The events leading up to the high-profile resignations of Harvey Pitt and William Webster are symptomatic of a broad effort by President Bush, Republicans on Capitol Hill and the business community to undermine a six-month old law designed to prevent corporate fraud and accounting scandals like those that racked American business for the past year.
Business lobbyists want to make it easier for banks to give loans to members of their own boards of directors. They also want to make it more difficult to implicate CEOs in potential fraud against their own companies. And they want to exempt multinational companies from having to comply with American accounting standards if those firms' systems already meet European regulations.
Bush and his congressional deputies have shown little enthusiasm for toughening accounting and corporate-governance laws even as companies such as Enron and WorldCom collapsed, accounting irregularities shook investor confidence and the stock market plummeted. Just hours after Bush signed the far-reaching reform into law on July 30, the White House began its effort to weaken the measure, according to one of the bill's co-authors, Sen. Patrick Leahy (D-Vt.). Republican victories on election day, which gave the GOP control of both houses of Congress, have only emboldened the accounting industry to ensure that new accounting rules and regulations set by the Securities and Exchange Commission, and the new oversight board it must create, are as weak as possible.
The bill Bush signed into law calls for a 77 percent increase in the SEC's annual budget, which would raise it from $438 million to $776 million. Yet the administration initially refused to boost the commission's budget by more than 30 percent, and only after a storm of criticism did it vaguely vow to "work with the Congress to make sure it has the resources it needs."
But Bush has done little to follow through on this promise. The legislation introduced by Sen. Paul Sarbanes (Md.), the top-ranking Democrat on the Banking, Housing and Urban Affairs Committee, sketched a broad outline for reining in the accounting industry. Yet it tasked the Bush administration -- by way of the SEC -- with finalizing the details of reform.
The new rules that would have the biggest impact on the accounting industry were to be drafted by a public accounting board set up by the SEC. The composition of the board is crucial because the panel will decide whether to set tough new standards for the accounting industry or to let the industry continue to set its own standards. That decision, reformers say, will determine in large part whether the law is meaningful or hollow.
So when word leaked to the accounting industry that SEC Chairman Harvey Pitt would appoint as chairman of the accounting board a vocal advocate for stricter rules, industry lobbyists swarmed Republicans on the House Financial Services Committee. Shortly afterward, Rep. Michael Oxley (R-Ohio), who chairs the panel, suggested that Pitt drop his first choice and select instead a chairman more amenable to the accounting industry. Pitt complied and chose William Webster, a former FBI and CIA director who had previously served on the audit committee of a company (US Technologies) under investigation for fraud. Pitt was soon forced to step down when it became known that he was aware of this fact but had failed to tell the other SEC commissioners. Webster's resignation followed just days later.
Until Pitt quit, accounting executives were confident that the administration would let them set their own standards. At a New York University forum in October, James Gerson, a partner at PricewaterhouseCoopers and chairman of the American Institute of Certified Public Accountants' auditing standards board, told participants he was sure the industry would be allowed to write its own ticket.
Such bravado hurt the accounting industry, says Rep. Barney Frank (D-Mass.), who will be the top-ranking Democrat on the House Financial Services Committee next year. "They overestimated their strength," he adds. "They weakened Harvey Pitt."
The White House's complicity in Pitt's decision making became evident when, after Webster's October selection, it dispatched spokeswoman Anne Womack to the SEC. Clearly, the intent was not to curb Pitt's industry-friendly inclinations but instead to package them in a way that would be more palatable to the public. Pitt, a lawyer who at one time represented each of the biggest accounting firms in the nation, enjoyed a reputation for being well-versed in securities law but also for being extremely cozy with the industry.
As of press time, neither Pitt's successor nor Webster's has been named. The difficult task for whomever Bush ultimately picks is underscored by the fact that accounting firms were three of his top eight campaign donors in 2000, according to the Center for Responsive Politics. And the Democrats' ability to push Bush toward a more aggressive approach will be significantly constrained by the party's new minority status in the Senate.
Lobbyists are already working on another angle to weaken the law: making changes through a technical corrections measure, something Congress passes routinely to iron out small glitches in important bills. Indeed, after Bush signed the bill into law, U.S. Chamber of Commerce President Thomas Donohue held a forum at which he urged business executives to recruit lawmakers to address these "very fundamental weaknesses in the bill." Donohue then claimed the legislation had passed in a charged political climate in which lawmakers were in the mood for a "public hanging."
(Corporate documents show that as recently as April of this year, Donohue served on the board of directors of Qwest Communications, a company that has been beset by its own accounting problems. The company overstated revenues by as much as $1.48 billion in 2000 and 2001.)
Sarbanes, the reform's principal author, is resisting such a corrections bill; he fears it would make substantive changes and undermine reform. But several lawmakers have already taken up the call for a measure to address what they call flaws in the reform. "When Congress acts with the haste with which it acted, there are going to be problems that have to be revisited," says Rep. Richard Baker (R-La.), who as chairman of the House's Capital Markets Subcommittee has direct jurisdiction over the law and voted with 422 other House members for the reform. "As time goes by," he adds, "it will become evident there are aspects of the bill that have to be changed."
In what may be a testament to the effectiveness of the business lobby in Congress, Sen. Mike Enzi (R-Wyo.), a key GOP supporter of reform earlier this year, is growing disgruntled with its effect. Enzi, a former accountant and a member of the Senate Banking Committee who cut a deal with Democrats to pass reform through the Senate, privately told Sen. Jon Corzine (D-N.J.) that he has received many complaints about the law and wants to retool it.
"He said there were lots of people with problems with some of the details," says Corzine, a former CEO of Goldman Sachs, who co-authored a bill that eventually became the basis for the Sarbanes legislation. Enzi voiced his concerns before the election but has yet to take any action.
What's certain right now is that the most important legislative victory of the Democrats' 17-month reign in the Senate is in serious jeopardy. So, too, is the financial security of those who invest in the stock market -- more than half of all Americans.