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Archive for Saturday, July 20, 2002

SEC needs new leader

July 20, 2002

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— Should a mafia attorney be appointed director of the FBI? Should Arthur Andersen's attorney be retained as chairman of the Securities and Exchange Commission? President George W. Bush says, yes.

SEC Chairman Harvey Pitt was indeed the legal counsel for Arthur Andersen, LLP, the auditor and consultant of beleaguered Enron.

We are told that attorneys cannot be held accountable for the actions of their clients, and no one is making Mr. Pitt accountable for Arthur Andersen's misdeeds. On the other hand, Mr. Pitt is obligated to recuse himself from ruling on cases involving former clients for one year. Why? Is it because he has proprietary information about the client and would thereby be breaching the attorney-client privilege? Is it because he became such a strong advocate of the client's positions that they became his positions as well? Is it because he helped to craft strategies for those clients that are viewed as inimical to the agency he now serves and the public he is empowered to protect?

The answer is that we cannot know, and not knowing is what has obligated Mr. Pitt to recuse himself in so many cases. These are not just any cases. The Enron and Arthur Andersen cases started a tidal wave that is sweeping across the stock market and the economy.

Mr. Pitt also fought proposals from his predecessor, Arthur Leavitt, to end the practice whereby accounting firms could act both as auditors and consultants to the same corporate clients. This obvious conflict of interest for accounting firms is at the root of the current accounting scandals. It is a practice that should never have been allowed and certainly should not be continued.

In Mr. Pitt we have the fox in the henhouse, and the hens are not pleased. While we cannot speak for all SEC employees, it is a fact that many of them resent their new boss, and morale is reflecting this fact.

Harvey Pitt is the wrong man for the job. He was not just some disinterested attorney who could argue any side to any problem. He was the industry advocate whose arguments undermined the system.

But now, in reflexive acts, Congress is passing new laws that are unneeded and potential harmful to our economic and market system, when all that really needed to be done were two things: Congress needs to convince President Bush that it is time for Harvey Pitt to go. And Congress needs to convince President Bush to nominate a new SEC chairman who understands what caused the current debacle. The nominee needs to be someone who will immediately move to ban the dual accounting roles of auditing and consulting.

This is what will bring integrity back into the system and confidence back to the investing public. It is all a matter of incentives. The chairman should have an incentive to serve the public interest. Auditors should have an incentive to serve the investing public. Consultants should have an interest in serving corporate clients as should corporate attorneys.

Prediction: Harvey Pitt will go.

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