SEC Chairman Proposes Creation Of New Organization To Oversee The Accounting Profession

National Public Radio's All Things Considered
01/17/2002

MELISSA BLOCK, host: From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.

NOAH ADAMS, host: And I'm Noah Adams.

Today Enron severed ties with its accounting firm Arthur Andersen. The relationship between the bankrupt energy giant and its auditors has come under intense scrutiny in recent weeks, especially since Andersen announced that a partner in the firm ordered the destruction of documents related its Enron audits.

BLOCK: Meanwhile, in Washington today the head of the Securities and Exchange Commission called for the creation of a new organization to oversee the accounting profession. The proposal is meant to answer critics who say the SEC isn't doing enough to protect investors from fraud. NPR's Emily Harris reports.

EMILY HARRIS reporting: SEC Chairman Harvey Pitt calls the Enron bankruptcy tragic and unprecedented. It has kicked audit reforms into high gear. But Pitt says Enron's dramatic disintegration is not the only reason he's calling for a change in oversight of the accounting industry.

Mr. HARVEY PITT (SEC Chairman): Even Enron itself did not implode overnight. That had to have taken years to have occurred. And in those years, we had other implosions. So my concern is that the factors that we can correct have been uncorrected for many, many, many years, and it's our obligation now to focus our attention on how to solve the problems.

HARRIS: Enron's auditor, Andersen, is also the subject of multiple investigations. One major issue is how much the auditors knew about Enron's questionable off-the-books partnerships and whether Andersen helped Enron hide its problems. SEC Chairman Pitt says people must have confidence in the work of accountants or they won't invest in publicly traded companies. Pitt says protecting this process is crucial for the economy.

The crux of his new proposal is to at least partially take away the power of accountants to police themselves. He wants a private-sector oversight body that would include accountants, but would be controlled by others.

Mr. PITT: It would have to have real teeth. There's no point in creating a system or a structure that doesn't produce real results.

HARRIS: Currently, accounting firms review each other's work once every three years. The board charged with industry oversight has no disciplinary powers. The trade organization it's affiliated with is proud of more than 100 years of self-regulation. Pitt says it's time for that to go. But Al Anderson of the American Institute of Certified Public Accountants says that doesn't mean self-regulation failed.

Mr. AL ANDERSON (American Institute of Certified Public Accountants): I don't think it has failed. I think that the expectation gap is far outdistancing the current models. And we really need to step up to the plate to match what we're doing relative to the expectation gap.

HARRIS: Expectations for clear and up-to-date information he says have changed as the flow of capital has sped up. Oversight of auditors is not going to change quickly. Pitt promises to involve every possible interest group and Congress to flesh out details. But so far he's not pushing to change one problem experts say is a constant in the industry and may have been critical in Andersen's relationship with Enron. Ed Ketz is an associate professor of accounting at Penn State.

Professor ED KETZ (Penn State): The problem is that the auditors are hired and fired by the firms, and secondly, that they receive consulting fees in addition to the audit fees. And so what we get is an enormous amount of power by management over the auditors, and we also get a tremendous conflict of interest.

HARRIS: Pitt himself faces potential conflict of interest charges in the Andersen investigation. Prior to becoming SEC chair, he worked as a lawyer for major accounting firms. Today he said that Enron investigation is in the hands of the commission's Enforcement bureau. If he needs to be involved, he said, he'll follow the letter and spirit of ethics laws. Emily Harris, NPR News, Washington.

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Penn State's Smeal College of Business offers highly ranked undergraduate, MBA, executive MBA, Ph.D., and executive education opportunities to more than 5,500 students at all levels. Featuring academic departments of accounting, finance, marketing, insurance and real estate, management, and supply chain and information systems, the college is also home to major research centers such as the Center for Supply Chain Research, the Institute for the Study of Business Markets, the eBusiness Research Center, the Farrell Center for Corporate Innovation and Entrepreneurship, the Center for Global Business Studies, and the Center for the Management of Technological and Organizational Change.

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