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a tale of two chairmen

When it comes to policing corporate America in the wake of Enron and Arthur Andersen, the controversial SEC Chairman Harvey Pitt and his equally controversial predecessor, Arthur Levitt, have defined and galvanized the central debates over reforming Wall Street and the accounting industry.

related features

+ Interview: Harvey Pitt
FRONTLINE's interview with the current chairman of the SEC.

+ Interview: Arthur Levitt
FRONTLINE's interview with the former SEC chairman.

+ Accounting Lessons
Harvey Pitt, Arthur Levitt, Paul Volcker, Joseph Berardino, and Lynn Turner on what has been learned from the Enron-Andersen scandal, what is at stake, and what can and should be done to restore public confidence in the integrity of the markets.

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June 20, 2002

A glance at the headlines about SEC Chairman Harvey Pitt since last January, when the Enron scandal overtook Washington, tells the story:

"The Reluctant Reformer" ... "A Regulator With His Own Conflicts of Interest" ... "Harvey Pitt: Thunder to the Left, Thunder to the Right" ... "The Education of Harvey Pitt" ...

And those are only from the pages of BusinessWeek. The unkindest cut to this securities lawyer turned public servant (who began his career at the SEC and went on to represent the Big Five accounting firms) came from the Wall Street Journal, which ran a lead editorial in May entitled "Harvey Pitt's Credibility." "The SEC chief," pronounced the Journal's conservative editorial-page editors, "isn't restoring trust in American capitalism." Controversy had flared in January over Pitt's failure to recuse himself from the Enron and Andersen investigations. Now, the appearance of conflicts of interest in his meetings with former Big Five clients, according to the Journal, called his fitness for the top SEC job into question -- especially at a moment when investors' confidence in the integrity of America's markets has been shaken. In May, some critics began calling for his resignation.

In short, Harvey Pitt is the most controversial and embattled chairman of the Securities and Exchange Commission since ... well, since his immediate predecessor, Arthur Levitt. Yet as much as the two men may share this distinction, the similarities end there. Although both Pitt and Levitt, who differ greatly in substance and style, have galvanized opposition, it has mostly come from opposite ends of the political spectrum. Pitt, who serves in the anti-regulation Republican administration of George W. Bush, has received his harshest criticism from consumer and investor-advocacy groups, liberal commentators in the press, and pro-reform Democrats in Congress. Levitt, who served under President Bill Clinton, was attacked by business leaders, in particular the Big Five accounting firms and the American Institute of Certified Public Accountants (AICPA), and by free-market ideologues on the right.

Perhaps the most hopeful headline regarding Pitt came from New York Times business columnist Floyd Norris, writing about the uncertain fate of post-Enron legislation in Congress: "For Auditing Reform, Pitt Is the Last Hope." "Mr. Pitt, whom no one views as hostile to the [accounting] industry, is uniquely positioned to force real reform," wrote Norris. And with Pitt's announcement this week of the SEC's proposal for a new Public Accountability Board to oversee the accounting industry (an announcement that wasn't expected until later this year), he has seized the public-relations initiative, perhaps having learned from the past six months of largely negative press scrutiny, in an effort to head off critics who say his plan is too weak.

Finding himself in a squeeze between those who want strong action to shore up trust in corporate America and those who oppose more government intervention, Pitt appears to be walking a thin line. His SEC proposal is indeed tougher than many thought it would be, but he's still holding to the accounting-industry position on key issues like expensing stock options (bad idea, according to Pitt), revising the 1995 tort-reform law to restore some investor protections (not necesssary, Pitt says), and forcing accounting firms to separate their auditing and consulting practices to avoid conflicts of interest (it will hurt the quality of audits, explains the chairman).

Arthur Levitt was never accused of taking a soft line on the accounting industry and Wall Street, at least not in his speeches and public statements. Levitt -- who was branded by detractors as a rhetorical grandstander, an opportunist, a moralizer, and a crusader -- held nothing back in speeches and congressional testimony as SEC chairman, and holds nothing back today. His detractors on both left and right, however, say he talked big but accomplished little.

In his years at the SEC, from 1993 to 2001, Levitt launched highly public campaigns against what he saw as the abuses of corporate greed and loose business ethics that were pumping up the stock-market bubble and putting the investing public, and the economy, at grave risk. In 2000, in the last and biggest political battle of his tenure, he proposed a major reform of the accounting industry that included the separation of auditing and consulting to restore "auditor independence." Harvey Pitt was hired by the accounting lobby to represent their case that the industry was best left to police itself. In the end, under intense pressure from Congress, including threats to the SEC's funding, Levitt backed down. Auditing firms could keep their consulting work as long as they informed corporate audit committees of any potential conflicts of interest. "That was a compromise that I would not make today," Levitt tells FRONTLINE.

Another view of Levitt might be that of a voice crying in the wilderness, prophesying the coming calamity in the stock market and at Enron and Andersen. In a 1998 speech, Levitt spoke of "the numbers game" that accounting and corporate earnings reporting had become. Using terms like "accounting hocus-pocus," "gimmicks," and "trickery," Levitt said, "Too many corporate managers, auditors, and analysts are participants in a game of nods and winks." Citing the need for a "cultural change," Levitt concluded,

Our mandate and our obligations are clear. We must rededicate ourselves to a fundamental principle: markets exist through the grace of investors. Today, American markets enjoy the confidence of the world. How many half-truths, and how much accounting sleight-of-hand, will it take to tarnish that faith?

Ultimately, of course, more than rhetoric is needed to effect reform. The question historians will ask of these two chairmen, Pitt and Levitt, is what did they achieve? As Sen. Paul Sarbanes (D-Md.), chairman of the Senate Banking Committee and sponsor of the Senate's auditing-reform bill, put it to Harvey Pitt at the close of a heated exchange before the committee in March, "The test of your stewardship is what you do."

--Wen Stephenson

Wen Stephenson is managing editor of FRONTLINE's Web edition.

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