The Vindication of Arthur Levitt
The former SEC chief's demand for tougher accounting standards got the cold shoulder in Washington. After Enron, it's obvious he was right
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.
"CULTURAL EROSION." 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.
WATERED-DOWN REFORM. 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.
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