Calling Off the Dogs

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

However, Berger says the task force “has been involved in some very difficult, and what we think may be very important, investigations,” declining to provide further details. And Turner notes that the task force has worked on the Sunbeam, Waste Management, and Baker Hughes cases, and is “beginning to get legs.” “They’ve got a lot of interesting cases in the pipeline — the real question is whether Harvey will let them do their job,” he says.

The Future of Enforcement

what could really change with a new chairman? There are still many unknowns, including who President Bush will name to fill the four open commissioner slots. Regardless, no one believes the agency is calling the dogs off entirely, even if the task force ultimately fades.

“Financial-fraud cases have consistently taken up about 40 percent of the enforcement division’s resources, and I don’t expect that to change,” says attorney Bruch. Many of the enforcement division’s leaders, including Berger and new director Stephen Cutler, are holdovers from the Levitt era and unlikely to switch directions dramatically. Plus, with fewer initial public offerings coming to market, the corporation finance division now has more time to look through regular filings, upping the average company’s chance of being reviewed from about 8 percent in 2000 to as high as 25 percent.

And just because revenues are down doesn’t mean scrutiny will decrease. Given the rash of write-offs, the SEC is now likely to focus on asset impairments, says Bruch, testing whether restructuring charges are “specific, targeted reserves, or ones that are trying to provide a cushion for earnings down the road,” à la Sunbeam’s cookie-jar reserves.

As for the new benefits of cooperation, skeptics point out that it will hardly offer automatic protection to anyone who comes forward. “In a typical case, investors lose money and upper management is involved in cooking the books,” says Turner. “And in those cases, no matter what, most companies are still going to be afraid to go into the SEC and open the kimono.” Adds David A. Zisser, a Denver attorney who has defended more than 100 companies or individuals in SEC cases since leaving the agency in 1981: “Cooperation always helps. The question is whether it helps as much as you’d like it to help.” He points out that the logistical situations that make companies seem uncooperative — such as when the SEC is asking for documents a company needs to complete its own investigation, or is pressing issuers to devote more of their limited resources to the collection of evidence — are unlikely to be resolved simply by virtue of a new tone at the top.

And self-policing, after all, isn’t such a new idea. Many of Levitt’s measures to transform the culture by stepping up pressure on internal auditors have been particularly effective. “Now, when a company is being aggressive, that bubbles right up to the internal audit committee,” says Illiano, creating a new spirit of honesty — or fear — among accounting staffs.


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