Commentary: The SEC Can't Guard the House Alone

Ever since the Enron Corp. scandal broke last fall, Securities & Exchange Commission Chairman Harvey L. Pitt has insisted that the SEC can clean up Corporate America all by itself. Whether it's based on confidence in his agency or on the Bush White House's desire to contain any political fallout from the scandal, Pitt's strategy has been to work around, rather than with, Congress on badly needed reforms.

But the June 20 unveiling of his proposal for a new accounting-discipline board shows that Pitt has hit the limits of that approach. To give the new board teeth, Pitt is proposing a jury-rigged scheme that's likely to collapse the first time it is challenged in court. Instead, Pitt should seize the momentum that's building with the Senate Banking Committee's June 18 passage of an accounting-reform bill and work with Congress to establish the sound accounting regulator that investors need to restore confidence in Corporate America's books.

Certainly, Pitt stunned accountants and their lobbyists by proposing a stronger than expected Public Accountability Board (PAB). The PAB would have broad powers to investigate auditors' lapses in skills, ethics, or independence. The board could censure or fine individual CPAs or their firms and remove them from a particular audit--or bar them from auditing altogether. Its funding--from companies as well as accounting firms--would be more reliable and independent than that of past accounting overseers.

But the crucial issue is how a disciplinary board for accountants will impel companies to cooperate with investigations of failed audits. To get to the heart of audit breakdowns, the board needs to hear from corporate officers--even if they don't want to talk. To do that, the new board must be able to subpoena witnesses and documents. The Senate bill lets the discipline board request an SEC subpoena, but Pitt's PAB wouldn't even have that power. Only Congress can extend that power, and Pitt is avoiding Congress. Why? Like the White House, he believes that controlling the outcome of any legislative effort would be difficult. He argues, too, that giving the board subpoena power will make it a government agency, burdening it with budget limits and legal procedures that will hamper its crackdown on accountants.

So Pitt has come up with another plan: He would require every public company in America to sign on as an "adjunct member" of the PAB, thus submitting to its oversight. If a company balks at cooperating with the PAB, the SEC would refuse to accept its financial reports, thereby shutting the company out of public capital markets.

It's a clever scheme, but also "a little squirrely--obviously an end run to try to give government power to a nongovernmental entity," says Adam C. Pritchard, a University of Michigan law professor and former SEC lawyer. As a private membership organization, the PAB would exercise its powers without the safeguards of legal procedures and court review that the SEC and other agencies must follow. Companies aren't likely to surrender those protections: "It's a clear target for a court challenge," says Stanley Keller, chairman of the American Bar Assn.'s panel on SEC matters. SEC officials insist the plan would withstand any such challenge. If they're wrong, a loss would gut Pitt's board even before it got started.

The PAB proposal has other problems. Pitt's board would have one full-time director (as chairman or vice-chairman) and eight part-timers. A nine-member board could well be unwieldy, and part-timers are more likely to represent their own industries, not investors' interests. While CPAs would get only three seats, their expertise would give them an enormous advantage over the board's other part-time members.

Neither the SEC nor the White House would appoint the board's members. Instead, they expect accountants, corporate leaders, and investors to create a board for the SEC's approval. While the agency will monitor the process, it smacks of a backroom deal.

But none of that will matter if the board lacks the power to pursue its probes. It can have that power--if Congress establishes the board by law. It's time for Pitt to work with Congress, not bypass it, to give America's investors the accounting and auditing system they deserve.

By Mike McNamee

With Amy Borrus in Washington

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