October 28, 2002
Remarkable Goings-On at the SEC...

Sebastian Mallaby writes in the Washington Post:

On Sept. 11 this year, [SEC Chair Harvey] Pitt had lunch with John Biggs, the head of a big pension fund, and asked him to apply for the chairmanship of the new audit oversight body that is the core of the post-Enron legislation. According to Harvey Goldschmid, another SEC commissioner who was present, Pitt said to Biggs, "I will support you." There was no doubt in Goldschmid's mind, nor in Biggs's either, that this meant Pitt would support Biggs above all other candidates.

On Friday, however, Pitt strongly implied that none of this had happened. "I know what took place at that meeting and it isn't worth getting into a refutation of the specifics," Pitt declared at an open session of the SEC.

"But let it be said that at some point for reasons that I don't understand efforts were begun to create a false impression. A false impression first that Mr. Biggs had been offered, promised, assured, guaranteed, a position."

Literally speaking, such an impression would indeed be false. Biggs was not assured or guaranteed the job, since he needed to speak to the other SEC commissioners before getting it. But Biggs was assured of Pitt's support, which effectively meant that the job was his -- as it would have been, indeed, if Pitt had not reversed himself after the accounting lobby mounted a campaign against Biggs's appointment. How do we know that Pitt promised this support? We have Goldschmid's word. We have Biggs's word. And we have the fact that Biggs arranged to leave his job early in order to make himself available, a step he would not have taken if he had doubted Pitt's intentions.

This is really quite remarkable...


washingtonpost.com: The Chairman Joins the Lobbyists washingtonpost.com

The Chairman Joins the Lobbyists

By Sebastian Mallaby

Monday, October 28, 2002; Page A19

Early last summer, when post-Enron legislation was blocked in the Senate, reformers were fed up with Sen. Paul Sarbanes (D-Md.). As chairman of the Senate Banking Committee, Sarbanes was supposed to get a bill past the accounting lobby and on to the Senate floor; he appeared to be failing. The right tactic, most reformers thought, was to name and shame the senators who were siding with the lobbyists. But Sarbanes refused to go personal or public. He carried on in his consensual way, discreet, soft-spoken and courtly.

So it's not a small matter that Sarbanes has now gone personal and public, demanding the resignation of Harvey Pitt, the chairman of the Securities and Exchange Commission. Other senators, who weigh their words less cautiously, called for Pitt's resignation long ago. But Sarbanes only says such things when the case becomes overwhelming.

This, unfortunately, is a fair way to describe the case against Pitt after last week's astonishing performance. In his bungled effort to implement the post-Enron accounting reform, Pitt has not merely been incompetent. He has not merely bowed to the accounting lobbyists whom he is meant to regulate. He has been very nearly dishonest.

On Sept. 11 this year, Pitt had lunch with John Biggs, the head of a big pension fund, and asked him to apply for the chairmanship of the new audit oversight body that is the core of the post-Enron legislation. According to Harvey Goldschmid, another SEC commissioner who was present, Pitt said to Biggs, "I will support you." There was no doubt in Goldschmid's mind, nor in Biggs's either, that this meant Pitt would support Biggs above all other candidates.

On Friday, however, Pitt strongly implied that none of this had happened. "I know what took place at that meeting and it isn't worth getting into a refutation of the specifics," Pitt declared at an open session of the SEC.

"But let it be said that at some point for reasons that I don't understand efforts were begun to create a false impression. A false impression first that Mr. Biggs had been offered, promised, assured, guaranteed, a position."

Literally speaking, such an impression would indeed be false. Biggs was not assured or guaranteed the job, since he needed to speak to the other SEC commissioners before getting it. But Biggs was assured of Pitt's support, which effectively meant that the job was his -- as it would have been, indeed, if Pitt had not reversed himself after the accounting lobby mounted a campaign against Biggs's appointment. How do we know that Pitt promised this support? We have Goldschmid's word. We have Biggs's word. And we have the fact that Biggs arranged to leave his job early in order to make himself available, a step he would not have taken if he had doubted Pitt's intentions.

