Why the Enron Probe Needs Harvey Pitt

Far from recusing himself, as some in Washington are demanding, the SEC chairman's years as a securities lawyer make him a huge asset

By Mike McNamee

Should Harvey Pitt step out of the probe of Enron Corp. and the company's auditor, Arthur Andersen? Pitt, chairman of the Securities & Exchange Commission, represented both Andersen and the accountants' trade association, the American Institute of Certified Public Accountants (AICPA), during his long and lucrative career as a private securities lawyer. Given that background, Democrats are arguing that Pitt shouldn't be overseeing the probe. Senator Jon Corzine (D-N.J.) says Pitt "ought to do what Attorney General John Ashcroft has done and clearly step aside."

That would be a mistake, however. Recusing himself from the investigation wouldn't win Pitt any points with critics. And if the SEC's professional staff can be influenced on a high-profile investigation because of the boss's old client relationships, the probe is at risk as long as Pitt is in the SEC's headquarters -- never mind recusing himself. Nothing short of Pitt's resignation -- which no one believes is called for -- would solve that problem.


  Besides, recusal would remove the SEC chairman from the most important job: Cleaning up accounting to reduce the risk of future Enrons. Pitt wants to set up a new, independent board that will impose meaningful discipline for the first time on accountants that fail the public by letting companies get away with financial shenanigans.

True reforms will mean taking power away from the Big Five accounting firms -- and overcoming their political clout will take all the savvy and skill the SEC can muster. The job can't be done unless a strong SEC chairman with Pitt's knowledge and expertise leads the charge.

Pitt insists that he's following the letter of the law. "Apart from joining the unanimous vote to authorize the SEC Enforcement Div. to commence an investigation [in November], Chairman Pitt has not participated in the Enron investigation," SEC spokeswoman Christi Harlan said on Jan. 16. What that means, she added, is that he has not directed, advised, or overseen the investigators.


  By longstanding SEC practice, once the commission authorizes an investigation, the Enforcement Div. is on its own. Director Stephen Cutler picks the avenues to pursue, decides who to interview, and signs off on subpoenas. When former Enron CFO Andrew S. Fastow failed to appear under SEC subpoena, Cutler decided to take Fastow to federal court -- and told Pitt of his decision only just before the case was filed, aides say.

Pitt could still influence the investigation -- but that's true whether he formally recuses himself or not. In the end, the quality of the probe depends on the professionalism of the SEC enforcers. In the harsh glare of the Enron scandal, "we know we can't afford to blow this one," says a top securities cop. "Everything that can be done, we're doing."

The SEC boss, too, knows that he can't show favoritism. "We're keeping a close eye on Mr. Pitt," confides a top Democratic lawmaker. The plan Pitt proposes for reforming accountant discipline will come under withering fire for failing to go far enough. Critics want the SEC to patrol the profession itself.


  Truth is, Pitt might surprise them. While his work for the AICPA has been cited as a conflict, he has also fought the association and Andersen. In the most contentious accounting struggle of recent years -- the 2000 battle over whether to bar accounting firms from consulting for their audit clients -- Pitt was engaged by PricewaterhouseCoopers and Ernst & Young, the two firms working with then-SEC Chairman Arthur Levitt Jr. on his proposal to separate the functions. The AICPA and three other firms, including Andersen, fought the proposal and ultimately defeated it.

That donnybrook demonstrated what the Big Five could do even when they were split in the face of a determined and populist SEC chairman. Just imagine how little reform would occur if the SEC were essentially leaderless, as it would be if Pitt took himself out of the Enron/Andersen affair. Pitt should stick around and silence his critics in the best way possible: by reining in the Big Five so that future Enrons can't find compliant auditors to help hide their maneuvers.

McNamee covers the SEC from BusinessWeek's Washington bureau

Edited by Douglas Harbrecht