(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

Chairman Pitt: Ethical Issues Key to Accounting Reform

SEC Chairman Harvey L. Pitt stressed the importance of ethical concerns in financial reporting in wake of the Enron collapse. Speaking at the annual "SEC Speaks" conference hosted by the Practising Law Institute, Chairman Pitt stated that "the public cannot be served if professionals who serve as gatekeepers merely follow the letter of the law, but not necessarily its spirit." He added that "we need to move away from wooden, rigid literalism and encourage all upon whom the present system depends to adopt a bias in favor of the needs of the investing public."

The chairman acknowledged that it was not the proper role of the SEC or other government authorities to directly establish standards of professional ethics and competency. He stated, however, that "the government has to ensure that appropriate standards of ethics and competency are in fact established and then rigorously implemented and enforced."

Lawyers and Accountants

Chairman Pitt advised that "it is inappropriate for corporate lawyers to assist clients in finding ways to evade legal requirements, or disserve the public interest, even if those results can be achieved in a manner arguably within the literal letter of the law." He also pointed out that corporate lawyers represent both the corporation and its shareholders. "Even though management may hire or fire them, they must be satisfied that objectives management asks them to pursue truly are intended to, and do, further the interests of the company and its shareholders," concluded the chairman.

With regard to accountants, the chairman stressed that while he did not consider auditors to be "guarantors of the accuracy of corporate reports," it is necessary to improve the level and quality of audits. He cited an exposure draft issued by the Auditing Standards Board on revised standards for fraud detection as "a timely and a positive development and one that needs to be finalized promptly." He also criticized current accounting standards that are "cumbersome and offer far too detailed prescriptive requirements for companies and their accountants to follow." Such an approach, observed the chairman, often emphasizes narrow readings of accounting principles to ascertain whether there is technical compliance with the rules over proper concern for the overall picture of the company presented to the public by the financial reports.

Oversight

To facilitate this change in emphasis from technical compliance to principle-based accounting, Chairman Pitt called for "fundamental and far-reaching changes" in the Financial Accounting Standards Board. The SEC must play an "active and aggressive oversight role" and must have greater influence over FASB's agenda, claimed Mr. Pitt. Of particular concern to the chairman was the timeliness of FASB's response to critical situations. He also expressed his desire to see the implementation of a new oversight authority primarily comprised of persons unaffiliated with the accounting profession.

Corporate Governance

Mr. Pitt stated that he had asked Financial Executives International, an industry association, to review its model code of conduct for corporate directors. In addition, the Commission asked the New York Stock Exchange and Nasdaq to review their listing agreements to see if new obligations for corporate officers and directors would be appropriate and effective. He also stressed that the role of audit committees and outside directors must be strengthened.

Mr. Pitt also stated that the SEC needs to "focus on tailoring the remedies we are able to seek to fit the needs of investors." Currently, the SEC may request the courts to injunctively bar violators from serving as officers and directors of public companies. The chairman, noting that the agency may administratively bar violators from the securities industry, stated that the SEC is proposing to Congress that the agency be given comparable administrative authority to bar officers and directors from serving in similar capacities for any public company.

Additionally, he indicated that the SEC will review its approaches to remedies concerning executive compensation. Of particular concern to Mr. Pitt are stock options. While the chairman did not suggest specific SEC actions, he advised that "compensation, especially in the form of stock options, can align management's interests with those of the shareholders, but not if management can profit from illusory short-term gains, but not suffer the consequences of subsequent restatements, the way the public does."