The financial regulator is investigating Enron auditors Andersen and the firm’s admission that it shredded important documents related to the company. Later in the day Enron announced that it had fired Andersen as auditor.
Although Pitt promised that the SEC is consulting US firms about the proposed overhaul, he noted that the profession’s American Institute of Public Accountants will not be part of the new watchdog. It is still unclear who exactly the new body’s members will be.
Along with his intentions for reform the regulatory chief issued a mile long list of concerns including ‘too many accounting and financial failures’ and ‘a vicious cycle that has been in evidence for too many years’.
‘Our disclosure and financial reporting system has long needed improvement. Its inadequacies are more visible after Enron’s failure, and the need for change cannot be ignored any longer,’ he said.
Noting that after 67 years in operation the US system of periodic disclosure has reached its sell by date, Pitt added: ‘Today, disclosures are made not to inform, but to avoid liability. We need to move to a system of “current” disclosure.’
The SEC’s wish list includes ‘plain English financial statements’ along with a review of corporate governance issues and the role of audit committees. Pitt said the Commission has recently called for companies to provide ‘transparent disclosure of key accounting principles and policies in annual reports’ and that it will ‘shortly’ make a statement with its demands for management discussion and analysis (MD&A) documents.
As well as improving its own overview of reporting and disclosure rules the Commission says it will ask the Financial Accounting Standards Board (FASB) to speed up its act.
Although the full details of his plans are not yet clear Pitt outlined some headlines. The new private sector watchdog, which will be led by ‘public membership’, will be given wide-ranging powers to investigate and discipline firms and individuals.
This would include the power to compel documents, take testimonies and prevent a firm from auditing publicly traded companies. ‘Anybody who fails [to comply] would have to be ousted from the profession,’ he added.
The regulator will also review the current practice where firms examine their rivals accounting policies every three years.
Pitt noted that the SEC could not afford the ‘tens of millions of dollars’ needed to provide ‘direct oversight’ of the profession but promised that the Commission would oversee the new body. ‘I believe it is most effective if the private sector bears responsibility subject to our oversight,’ he added.
When questioned the issue of auditor independence Pitt said: ‘Independence is not the cause of the problems we’re witnessing now.’
Another irony in the Enron scandal is that Pitt once represented Big Five firms including Andersen.
However Pitt seems determined to stay put. In response to more than one question on the subject he promised that there is no way he would ‘do anything to compromise the integrity of the SEC’.
In spite of the chief’s tough words some commentators argued yesterday that the overhaul should run deeper.