Use outsiders to discipline accountants, official urges

Outdated ethics rules in past decade have hurt investors, SEC chief says


WASHINGTON - Responding to growing pressure over Enron's collapse, the head of the Securities and Exchange Commission proposed yesterday to have a group of outside experts discipline accountants rather than relying on the industry to police itself.

Harvey L. Pitt, SEC chairman, said antiquated rules on corporate disclosure and accounting ethics had allowed investors to suffer from a series of auditing lapses over the past decade.

"We simply cannot afford a system like the present one that facilitates failure rather than success," he said at a news conference yesterday afternoon. "This commission cannot, and in any event, it will not, tolerate this pattern of growing restatements, audit failures, corporate failures and then massive investor losses. Somehow, we have got to put a stop to a vicious cycle that has now been in evidence for far too many years."

But some experts criticized his plan, which is preliminary and months from adoption. They urged Pitt to consider proposals by his predecessor to assure that auditors remain independent from their clients. Pitt, they said, missed the point that accounting firms that earn more from consulting than auditing, as Enron did for Andersen, face inevitable conflicts of interest.

"He's chasing a gopher down a wrong hole," said James D. Cox, a professor of securities and corporate law at Duke University and author of an accounting textbook. "This is not a situation which involved somebody at Arthur Andersen who had previously engaged in misconduct. This is a question of ongoing problems in an accounting profession which has close ties to clients, ties which seriously compromise their independence."

Yesterday, Pitt said changes in the oversight rules and disclosure requirements were essential but dismissed suggestions that he take steps to keep auditors from performing other work for the same clients.

"Auditor independence is not the cause of the problems that we are witnessing," Pitt added. "This system has enough flaws and enough difficulties in it that cry out for repair. And it would be easy for some people to convince you that the entire problem is a question of auditor independence and ignore the much bigger issues of the quality of our disclosures, the penetrability or impenetrability of financial reports, and how audits are structured and performed."

He also deflected suggestions that the federal government needs to play a greater role in overseeing the industry and that the SEC be given more lawyers and officials to prosecute white collar corruption. He does not, he said, "believe that the solution to every problem, even major problems, is throwing the taxpayers' money and more bodies from the government at the issue."

While Pitt said that no new law was needed to enact his proposal, to shift the responsibilities for discipline from the American Institute of Certified Public Accountants to a new organization, Cox said the commission might not otherwise have the necessary authority .

Professional accountants face several levels of oversight. The institute disciplines them for ethics and rules violations. The Securities and Exchange Commission traditionally files complaints for more egregious violations, federal violations in particular. State boards can discipline them or strip them of their licenses for violations of their own rules and laws.

Pitt said yesterday that he would take the accounting institute out of the business of conducting disciplinary and quality review proceedings. It is also likely to remove the Public Oversight Board, a group of outside experts, from performing such roles as overseeing peer reviews of accountants' work.

His proposal was generally supported by the institute, a client of Pitt's before he became chairman.

Pitt's proposals still face many months of review. No specific rules have been written, and once they are, they will be subject to the normal process of comment and revision. The SEC, with five seats, is also hobbled by three vacancies.

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