) certainly justified Pitt's resignation on Election night, but it should not obscure the larger stakes. At bottom, the issue is this: Will the accounting industry be permitted to resume its practice of regulating itself almost as if the recent scandals had never happened? Or will strong oversight and regulation apply, as intended by the Sarbanes-Oxley Act?
Every investor ought to be appalled by the attempt of the accounting industry and the White House to reverse reform by stealth. What practical difference does it make if the board is headed by a William Webster or by a truly independent and expert figure such as former TIAA-CREF chief John H. Biggs? Webster, according to well-placed SEC sources, lacks the technical expertise that the job requires and was intended by his sponsors to be an ally of the accounting lobby. A Webster-style board would likely allow the accounting industry to revert to the weak self-regulation that failed to prevent the fraudulent audits, bankruptcies, and stock market calamity of recent months.
Whoever eventually heads it, the board faces four key regulatory issues that will determine its success or failure: auditing standards, internal quality controls for accounting firms, disciplining of accountants, and the independence of auditors from clients. The new act specifies nine categories of prohibited activities, but the board must precisely define them and set up detailed enforcement systems. A key issue is whether the board should rewrite the rules that proscribe how far an audit must go to look for fraud or accept the current rules composed by the profession's trade association, the American Institute of Certified Public Accountants.
Unlike the banking industry, which is policed by government regulators, accounting has historically governed itself through professional-standards and peer-review systems. As the serial scandals revealed, these were often a joke. The AICPA spent only a few million dollars a year on self-policing. Short of being caught red-handed stealing clients' money, accountants were rarely disciplined. Industry peer review failed to prevent palpable conflicts of interest. The nominally independent Financial Accounting Standards Board (FASB) defines accounting and auditing standards. But the crucial governance task was actually delegated to the industry's own trade association, the AICPA. A 2000 report by the industry's Audit Effectiveness Panel, for example, presciently concluded that standards for detecting fraud in an audit were seriously inadequate. But the industry successfully resisted strengthening the standard to what the panel recommended.
The Sarbanes-Oxley bill aimed to change all that. It gave a new independent board statutory authority to define and enforce its own standards, along with a budget expected to exceed $100 million. But the accounting industry, through the AICPA and its longtime advocate Pitt, resisted tough legislation. When public outrage forced even Republicans to support a strong law, the accounting industry then fought a rearguard action to weaken the act's implementation and lobby for a tame panel that would once again adopt AICPA procedures as its own.
Although Pitt has denied it, my sources confirm that he indeed had offered the job to Biggs. Biggs, a serious critic of accounting practices, said that the board should write its own rules rather than just taking what the AICPA gave him. My SEC sources say Pitt hoped that other appointees on the oversight panel would neutralize Biggs, but when word of his pending appointment leaked, accounting industry lobbyists, House Finance Services Committee Chairman Michael G. Oxley, and White House Chief of Staff Andrew J. Card sprang into action. Pitt soon rescinded the offer, and the White House produced 78-year-old Webster.
As former head of the FBI and the CIA, Webster is the sort of nominally independent figure to whom corporate boards turn to simulate public reassurance--without real independence. In addition to heading the audit committee for U.S. Technologies, Webster serves on several other corporate audit committees. But industry lobbyists widely expected him to be the tool of Pitt and of Pitt's political ally, SEC chief accountant Robert K. Herdman.
It's hardly surprising that business conservatives resist regulation of, say, health, labor, and the environment. You would think, though, that they would want to have honest corporate books. American capitalism works only to the extent that investors receive truthful information. The AICPA's behavior is scandalous, but the deeper scandal here is the myopia of political leaders who pose as champions of capitalism. Robert Kuttner is co-editor of The American Prospect and author of Everything for Sale.