Editorial: Who should be minding the store?

Monday, March 25, 2002 | 8:51 a.m.

In January, shortly after revelations made clear accounting firm Arthur Andersen's complicity in the collapse of Enron, federal regulators unveiled proposals they said would increase the oversight of the largely self-regulated accounting industry. Securities and Exchange Commission Chairman Harvey Pitt's plan would scrap an independent private sector body, the Public Oversight Board, which has overseen accounting firms since 1977. Pitt wants a new board to regulate the industry, a board that ostensibly wouldn't be indifferent to an accounting firm's willingness to help a corporate client deceive the public about its true financial condition.

At first glance it might seem that Pitt is on the right track. But his proposal wouldn't do enough to restore the confidence of investors that publicly traded companies aren't cooking numbers. For example, while seven representatives on the 13-member board would come from outside the accounting industry, another six would include representatives from the Big Five accounting firms. That hardly seems like the kind of board that would be willing to ride herd on wayward accountants. So just how did the accounting industry fare so well and get such considerable sway under Pitt's plan? To begin with, Pitt represented all of the Big Five accounting firms as a lawyer before he was appointed by President Bush to the SEC. And Pitt's proposal was hatched in secret meetings with the Big Five's representatives.

In an interesting twist, the Public Oversight Board -- the body that has been criticized for not being effective in policing accounting firms -- has derided Pitt's proposal, saying it isn't tough enough. One of the problems encountered by the existing board is that it is funded by the industry, the same industry that has blocked some of the board's attempts to require greater accountability of accounting firms. Public Oversight Board Chairman Charles Bowsher has noted that the board suffered a setback two years ago when the accounting industry refused to pay for investigations to determine whether conflicts of interests existed within accounting firms. On the issue of conflicts of interest, Congress should prohibit accounting firms from providing both auditing and consulting advice to the same client. Otherwise auditors may take it easy on a client because they don't want to jeopardize the accounting firm's consulting contract.

Bowsher would like to see a strong oversight board emerge, one that doesn't have members with direct ties to the accounting industry. He is bothered that the current board's independence is suspect since it relies on its funding from accounting firms. Bowsher says this should be changed so that a new board instead is funded by fees levied on the top 100 corporations. Bowsher also believes a new board should be able to issue subpoenas to help it, if need be, get information an accounting firm may resist turning over -- power the existing board doesn't currently have. Under Bowsher's plan, which would require the approval of Congress, an independent seven-member board would be appointed by the Federal Reserve Board, the Treasury secretary and the SEC.

Worker retirement plans increasingly are invested in publicly traded corporations through 401(k) plans or employees' own purchases of individual stocks. So there is an even greater incentive now to put in place reforms to make sure corporations, and the accounting firms that review their financial data, aren't deceiving the public. The concern about deception was heightened even more after federal prosecutors indicted Arthur Andersen for obstruction of justice, as the Department of Justice alleges that the company destroyed some of its Enron records. Self-regulation just won't do anymore -- Enron's collapse, the largest bankruptcy in U.S. history, proved that. A board should be put in place along the lines proposed by Bowsher, an oversight panel with genuine powers that won't be a paper tiger.