SEC cave-in

January 24, 2003

THE NEXT time President Bush talks about restoring investor confidence by getting tough on corporate fraud, picture a herd of high-priced lobbyists stampeding over financial regulators.

Then picture the lobbyists smiling.

This week's case in hand is the neat bit of pressure successfully applied at the Securities and Exchange Commission by those representing accountants and lawyers.

As the SEC wraps up one of its busiest rule-making periods ever - to comply with the sweeping mandates of the Sarbanes-Oxley corporate reform legislation passed last summer - both professions side-stepped agency proposals that would have greatly altered their trades.

Accountants, SEC commissioners ruled Wednesday, won't have to give up the lucrative business of devising tax-avoidance schemes, a practice often in conflict with the independence of their audits.

Lawyers, commissioners decided yesterday, won't be required to engage in "noisy withdrawals" in the face of unaddressed corporate wrongdoing - notifying the SEC they've dismissed corporate clients because their boards failed to address problems.

The SEC did approve measures to induce greater auditor independence, such as requiring lead auditors to rotate every five years. And over protests from mutual funds, the agency opted to force them to disclose how they cast corporate proxy votes on behalf of their investors.

Strictly speaking, SEC commissioners are fulfilling Sarbanes-Oxley's mandates. But the law gave them discretion to go a lot further, as with the proposed stronger rules governing accountants and lawyers. These two professions often have played central roles in corporate frauds, they have not effectively policed themselves, and the SEC cave-in this week only underscores the image of an agency - and an administration - too cozy with corporate America.

Remember: The Bush administration attributes corporate misconduct to a few bad apples, not systemic deficiencies; has tolerated woefully inadequate SEC funding; and appears content with SEC Chairman Harvey L. Pitt still leading the agency almost three months after he had lost so much credibility he had to resign.

No set of federal regulations could prevent all corporate fraud. But separating auditing from tax consulting and requiring lawyers to indirectly report corporate wrongdoing would have been big steps toward providing greater independence for these critical professions to represent stockholders' interests, not just corporate managers'. And that, in turn, would have been a big step toward the president's professed goal of restoring investor confidence.

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