Calling Off the Dogs

Recent signals from the SEC raise the question: Is Harvey Pitt taking a softer line on financial fraud?

The factors of cooperation listed in the Seaboard case are hardly new, say attorneys, but gain new power in being cataloged and blessed by Pitt. “This statement gives companies substantially more ammunition in dealing with the division of enforcement than they may have otherwise had,” says Jerry Isenberg, an SEC enforcement division official until November 2000 and now a partner at law firm LeClair Ryan, in Washington, D.C. He and others read it to mean that cooperation will more likely stem SEC action up front, rather than simply help mitigate charges.

But some people wonder whether a new era of good feeling at the SEC will translate into effective enforcement against accounting fraud. “In [Pitt's] speeches he says, ‘I’m going to be really tough’ — then he turns around and says, ‘but I’m not going to punish you,’ ” says Lynn Turner, the SEC’s chief accountant until this past August and now professor of accounting at Colorado State University College of Business. “I don’t know how you walk that fine line, but we’ll have to sit back and watch.”

Less Nitpicking, More Sympathy

Some accountants also expect to find more sympathy from the commission in disputes over the gray areas of GAAP, now that former Ernst & Young senior partner Robert Herdman has replaced Turner as the commission’s chief accountant.

“Everyone I’ve spoken to is pleased [Herdman] was chosen,” says Gary Illiano, a former SEC enforcement official and now regional director for Grant Thornton LLP. “We expect him to be much more willing to work with people than [Turner] was.” Indeed, by way of introduction, Pitt said, “I am confident that, with Bob’s leadership, the commission will make sound decisions in a respectful, affirming way, not in a demeaning, demanding, or demonizing way.” Illiano says this likely means less SEC interference with the Financial Accounting Standards Board’s decisions, and a move away from the hyperscrutiny of last summer, when SEC enforcement launched investigations into four companies simply for issuing press releases with pro forma numbers.

Leadership changes in the SEC’s division of corporate finance may also mean less nitpicking over regular filings. Along with the departures from the division of director David Martin and deputy director Michael McAlevey, longtime accounting chief Robert Bayless quietly stepped down in October. Bayless, who was widely considered the second-most powerful person in the agency, vetted companies’ regular filings with a rigor that some say led to his being asked to leave. Bayless, however, denies that Pitt asked him to step down, and says “it is premature to discuss my plans or future role, other than to say that I expect to continue to be an active member of the commission’s team.”

Whether the Seaboard case portends that fewer CFOs will be held individually accountable under Pitt’s regime is still unclear, say most experts, as is how aggressively the agency will market such cases to criminal authorities. But a softening in such areas is certainly possible, speculates William McLucas, Richard Walker’s predecessor as the SEC’s head of enforcement and now a partner at Wilmer, Cutler & Pickering, in Washington, D.C. “The facts remain the same under any chairman,” says McLucas. “But the judgment about what constitutes a serious violation of the law and who is responsible may change under the new administration.”

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