WASHINGTON (AP) — Reforms and the policing of corporate America have been thrown into disarray at a critical time for investor confidence with the resignations under fire of the Securities and Exchange Commission's chairman and the new head of an accounting oversight board.
SEC Chairman Harvey Pitt and William Webster, a former director of the FBI and CIA, both have quit amid the furor over the SEC's selection of Webster to head the new oversight board. So has Robert Herdman, the agency's chief accountant, whose role in Webster's appointment is being investigated along with Pitt's.
Their departures bring turmoil just when the SEC must investigate and prosecute the accounting scandals that have shaken Americans' confidence in the stock market and corporate integrity. The oversight board, with subpoena authority and the power to discipline accountants, was created by Congress last summer to prevent future corporate debacles like Enron, WorldCom and Global Crossing. The board, which had its first meeting Wednesday, is starting out without a chairman and under a cloud.
“It's unprecedented turmoil,'' said Saul Cohen, a securities lawyer in New York who also has taught law and worked on Wall Street. “It's something that makes people feel uncomfortable.''
SEC spokeswoman Christi Harlan insisted that the agency was moving ahead, citing recent actions on new rules to combat corporate fraud and “very aggressive enforcement actions.''
Last Tuesday, for example, the SEC expanded its civil fraud charges against bankrupt telecom giant WorldCom as the company raised its estimate of inflated earnings to more than $9 billion.
Webster, who attended the closed meeting of the oversight board despite his resignation, said afterward, “We're optimistic that we can finish'' organizing by the April deadline set by Congress.
As for finding a successor to Pitt, who must be named by President Bush and confirmed by the Senate, Cohen suggested that could take a while because it's become “a radioactive job.''
Finding a suitably tough new chairman for the accounting oversight board is critical, said Barbara Roper, director of investor protection for the Consumer Federation of America.
“Getting a board in place that will raise the quality of public audits so that we can start to believe companies' financial disclosures again is essential to restoring investor confidence,'' she said.
Also going forward, the SEC has to put into effect and enforce an array of rules — also mandated by Congress — governing companies and executives and what they must disclose to investors.
The watchdog agency, created during the Depression in 1934 in response to the stock market crash of October 1929, has been rocked like never before.
At the same time, the SEC is plagued by an exodus of its legal and auditing talent to the far more lucrative private sector — a problem that existed before the blowup over Webster and is said to have accelerated in recent years.
Morale is extremely low at the agency and its professional employees are severely overworked, according to Paul Maco, a former SEC official now in private law practice.
With the choice of a new chairman and other policy moves, “It's vital that the Bush administration show that corporate reform continues to be at the top of the president's agenda,'' Maco said.
Despite the multiplying demands on the agency, the White House recently asked Congress to give the SEC $200 million less than was ordered by last summer's law to fight corporate fraud. Democratic lawmakers and consumer advocates have assailed the Bush budget request as an attempt to undercut the corporate crackdown effort, even as a growing number of executives have been taken away in handcuffs in recent months for corporate malfeasance.
The new money for the SEC would, among other things, pay for hiring auditors, investigators and attorneys.
Last year, before Bush nominated Pitt, several Wall Street and corporate executives already had turned down the SEC job. In past years, SEC chairmen often have come to the agency from the securities industry and frequently have been major fund-raisers for the party in the White House.
President Kennedy's father, Joseph P. Kennedy, had been a powerhouse on Wall Street when he became the first SEC chairman.
This time, probably because of the political and legal climate, several of the people being rumored as possible candidates have backgrounds as prosecutors — including former New York mayor Rudolph Giuliani, assistant attorney general Michael Chertoff and Oklahoma Gov. Frank Keating.