Shaken by the Enron scandal, the Securities & Exchange Commission is moving rapidly to speed up and improve corporate financial disclosure. Long-term, SEC Chairman Harvey L. Pitt hopes to overhaul corporate reporting so investors will get far more detailed information about company operations on a real-time basis. For now, though, he's focusing on steps the SEC can enact quickly -- as soon as midyear -- to bolster investor confidence.
On Feb. 13, Pitt discussed his actions with Washington Senior Correspondent Mike McNamee. Edited excerpts from the interview follow:
Q: What's the SEC announcing?
A: We're taking steps that will move us to more of a current-disclosure system than the commission has ever had. We intend to make companies far more transparent for investors. These are things that should have been done years ago. Under these proposals, we will use Form 8K [a report companies file to the SEC to announce important corporate events] in ways it has never been used before. We have picked issues we feel must be disclosed. Companies won't have to think about whether to disclose them or not -- they'll be required to.
Q: What sorts of issues?
A: We'll have much more current disclosure of off-balance-sheet entities. The new rules will deal with immediate disclosure of related-party transactions [between companies and their officers or directors]. Waivers of corporate ethics and conduct rules -- there's no disclosure of those now. Investors should be told.
Material write-offs [against earnings] will be disclosed when they happen, not held for the next quarterly report. Under today's system, a company may have 135 days to report a write-off. These are significant and important improvements.
Q: Do you think this reporting system could have prevented Enron's run-up and collapse?
A: They will minimize the chances of another Enron occurring. We have an obligation to the investing public to show that we have both the creativity and concern to deal with such problems.
The commission has already said it will require all companies to identify the three, four, or five most critical accounting issues [that affect their financial results]. They have to disclose what alternative methodologies [for accounting] were considered and rejected, and what their results would have been with different assumptions. There are some who believe this proposal alone would have had a very strong likelihood of preventing the complete absence of disclosure that so caught markets by surprise [with Enron].
Q: How does this fit with your long-term goal of overhauling financial reporting?
A: We're going to a system of faster disclosure. We want to supplement that with a system where companies release more trend and value information. Investors should get a wider range of data than just the standard financial statements. In the end, investors should see the company through the same reports, the same eyes, as managers and directors.
Q: You've said you want to move markets away from their fixation on one number -- quarterly earnings per share. Do you believe investors will use all this data? You're asking every investor to serve as his or her own analyst.
A: I believe this is what the federal securities laws always intended to do. When you rely on someone else to tell you what to buy, you may be buying a pig in a poke. I know that when I make a decision, I want all the information I can possibly have.
A system with greater transparency and greater honesty will allow individual investors to understand things in the same way sophisticated investors have for decades. For those investors who don't want to do the work, there are always diversified mutual funds.
Q: Treasury Secretary [Paul H.] O'Neill is proposing changes in corporate governance that will hold CEOs, top officers, and directors personally responsible for financial statements and disclosures. How do you feel about that?
A: I believe individual officer accountability is critical. [The SEC] will probably seek legislation giving us the power, administratively, to bar those who are guilty of serious wrongful conduct from ever serving again as officers and directors [of public companies]. We believe that we should not give directors and officers who betray their trust a second bite of the apple or a long delay before they're barred.
Right now, we have to petition a court to issue a bar. If you look at the commission's statistics, we're asking for more officer and director bars. We requested 14 in 2000, but last year -- four months of which were mine [as chairman] -- we requested 33 officer and director bars. You can assume that the numbers will be going in that direction.