SEC's Pitt must focus on protecting investors

Andrew Smithers12 April 2012

BEAR markets reveal the scandals that were hidden when share prices were rising. After a record bubble we have a record number of scandals. The past behaviour of accountants, analysts and business executives is crying out for investigation.

In the US, this is the job of Harvey Pitt, the new head of the Securities and Exchange Commission. There is mounting concern that he is failing to do it.

David Dietz, of the US-based financial information services provider Bloomberg, has looked at the 673 largest bankruptcies of public corporations since 1996. He claims that in 54% of cases, no warnings were issued in the audit reports.

'Common sense tells you something is rotten,' said Ann Yerger, research director for the Council of Institutional Investors. Arthur Levitt, Pitt's predecessor, has thought this for some time. He warned in 1998 that: 'Accounting is being perverted...we are witnessing an erosion in the quality of earnings and therefore in the quality of financial reporting.'

He wanted investors and other outsiders to have a role in policing the profession. The accountants, however, were against this and they hired Pitt, who argued the industry was better off policing itself.

The accountants have a lot of political pull. According to Jane Mayer of the New Yorker, in an article headlined How the Accountants Bought Congress, they spent nearly $39m(£27m) on political contributions between 1999 and 2001. The money was accepted by 94 senators out of the 100 it was offered to.

When Levitt retired, President Bush appointed Pitt to succeed him. Pitt's previous career has already raised problems. KPMG is one of the remaining big four accounting firms and he worked for them when he was in private practice. KPMG's new chairman and chief executive Eugene O'Kelly recently wrote a memo about a meeting with Pitt, when he urged him to drop the SEC's investigation into KPMG's auditing of Xerox. But according to the New York Times, Pitt claims that 'neither Mr O'Kelly nor I discussed any enforcement matter, including Xerox.'

Whatever the truth, which seems to be in dispute, the Wall Street Journal headlined a piece Concerns About SEC Chairman Mount. Pitt has appeared reticent, not only on accounting matters but also on tackling the sins of investment analysts.

Eliot Spitzer, New York's Attorney General, has not. He has private e-mails from analysts of Merrill Lynch, a leading investment bank, denouncing companies as 's**t' while they were publicly recommending clients to buy these shares.

It has been clear for years that there are huge conflicts of interest in investment banks pushing analysts to recommend stocks they believe to be rubbish. These must be resolved.

The SEC has now announced that it has agreed new rules to tackle these problems. But they cut no ice with Spitzer, who says the rules are clearly inadequate and that he is working on real reforms. This only confirms the impression that, under Pitt, the SEC is not doing its job. It is there to protect investors, not Wall Street.

www.smithers.co.uk

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