Arthur Andersen has been condemned to death row after a ruthless prosecution by the Justice Department, Wall Street houses are being harried by an aggressive posse of state attorneys and the Securities and Exchange Commission, the US’s securities supremo, has issued a consultative document on some tepid reforms to the accounting industry.
The unprecedented turmoil in corporate America that has rocked investor confidence and contributed to the steep stock market declines is prompting a patchy response from US regulators. The White House’s chief enforcer, SEC chairman Harvey Pitt, with the clearest mandate and most sweeping powers, has so far received as many blows from his myriad detractors as he has delivered to the alleged miscreants.
Pitt is confronted with a regulatory and financial crisis that travels down Wall Street and into Main Street, probably the worst since the end of the Great Depression. Last Thursday the SEC gave preliminary approval to plans for a new oversight system for corporate auditors, asserting that the board would be independent of the accounting industry and would help restore investors’ confidence in corporate financial reports.
Even before he had a chance to explain his proposals an influential congressional leader, Thomas Daschle, criticised it as a ‘toothless tiger with no real merit’. Daschle said having accounting industry people on the board would erode confidence because people would perceive it as ‘the fox in the chicken coup’.
Pitt, who will be at the centre of the efforts to clean up the industry, dismissed the criticism but bristled at talk that he was too sympathetic to its interests to make a meaningful difference. At a time when the nation needs some clear-minded leadership there is a danger that the campaign to clean up corporate America is about to collapse into turf war between competing fiefdoms.
Pitt’s curriculum vitae reads like a checklist from central casting for a perfect securities regulator: brilliant lawyer; celebrated courtroom tactician; excellent negotiator with an impeccable record for advising the chiefs of America’s securities and regulatory industry. He is also a very experienced political player who knows how Washington works. Even his burly and bespectacled appearance makes him look as if taking out a few punks from the securities industry might make his day. That’s why a lot of people are scratching their heads as to how his first 11 months on the job could have been so flat-footed and how he has managed to give the appearance, probably unfairly, that he is too willing to hold hands with those the public want to see handcuffed.
‘Harvey Pitt should resign,’ says Lawrence Mitchell, professor of law at George Washington University, who claims his close links to Wall Street and the major accountancy houses will inhibit his resolve to impose meaningful change. But David Ruder, former SEC chairman, says Pitt’s mis-steps have distracted attention from the strides he has taken to clean up the system and prevent it from happening again. Ruder, currently a professor of law who has known Pitt for more 30 years, adds: ‘He has a very active regulatory regime that has been unjustly criticised by people who want everything now.’
A deregulatory, conservative Republican with poor political instincts, could not have chosen a worse time to take the top job. Until last week, the White House had shown little interest in the issue because of its preoccupation with the terrorist crisis. But this is one scandal where the problems start at the top.
The biggest ever contributor to President Bush’s political campaigns was fellow Texan Kenneth Lay, the chief of Enron whose accountant was Arthur Andersen. Vice president Dick Cheney’s company Halliburton is also under investigation for accounting irregularities. Its accountant was also Arthur Andersen.
Eliot Spitzer, the upstart Democrat attorney general from New York, brilliantly sensed that Americans were looking for an activist role when he toppled the world’s largest broker Merrill Lynch by subpoenaing emails that exposed analysts were recommending stocks to investors that they privately canned as rubbish.
Once again, Pitt looked flat-footed as Spitzer was joined by 40 other states looking to kick corporate ass in New York, even if it created a legal and bureaucratic nightmare for the SEC and Wall Street houses. Pitt’s attempt last October to distance himself from his activist predecessor, Arthur Levitt, by telling the SEC’s traditional enemy, the American Institute of Certified Public Accountants, he wanted to create a ‘kinder and gentler place’, exploded in his face as the Arthur Andersen crisis deepened. Then came another bombshell when it was revealed he had been privately meeting with the heads of former clients, such as KPMG, that were under investigation by colleagues.
Within months he had alienated enough people to have a conservative voice-piece like the Wall Street Journal lambaste him in language it normally reserves for its political demons, like Bill Clinton, and question whether he could ever run the SEC in an above-board fashion.
David Yellen, dean of the Hofstra University Law School in New York, said: ‘Harvey was slow in getting started as chairman but there are good reasons for not going in with guns blazing.’
Pitt’s supporters point out he has instigated a record number of probes into possible dodgy accounting; issued a raft of new rules and interpretations and pressed the New York Stock Exchange and Nasdaq into overhauling corporate governance rules. Maintaining that momentum could bridge the credibility gap and ensure that some historic troubles prompt some historic reforms.
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