-accounting system after Enron the same way I looked at it before. What it means is nothing can be off the table. Whatever solution is [proposed], even if I might have thought in the past it was outlandish, it has to be given serious thought now. My values haven't changed. But my reality has changed.

Q: What's the broader lesson of the Enron debacle for the SEC?

A: Enron is a poster child for things I thought needed improving in the system. It's an impetus to move more quickly than I envisioned.... I believe the President has outlined the right program for us to follow. I intend to implement the President's directives as quickly as we can.

Q: Can you elaborate?

A: [Enron's accounting] pointed up fundamental flaws in the system, because it's predicated on technology that's 67 years old. In 1934, we didn't have computers, we didn't have the Internet. So the concept I came in with was that much of [the data] being disclosed [were] irrelevant or stale or impenetrable. Investors should have the ability to look at a financial statement and understand what the company's status is.

You also have a system in which, because we dealt with quarterly and annual reporting, the only time people were required to report was at the end of the quarter or year. What happens if something really significant happens before the end of the quarter? Well, under federal law, there was no obligation to tell shareholders.

Q: Is it just a question of getting information to investors sooner?

A: What [has] evolved is a system that's two-tiered. On the one hand, we have all of the really fabulous deals. And they're often done outside the SEC-regulated system. They're done as unregistered offerings for sophisticated investors.... The sophisticated investors are getting the deals that are so good that nobody cares about [having the protections] of registration. What's left for the public are the deals that can only get sold by selling them to the public.

We've pushed the better deals outside the system...so the goal [is to] provide the ordinary investor access to the best deals with the same kinds of information that the most sophisticated investors get, albeit obviously disclosed in a way that's both comprehensible and doesn't disclose corporate secrets or ruin a company's competitive position.

Q: You favor a new board to oversee accountants, but critics say your version is too wimpy.

A: People who claim [my solution] might not go far enough -- well, sometimes they may be right. But a lot of times...they're really saying: "We need my solution, not yours." What I proposed is the most far-reaching reform for the accounting profession. Anyone who thinks it's weak doesn't understand it. They also probably overlooked the fact that, when I announced it, I said this is the beginning of the process.... It's a work in progress.

Q: Bush wants CEOs to sign a financial-health statement. What's to keep that from being mere boilerplate?

A: If you have an errant CEO and the company he or she disserved pays the fine, then you have what I would call an S&L situation: You have given someone a free ride with other people's money. That makes no sense. So I support the President's notion that there must be individual accountability. The best way is to do what we do in the banking and securities industries: If you engage in serious misconduct, you're out of the game.

Q: Why do you think miscreant CEOs should be fined, and how will you go about collecting from them?

A: There's a vicious cycle that has come up. Companies record fabulous earnings for four or five years in a row. Then in the sixth year, they announce a restatement that gets rid of all of the profits that were claimed in the first five years -- and maybe some extra. And yet nobody ever asks about the incentive bonuses and stock options and salary compensation that executives received. Nobody ever says: "Gee, give that back." We're going to go after compensation packages for CEOs, and perhaps others, whenever we think the facts show disservice to the shareholders.

Q: Can the SEC shoulder its new responsibilities without a significant budget increase for enforcement?

A: We have more financial fraud cases under investigation than at any time in our history. And we need people. I think the Office of Management & Budget has been very responsive.

Q: Did it really have to take such a mess to institute these reforms?

A: My predecessor decided to pursue Reg FD, fair disclosure, which is not a disclosure regulation -- it's an antidisclosure regulation. Your best bet under FD is to say nothing to anyone. And the SEC focused on the issue of [auditor] independence. [That goal] is important, but it was not dealt with in a thoughtful way.... Problems exist which still need to be solved, but they don't go away simply because you pass a ban [on firms that do auditing and consulting].

Q: You still oppose a rule that bans an accounting firm from doing audits and consulting work for the same company?

A: If some of these [congressional] proposals go through, in the next five years, we will have far worse audits than we have now. With all the bashing of accountants, it's hard to see the best and the brightest minds going into this field. And if accounting firms are more dependent on audit clients, then, by definition, they're less independent. Independence is important. But the real issue is the quality of audits.

Q: Some lawmakers want to repeal parts of the Private Securities Litigation Reform Act (PSLRA) of 1995 that shields corporate executives, accountants, and other financial advisers from excessive lawsuits. Do you agree?

A: In the last several years, there have been some of the largest settlements of civil lawsuits involving accounting firms and others in cases brought by shareholders. PSLRA, I think, was a properly conceived piece of legislation designed to make shareholder litigation benefit shareholders -- not the people who brought the litigation.... My predecessor...said he thought the legislation as it was enacted was in the public interest and benefited shareholders. I agree with that assessment.


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