So while Pitt denounces others for creating a "false impression," it looks as though he's the one who's doing that. And doing it in the most brazen way, from his chairman's perch at an open meeting of the SEC, with the TV cameras running.

Given Pitt's efforts to mislead us on this score, why should we believe the other things he says, notably that pleas from the accounting lobby or Republicans in no way influenced his U-turn on Biggs's candidacy? There is, after all, no good alternative explanation for Pitt's reversal, as Biggs was easily the most qualified contender.

Pitt himself declared on Friday that Biggs had excellent credentials. But he claimed that William H. Webster, the ex FBI and CIA chief whom he eventually backed, was even better. This is just not credible. Under the law, the chairman of the new audit overseer is supposed to understand accounting and the role of auditors. Though he is extremely distinguished, Webster has only a general grasp of these issues -- so general in fact that one SEC commissioner speculated that his appointment might provoke a legal challenge.

Given that Pitt's explanation of his actions makes no sense, it's hard to avoid the conclusion that the accounting lobby, operating through the House Republican caucus, did indeed sway his decision. Pitt says that "at no time since this process began has any member of the accounting industry . . . or any member of the Republican Party sought to influence my judgment." But Pitt visited Rep. Michael Oxley (R-Ohio), a leading ally of the accounting industry, on Sept. 26. Are we to believe that they discussed the weather?

The rap against Pitt used to be that he opposed serious audit reform, even though Enron, WorldCom, Adelphia and other scandals made the case for reform obvious. But now the rap has gotten worse. As well as holding damaging but honest views, Pitt's sincerity must be doubted. If Pitt won't take Sarbanes's advice, President Bush needs to replace him.

Posted by DeLong at October 28, 2002 11:46 AM | Trackback

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Comments

Should this report be accurate, and it almost surely is accurate, then Harvey Pitt has simply lied and indeed wishes to limit the significance of the accounting board in any way possible. Harvey Pitt should not be the SEC Chair. This is disgraceful.

Posted by: on October 28, 2002 12:09 PM

This administration is determined to make the stock and bond markets even more hazardous to the middle class investor.

Posted by: on October 28, 2002 12:25 PM

Miffed/missed appointee John Biggs was a capable guy, but he was no more of an "accountant" than William Webster. The other "buyside" member of the oversight board, Kayla Gillian, is a laywer (CALPERS) with no accounting experience. To attack the selection of Webster based on his lack of direct accounting experience is poppycock.

I don't not know what people expect the oversight board to do to improve audits, but it sure looks to me like we'll soon have: the SEC; Oversight Board, FASB, and the various regulators (FDIC, FED, etc) applying their views about proper audits. It sounds like a subsidy to the accounting and legal professions; a subsidy that will be picked up by taxpayers and/or the customers, creditors and investors of audited companies.

Will this bring more certainty to the markets? One upshot of this bursted bubble is that many people understand (just a little bit...)what an audit is: audits are based on sampling; on estimations of market values for similar assets/liabilities, revenue recognition, etc. Any well informed finance person knows that if you went through an audit of the same company by the same auditor, the financial results may vary considerably. Consider if you sat down to count, say, 200 million voting cards, you could recount dozens of times and keep coming up with different answers, even different enough to indicate different winners.

I don't want to paraphrase Michael Lewis' comments on investment analysts, but any good financial analyst uses the companies' audited statements as a basis for their analysis-merely a starting point. Many adjustment need to then be made to get a clear picture (absent fraud) of the firm's financial condition.

For a large company operating multinationally, its audited financials will be about as accurate, and as subject to revision, as would be the NIPA numbers in the US. That's what people need to get educated about. "Big Whoop" about this oversight board.

Posted by: Josef on October 28, 2002 10:24 PM
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