WASHINGTON – The last fiscal year was a busy one for enforcement at the Securities and Exchange Commission. As departing chairman Harvey Pitt noted, the agency took a record 598 enforcement actions, up 24 percent from the year before.
But a closer look at the numbers reveals one of the agency's persistent weaknesses: The big accounting firms that audit the vast majority of companies listed on the stock markets remain difficult targets for the agency, past and present SEC officials say.
During the fiscal year ended Sept. 30, the SEC took action against only two auditors it identified as working for Big Five accounting firms, a Washington Post examination found.
The agency was far more likely to discipline auditors employed by smaller accounting firms than it was to take action against those employed by the big firms. The agency took action against 15 auditors from smaller firms.
In several cases, the SEC acted against big accounting firms, but it did so without identifying or punishing the individual accountants responsible for the firms' alleged wrongdoing.
“In most circumstances, where wrongdoing is involved, you will not get the accountability and deterrence that is necessary unless you name individuals,” said SEC Commissioner Harvey Goldschmid.
“It isn't easy to take on those big boys, but one has to do it because otherwise I think the big boys are encouraged to feel that they can push the SEC around,” former SEC commissioner Bevis Longstreth said.
Though Arthur Andersen LLP was convicted of a felony involving its client Enron Corp. last year and has all but gone out of business, it was the Justice Department that prosecuted Andersen, and the charge was obstructing justice — not the sort of accounting violations that are at the core of SEC policing efforts.
During the past fiscal year, the SEC barred Kevin Andersen, an accountant for a small Utah firm who is unrelated to the Andersen firm, from auditing public companies. But the SEC brought no new cases against Arthur Andersen or any of its individual auditors.
The cash-strapped agency has been slower to take actions involving big accounting firms partly because the big firms can deploy overwhelming resources in their defense, SEC insiders and private securities lawyers say. In contrast, small accounting firms and their employees are more likely to settle cases with the SEC because they are ill equipped to battle the government, lawyers say.
Congress and President Bush have promised but have not yet delivered a big boost in the agency's funding.
Charles Niemeier, acting chairman of the new accounting oversight board, cited another difference between small and large accounting firms. The small firms were more likely to commit errors of incompetence, such as failing to detect accounting problems, he said. The big firms were more likely to show lapses of integrity — finding the problems but allowing them to go uncorrected, he said.
A senior official at a major accounting firm said SEC officials have approached cases with sensitivity to the likelihood that any enforcement action against an auditor would end the auditor's career.
The SEC's investigations of accounting scandals are ongoing, and the agency's response can't be judged until they are concluded, SEC spokesman John Nester said.
SEC Enforcement Director Stephen Cutler said the SEC has a strong record of enforcement against individual auditors.
“Now I don't think there is any question that the commission has pursued such individual misconduct aggressively,” he said, citing actions against 10 auditors at Big Five firms over the past few years. He predicted “more of the same in the near future.”
Cutler faulted the agency for erring in a different way. He said the SEC has failed to hold accounting firms accountable for the conduct of individuals.
“In short, absent egregious conduct in which senior firm managers participated or acquiesced, the commission typically has elected not to pursue a case against the firm itself,” he said.