How to Undermine a Law: Pitt, Webster and the SEC Mess. (Gazette)

By Bolton, Alexander | The American Prospect, December 16, 2002 | Go to article overview

How to Undermine a Law: Pitt, Webster and the SEC Mess. (Gazette)


Bolton, Alexander, The American Prospect


THE EVENTS LEADING UP TO the high-profile resignations of Harvey Pitt and William Webster are symptomatic of a broad effort by President Bush, Republicans on Capitol Hill and the business community to undermine a six-month old law designed to prevent corporate fraud and accounting scandals like those that racked American business for the past year.

Business lobbyists want to make it easier for banks to give loans to members of their, own boards of directors. They also want to make it more difficult to implicate CEOs in potential fraud against their own companies. And they want to exempt multinational companies from having to comply with American accounting standards if those firms' systems already meet European regulations.

Bush and his congressional deputies have shown little enthusiasm for toughening accounting and corporate-governance laws even as companies such as Enron and WorldCom collapsed, accounting irregularities shook investor confidence and the stock market plummeted. Just hours after Bush signed the far-reaching reform into law on July 30, the White House began its effort to weaken the measure, according to one of the bill's co-authors, Sen. Patrick Leahy (D-Vt.). Republican victories on election day, which gave the GOP control of both houses of Congress, have only emboldened the accounting industry to ensure that new accounting rules and regulations set by the Securities and Exchange Commission, and the new oversight board it must create, are as weak as possible.

The bill Bush signed into law calls for a 77 percent increase in the SEC's annual budget, which would raise it from $438 million to $776 million. Yet the administration initially refused to boost the commission's budget by more than 30 percent, and only after a storm of criticism did it vaguely vow to "work with the Congress to make sure it has the resources it needs."

But Bush has done little to follow through on this promise. The legislation introduced by Sen. Paul Sarbanes (Md.), the top-ranking Democrat on the Banking, Housing and Urban Affairs Committee, sketched a broad oufiine for reining in the accounting industry. Yet it tasked the Bush administration--by way of the SEC--with finalizing the details of reform.

The new rules that would have the biggest impact on the accounting industry were to be drafted by a public accounting board set up by the SEC. The composition of the board is crucial because the panel will decide whether to set tough new standards for the accounting industry or to let the industry continue to set its own standards. That decision, reformers say, will determine in large part whether the law is meaningful or hollow.

So when word leaked to the accounting industry that SEC Chairman Harvey Pitt would appoint as chairman of the accounting board a vocal advocate for stricter rules, industry lobbyists swarmed Republicans on the House Financial Services Committee. Shortly afterward, Rep. Michael Oxley (R-Ohio), who chairs the panel, suggested that Pitt drop his first choice and select instead a chairman more amenable to the accounting industry. Pitt complied and chose William Webster, a former FBI and CIA director who had previously served on the audit committee of a company (US Technologies) under investigation for fraud. Pitt was soon forced to step down when it became known that he was aware of this fact but had failed to tell the other SEC commissioners. Webster's resignation followed just days later.

Until Pitt quit, accounting executives were confident that the administration would let them set their own standards. At a New York University forum in October, James Gerson, a partner at PricewaterhouseCoopers and chairman of the American Institute of Certified Public Accountants' auditing standards board, told participants he was sure the industry would be allowed to write its own ticket.

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