The head of the U.S. Securities and Exchange Commission plans to create a new governing body to oversee accounting firms in the wake of energy giant Enron Corp.'s collapse.
The new body, to be dominated by private sector individuals independent of the profession, would have sweeping powers to investigate wrongdoing and launch disciplinary proceedings against accounting firms and individuals, including restricting them from auditing the books of public companies.
"We simply cannot afford a system like the present one that facilitates failure rather than success," SEC chairman Harvey Pitt said at a news conference yesterday. He said the commission will not tolerate a growing pattern of corporate failures where questions about a company's financial statements and its auditors play a leading role.
"Somehow, we have got to put a stop to a vicious cycle that has now been in evidence for far too many years."
The trade group that regulates the accounting profession, the American Institute of Certified Public Accountants (AICPA), would not have a role in the new body, Mr. Pitt said. The new body's disciplinary actions would be subject to oversight by the SEC.
Mr. Pitt unveiled his plans as federal agents and congressional investigators continued to sift through the rubble left behind by Enron.
The company, at one time the seventh-largest in the United States, filed the largest bankruptcy in the nation's history last month. Accounting firm Arthur Andersen LLP has come under fire because it raked in millions of dollars in fees from Enron for consulting work unrelated to auditing the company's books.
Enron's announced late yesterday that its board of directors fired its long-time auditor, citing "recent events."
The dual role of consultant/auditor is not unusual among the Big Five accounting firms, but critics say it represents a conflict of interest that may have played a part in Arthur Andersen's failure to catch errors in Enron's financial reporting. They argue that auditors dependent on clients for lucrative consulting work are less likely to press management to disclose problems.
John Carchrae, chief accountant at the Ontario Securities Commission, said yesterday that Canadian regulators are closely monitoring the unfolding Enron saga and the SEC's efforts to deal with accounting questions it raises.
"The underlying questions and issues that Enron highlights are issues that need to be thought about globally," he said.
Mr. Pitt told reporters that restoring the public's confidence in the auditing profession is his agency's No. 1 priority. But he said questions surrounding the independence of accounting firms that do both auditing and consulting work for the same client are not the cause of the problem.
Less than two years ago, the accounting profession successfully blocked efforts by then-SEC chairman Arthur Levitt to introduce rules that would have prevented accounting firms from doing consulting work for their audit clients.
Mr. Pitt, a prominent securities lawyer who counted Arthur Andersen among his clients before he was appointed SEC chairman last spring, played a key role in those efforts. As a result, he has come under pressure from several critics, including many Democrats in Congress, to remove himself from the SEC's investigation of Enron.
An SEC spokesman said yesterday that Mr. Pitt will not make that decision until it is necessary.
Mr. Pitt called the demands for him to disqualify himself "relatively misdirected" and said there is no way he would do anything to compromise the integrity of the SEC.
There is no question that the SEC head is acting in the public interest, said Edward Waitzer, a Toronto securities lawyer and public director of the AICPA.
The AICPA said in a statement yesterday that it is "dedicated to being proactive in addressing the public's concerns" and will "do all it can to work with the SEC."
In addition to setting up a new body to supervise accountants, Mr. Pitt said public companies must do their part to improve disclosure about their financial affairs. As part of these efforts, he added, companies' corporate governance and audit committees are in need of review.
Karen Howlett