SEC Shakeup

Who's Keeping the Dogs In?

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The recent reassignment of a top Securities and Exchange Commission official has some SEC insiders wondering if the commission is putting a muzzle on its own members. And it seems one lawmaker may have similar questions about the abrupt transfer of former divisional chief accountant Robert Bayless.

In October, Bayless quietly resigned his post at the commission’s Division of Corporation Finance, which reviews corporate filings and is often the driving force behind SEC requests for corporate restatements. At the time of his resignation, Bayless told CFO magazine that new SEC chairman Harvey Pitt had not forced him to step down.

But CFO has since learned that Rep. Edward Markey’s (D-Mass.) staff is apparently looking into whether the chief accountant for the commission, Robert Herdman, forced Bayless to take a lower-grade position. Since his resignation, Bayless had been reassigned as a special adviser to Herdman, and is now in the office of the SEC’s Division of Enforcement. Surmises one source close to the SEC: “[Markey’s staff is] probably looking to see if someone inappropriately put constraints on the Division of Corporation Finance.”

Bayless, who had gained a reputation for pushing companies to restate earnings following accounting disputes, apparently requested a transfer soon after a blowup with deputy chief accountant John Morrissey. The focus of the alleged disagreement, say sources, is that Bayless objected to the exclusion of some of his comments in a letter to a corporate issuer. One insider claims Markey’s inquiry was triggered by an internal memo Bayless sent to his boss, Division of Corporation Finance director David Martin. (Martin has since left the agency.)

According to the source, Bayless states in the memo that he was resigning his post due to conflict with Herdman’s office. While the actual points of contention are not mentioned in the letter, insiders believe Bayless chafed at Pitt’s mandate for a more corporate-friendly–and less strident—SEC.

Certainly Pitt has given many indications that he would prefer to work out agreements with companies behind the scenes rather than have them make a public restatement. “I am very much in favor of a vigorous enforcement program,” he said in an interview with the New York Times last fall, “but I am not in favor of having investors barraged by conflicting statements and restatements.”

That raises the question: Is Pitt in any way pressuring the corporation finance division to limit requests for corporate restatements? Recall that Pitt was nominated by President Bush and was approved by the Senate Finance and Banking Committee. To be sure, the raft of recent corporate restatements has undermined investor confidence in corporate accounting–and roiled the major stock markets.

Aides to Markey did not respond to CFO’s calls and questions. Bayless and the SEC declined to discuss the circumstances surrounding his transfer.

Insiders say such constraint in requesting restatements can be seen in the case of Cornell Cos. Apparently, the Division of Corporation Finance had wanted the correctional-facilities operator to restate its third-quarter earnings for 2001. The sources claim the chief accountant’s office scotched the request–even though members of the corporation finance division believed Cornell’s numbers merited a restatement.

As it turns out, the corporation finance division was right. In February, Cornell set up its own special committee of independent directors, and later announced it would rejigger earnings for seven quarters. The reason for the restatement: Cornell management wanted to put a 2001 sale/leaseback agreement and a 2000 synthetic property lease onto the company’s balance sheet.

Due to a shareholder lawsuit, a Cornell spokesman declined to comment on what sparked the internal investigation. Instead, the spokesman referred to a press release, which says the company’s restatement followed “discussions with its independent auditors and outside advisers.” The press release makes no mention of the SEC. –Alix Nyberg

100 More, Or Less?

SEC commissioner Harvey Pitt wants to increase his staffing level by 100 to handle the “enormous surge in [SEC] enforcement, accounting, and disclosure activities.” In April, he ordered a four-month internal study of the agency to back up his request.

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