Harvey Pitt joined the SEC vowing to streamline regulations and foster closer ties with corporations, accountants, and Wall Street. But Enron's collapse is forcing him to step up oversight. On Mar. 8, Pitt spoke with correspondents Mike McNamee and Amy Borrus.
Q: Has Enron changed your thinking about the need for new rules?
A: There's always a danger that people overreact. Notwithstanding that, I can't look at the disclosure and accounting system after Enron the same way 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 is the broader lesson for the SEC?
A: Enron is a poster child for things I thought needed improving in the system. It is an impetus to move more quickly than I envisioned. All I want to do is make the system better, and I believe the President has outlined the right program I intend to implement all of 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 is predicated on technology that is 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? Under federal law, there was no obligation to tell shareholders.
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 timesthey'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 is weak doesn't understand it.
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: 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 anti-disclosure regulation. Your best bet under FD is to say nothing to anyone. And the SEC focused on the issue of [auditor] independence. [That] 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 auditing firms consulting for clients].
Q: You still oppose a rule that bans a firm from doing audits and consulting work for the same company?
A: If some [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.