Resigning his post as Securities and Exchange Commission chairman on November 5 did nothing to keep Harvey Pitt from being the center of controversy. First, of course, he didn’t leave. Then, two months later, the lame-duck chairman presided over what he described as “the busiest two weeks of rule-making in this agency’s history.” That was the last two weeks in January, during which the SEC wrapped up its six-month race to comply with the Sarbanes-Oxley Act of 2002 by voting on a stack of new — and often controversial — rules (see “Marching Orders” at the end of this article).
Reviews, predictably, have been mixed. Lawmakers have hailed the rules as the capstone on the most groundbreaking corporate reform since the 1934 Securities Act, and praised the SEC staff for its marathon effort. Investor advocates, by contrast, panned the results, claiming that in almost every case, the SEC softened the rules under pressure from special interests — particularly the accounting and legal professions. Some even claim Pitt — who was still waiting to relinquish his chair to incoming commissioner William Donaldson as CFO went to press — held on to his abdicated chairmanship as long as he did to gut the rules in favor of his accounting-industry cronies.
“It’s becoming more and more clear to investors that the Administration kept Pitt in place to get done what the special interests wanted, which was to minimize Sarbanes-Oxley as much as possible,” says former SEC chief accountant Lynn Turner, now an accounting professor at Colorado State University.
In fact, the resulting rules are as mixed as the public reaction. Initially many of the proposals by the SEC staff went further — often much further — than what Congress called for, causing near panic among the accounting and legal professions in particular. Then, after receiving floods of comment letters, the SEC backed off or softened some of its most aggressive stances in the final rules, angering investor advocates.
In the end, it’s safe to say that no one came away unscathed. For public companies, the new rules include a requirement to reveal off-balance-sheet arrangements, strictures on the use of pro forma numbers, trading restrictions during employee blackout periods, and a description of the financial expert, if any, on the audit committee. Mutual funds must now disclose how they vote their proxies. For the accounting industry, the rules contain a slew of auditor-independence and record-retention directives that reflect the disgrace still hanging over the profession in the wake of Enron. And, finally, the commissioners passed rules for attorneys — accompanied by stiff warnings about the moral of the accounting profession’s sorry tale — requiring them to report wrongdoing up the corporate ladder.
To be sure, some rules passed unceremoniously. Those requiring disclosures of off-balance-sheet arrangements in management’s discussion and analysis and a table listing contractual obligations (read: guarantees that could cause a sudden massive drop in liquidity) passed unanimously, in part because the Financial Accounting Standards Board had already addressed special-purpose entities and guarantees after Enron. Likewise, the rules requiring reconciliation of pro forma numbers with generally accepted accounting principles were simply a reprise of guidance that the SEC delivered shortly after Pitt took office. But the controversies surrounding the auditor-independence and attorney-conduct rules promise not to end as implementation begins.