The Vindication of Arthur Levitt
By Richard S. Dunham
During his tenure as chairman of the Securities & Exchange Commission, Arthur Levitt Jr. took a lot of heat from the accounting industry and Corporate America for his plan to strengthen enforcement of securities laws and require far greater disclosure from companies. At the time, Levitt's comments sounded alarmist to many.
Levitt, of course, was right. And as Congress and the Bush Administration consider which changes to enact in this Enron-induced reform frenzy, they would be wise to rip a page out of his playbook. With investor anger on the rise and trust in the markets on the wane, Washington should embrace a bold agenda of reform. New SEC Chairman Harvey Pitt and other regulators would do well to avoid halfway steps (see BW, 2/25/02, "The Betrayed Investor").
This is not campaign-finance reform, where the Shays-Meehan compromise plan approved by the House on Feb. 14 is viewed by most reformers as only a "first step" in changing a corrupt system. When it comes to protecting investors, it's an all-or-nothing proposition. The 100 million Americans who play the market depend on accurate and reliable information to make their investment decisions. The accounting industry has already been pressured into reversing its decades-long opposition to restrictions on mixing its auditing and consulting work (see BW Online, 1/31/02, "An Abrupt About-Face by Accountants"). Washington should now act quickly and decisively to enact additional reforms.
Levitt's view is that the Investor Class, though huge in size, isn't an effective interest group. "It is potentially the most powerful lobbying force in the country, and it is the least well-organized," he told a breakfast group of reporters recently. As a result, investors are outmaneuvered politically by business interest groups, most specifically by the accounting industry.
Levitt, a former chairman of the American Stock Exchange, publisher, and investment-company founder, worries that the Enron situation is being viewed by many as "merely an accounting problem." He sees "very widespread" breakdowns in the entire oversight system -- from corporate lawyers and accountants to investment bankers, analysts, and boards of directors. There has been "a vast cultural erosion cutting across virtually every gatekeeper that operates in this arena," he argues. "A culture of 'What can we get away with,' [has taken] hold, rather than a culture of 'What's good for investors'.... The ones who are hurt are the investors who get lured into this culture, get caught up in the hype, and are the last ones to get out."
As a result, public confidence in the truthfulness of corporate financial documents has been badly shaken (see BW Online, 2/19/02, "Enron's Legacy: A New Wariness"). But how to deal with it? Levitt has a simple and obvious first step: "Financial statements should be written in plain English." To police today's unreliable corporate overseers, he would create an accounting watchdog board with broad authority. "To restore public confidence today, we need to have an oversight body that has the power to subpoena documents," he says, "to bring in the clients [to testify under oath]." The funding and staffing for any oversight body would need to be independent of the industry, he adds. And that's just the beginning.
Levitt urges Congress to provide more funds to pay for expanding the SEC's enforcement staff. In the most cynical kind of Washington shell game, lawmakers have authorized the hiring of more SEC workers -- but haven't agreed to pay for their salaries. That's old-fashioned game-playing.
The self-described champion of shareholders has long advocated a ban on consulting work by accounting firms. Levitt also wants standards for the accounting profession to be set by experts independent of the industry, such as professionals and investors. Those changes have been resisted mightily by the industry's Big Five.
For years, Levitt ran into stubborn resistance on Capitol Hill from lawmakers who thought he was an overbearing alarmist. Today, the ex-SEC boss predicts that the same legislators will try to water down new shareholder protections. "The political class is antiregulatory," he argues. He predicts that a series of halfway measures will be pushed by longtime reform critics to prevent his radical changes from being adopted (see BW, 2/25/02 "Commentary: Congress Will Huff and Puff and...Do Little").
Some in Congress have criticized SEC Chief Harvey Pitt's reform proposals for being half-hearted. But the hue and cry hasn't been that great. And the White House can't be counted on for hard-hitting shareholder protections. The reason: President Bush has tried to "split the difference" between business and consumers on many issues, from automobile fuel-efficiency standards to arsenic levels in drinking water. When it comes to domestic policy, that seems to be his nature.
This is no time for compromise-first politics, however. By adopting the more far-reaching reforms advocated by the likes of Arthur Levitt, both Congress and President Bush will be serving investors as well as can be expected in the wake of the Enron fiasco.
Dunham is a White House correspondent for BusinessWeek's Washington bureau. Follow his views every Monday in Washington Watch, only on BusinessWeek Online
Edited by Douglas Harbrecht