Commentary: Sour Notes from Pitt's One-Man Band
By Mike McNamee
Securities & Exchange Commission Chairman Harvey L. Pitt likes to claim credit for the idea of a strong, independent board to oversee accountants. Congress took the idea and ran with it, ordering the SEC to create the Public Company Accounting Oversight Board (PCAOB) as the centerpiece of its efforts to restore investor confidence. But now that the board is enshrined in law, the question is: Can Pitt's brainchild survive his clumsy efforts to set it up?
In the latest example of his political ineptitude and go-it-alone style, Pitt may have crippled the new accounting-oversight board. He's waffling in the face of GOP opposition to the SEC's top candidate for chairman, John H. Biggs, the retiring CEO of pension- and mutual-fund giant TIAA-CREF. Pitt denies he ever offered the job to Biggs, who declines to comment on the flap. But Biggs's candidacy was advancing rapidly: In mid-September, he got an informal offer from Pitt, who then encouraged Biggs to talk to Treasury Secretary Paul H. O'Neill and Federal Reserve Chairman Alan Greenspan. BusinessWeek has learned that O'Neill and Greenspan--who by law must be consulted on the SEC's choices for the board--both gave Biggs a thumbs-up.
The brouhaha is a sad but all-too-familiar SEC spectacle since Pitt came on board. Throughout his 14-month tenure, the SEC chairman has sabotaged his own efforts through a lack of political skills. He has met privately with executives of companies under SEC investigation and angered Capitol Hill and investors by working closely with his former accounting clients even after it was clear that accountants bore much of the blame for the corporate crime wave.
Rooted in his supreme self-confidence and insular style, Pitt's ineptitude is nothing new. But whereas his earlier imbroglios mainly hurt Pitt's own credibility, this time he's damaging the accounting board and the SEC itself. Worse, his actions are delaying the day when investors can again feel America's markets are honest.
For SEC insiders, it's another blow to morale. Indeed, Pitt has angered them with other unilateral actions. Take his Oct. 3 deal with New York State Attorney General Eliot Spitzer on policing Street analysts: While the pact could bring tougher rules to investment banks, Pitt left other commissioners and staff working on analyst rules in the dark.
Staffers, stretched to the limit by the collapse of Enron Corp. and other companies, feel battered by the scorn their boss invites. Many are fed up with Pitt's imperious attitude. When staffers bring him an enforcement case that has been months in the making, "he's eager to second-guess every judgment--it's his `I'm the smartest guy on earth' attitude," says a former SEC official.
Agency workers aren't the only ones who seem upset. The Bush Administration is increasingly worried that the continued Pitt-falls could help Democrats resurrect corporate crime as a campaign issue. So on Oct. 4, the White House assigned a press aide to serve as Pitt's communications counselor. But the problems have already led to wider criticism that the agency is being politicized. The move "conveys an unfortunate impression of political influence over an independent agency," says SEC ex-Chairman Arthur Levitt Jr. And on Oct. 9, Senate Majority Leader Tom Daschle and House Minority Leader Richard A. Gephardt called for Pitt to step down. To help keep Pitt out of the news, however, the Administration won't put any pressure on him to resign, at least until after the election.
Yet Pitt manages to keep the story alive, all by himself. The nation's top securities lawyer is playing with legal technicalities when he insists that he never offered Biggs the PCAOB job. His reasoning: Only the full SEC, by public vote, can appoint members to the accounting board. But in a mating dance familiar to anyone who has ever been considered for a sensitive job, Pitt and Commissioner Harvey J. Goldschmid, a Democrat, made it clear that Biggs was the SEC's top choice to chair the board, according to well-informed sources. With Pitt's encouragement, Biggs then met with the SEC's other three commissioners and called O'Neill and Greenspan.
But then, word of the offer got out--and Capitol Hill Republicans balked. Biggs strongly advocates higher standards for auditors, including strict limits on accounting firms' consulting for audit clients and regular rotation of audit firms. Before long, House Financial Services Committee Chairman Michael G. Oxley (R-Ohio) let it be known that he wanted a more "moderate" chairman. So Pitt has warned Biggs that he might withdraw his support.
Pitt's actions are baffling. "He has snatched defeat from the hands of victory," says one lobbyist. Working with Goldschmid, Pitt was all set to burnish his reform credentials by naming the respected Biggs. "Although the big auditing firms may long for a tail-wagging puppy to be chairman of the new board, the American public wants and deserves a much-needed watchdog," says Berkshire Hathaway CEO Warren E. Buffett, who endorses Biggs. But Pitt failed to take precautions--such as clearing his candidate with his own party's leaders.
Worse, once he ran into opposition, Pitt didn't defend his choice. Instead, he blames unnamed foes for using "false stories planted in the press" to try to "coerce" the SEC to name Biggs. The leakers, Pitt says, are trying to politicize the PCAOB. But it's Pitt's missteps that created the opening for a public, political battle.
In the end, Pitt could be a two-way loser. Biggs and other candidates may see the PCAOB job, already a huge challenge, as too explosive to touch. And Pitt's one accomplishment--the creation of what promised to be a strong accounting industry watchdog--now seems threatened as well. For a nation of investors eagerly awaiting signs that markets can again be trusted, that's a sad outcome indeed.
McNamee covers the SEC from Washington.