Harvey L. Pitt may be down to his final days at the Securities & Exchange Commission, but he's still throwing his weight around. The outgoing chairman is trying to assert greater SEC control over the Financial Accounting Standards Board, the independent body that writes Corporate America's accounting rules. In doing so, Pitt has created a funding roadblock for the board, which gets no taxpayer funds.
Pitt, who should be gone from the SEC by the end of February, is pressing on with a battle that dates back more than a year. He wants the SEC to have a seat on FASB's seven-member board, plus veto power over its membership and control of its agenda, according to SEC and accounting sources. An SEC spokeswoman wouldn't comment on the matter or provide Pitt for comment.
FASB's relationship with the SEC has always been slightly murky. Companies and accounting firms established the board in 1972, and the SEC delegated to it the power to develop generally accepted accounting principles (GAAP). FASB is a private board with a public mission: Stock-issuing companies are required by law to follow GAAP on their financial statements. While the SEC keeps close tabs on FASB's work, the board's independence gives commissioners deniability when new merger or revenue rules rub industries -- or their advocates on Capitol Hill --the wrong way.
If successful, Pitt's power grab would reverse the trend toward greater FASB independence. In 1995, then-SEC Chairman Arthur Levitt Jr. buckled under pressure from Capitol Hill and forced FASB to retreat from requiring companies to count stock-option awards as an expense. Backlash from that incident led to changes that bolstered FASB's independence and gave it more ways to raise money. The bulk of FASB's $20 million budget traditionally has come from contributions from accounting firms and companies.
In last year's corporate scandals, FASB again came under fire. Congress criticized the board's rules, saying they helped Enron hide debt and create fictitious earnings. The Sarbanes-Oxley corporate reform act enacted last summer gave FASB firmer legal status and empowered the board to fund itself by levying fees on publicly traded companies. But FASB can't collect those fees until the SEC approves the board's budget.
That gives Pitt his leverage. Although he resigned in disgrace months ago, Pitt has remained in office while Congress deliberates over his successor. FASB and the SEC were near agreement in January, but Pitt grew angry when the accounting board contacted other SEC commissioners, rather than dealing solely with him, accounting sources say. Pitt then ordered his staff to draw up a policy statement for the five-member SEC to approve.
Pitt's crusade has little support among other commissioners, and the Senate is on the verge of confirming William H. Donaldson to head the SEC, ending Pitt's three-month stint as a lame duck. But the standoff is putting FASB in a squeeze, forcing the board to run down its reserve funds. "You're looking at early summer before [FASB] can get its revenue stream going," says an accounting source. Chalk it up to one more wrinkle in Pitt's long, long goodbye.
By Mike McNamee, with Paula Dwyer, in Washington
Edited by Douglas Harbrecht