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A Return for King Arthur?

Is it time for Arthur Levitt, the principled former head of the SEC, to take back his throne?

March 26, 2002

Is it time for Arthur Levitt, the principled former head of the SEC, to take back his throne?

One enduring legend in the medieval saga of King Arthur is that the wounded monarch — having won a last battle — would one day return to rule again.

Shareholders across the United States who seek a modicum of trust in the market might just wish that Mr. Levitt had been on the throne when the Enron scandal broke. He had shown the character, wisdom and gumption to advocate rules that would have prevented much of the Enron mess.

Alas, it was not to be. Despite a heroic and tireless fight on his part, Mr. Levitt was eventually run out of town by a fierce and concerted coalition of lawmakers and lobbyists.

As things stand now, U.S. investors they are most likely breathing at least a sigh of relief that the debacle of Enron and its accounting firm, Arthur Andersen, occurred so early in Mr. Pitt’s tenure.

In particular, Chairman Levitt was well aware of the role that accounting firms and independent auditors play in the markets. The scrutiny of open books and audits is a crucial line of defense protecting equity investors. This is all the more necessary since corporate competition — both in industry and in the financial marketplace — tends to create a “win at any cost” mentality.

Accountants and auditors are supposed to act as referees. They must be staunch and uncompromising defenders of the rights of the investor — or they help create a loss of confidence in financial markets. Accounting rules should err on the side of caution, Mr. Levitt argued all along — even if this meant presenting a less rosy picture of corporate financial performance.

Speaking at the NYU Center for Law and Business in 1998, Mr. Levitt pointed out one of the main problems in accounting — the use of gray areas of accounting rules and regulations to falsify accounts:

“Many in corporate America are just as frustrated and concerned about this trend as we, at the SEC, are. They know how difficult it is to hold the line on good practices when their competitors operate in the gray area between legitimacy and outright fraud.”

But such reasoning ran counter to everything for which the bubble years of the 1990s stood. After all, when accounting firms provided valuable consulting services to their clients, how could they get tough on them?

Accounting — whether in the United States or elsewhere — is as much an art as a science. How corporate accounts are represented often depends on whose side the accountants want to take. In a time when accountants were routinely offered cushy, high-paying jobs with their former clients, choosing sides wasn’t difficult.

In this environment, “King” Arthur Levitt’s tough rhetoric and run-ins with accounting firms were out of step. In particular, his decision to take on major accounting firms and the American Institute of Certified Public Accounts to force a separation of auditing from consulting was a major joust — and a wounding battle for him personally.

Joseph Berardino, the CEO of Arthur Andersen, admitted that his firm was among the leader in precipitating a fight with Mr. Levitt’s SEC. Not surprisingly, the election of President George W. Bush brought a feeling of relief to the corner offices in major accounting firms.

Harvey Pitt — Mr. Bush’s choice — had a different sense of how to rule the SEC. He built his law career by staunchly defending brokers and accountants — often against “unreasonable perSECution” by the same regulatory agency that he now heads.

In fact, just before the Enron scandal broke out in November, Mr. Pitt, with a remarkable sense of timing, gave a speech in which he promised a “kinder, gentler” SEC.

The Enron scandal embarrassed the accounting profession that Mr. Pitt once defended — and forced the SEC’s new sovereign to change tack.

In fact, the revelations of corporate wrongdoing seemed tailor-made to uncover underlying flaws in the cozy relationship between auditors and clients. Former SEC chairmen — including Mr. Levitt — were promptly summoned to Washington to provide advice on how to fix the mess.

Mr. Pitt’s notion of self-regulation by the accounting industry is now out of the question — especially when accountants and auditors are emerging as the main villains in the Enron fiasco. Mr. Pitt’s SEC will have to take a much tougher stance if he wants to avoid the wrath of U.S. Congress. Politicians, too, are running scared. It is only a matter of time before they start looking for an appropriate scapegoat.

Mr. Pitt’s SEC reform proposals indicate that the agency has learned little from the Enron scandal. The ideas behind it have been drafted in consultation with a small and secretive group of advisors. They have been drawn, believe it or not, from the same major accounting firms that King Arthur battled at the SEC — including Arthur Andersen.

Rather than jousting with the accountants that he regulates, it appears that Mr. Pitt would rather invite them into the castle — and pull up the drawbridge.

Not surprisingly, Mr. Levitt recently expressed a fear of backsliding into the old merry coziness between accountants and business — once the Enron scandal becomes history. It’s little wonder that those who would advocate an openness and credibility in U.S. markets hope that the SEC’s King Arthur will one day return — just as legend predicts that his medieval counterpart will also return.