SEC Chairman Harvey L. Pitt said Thursday the failure of Enron and its auditor Arthur Andersen clearly exposes the defects in the country’s “vaunted system of disclosure, financial reporting, corporate governance and accounting practices,” and the need to develop an entirely new method of financial oversight. Pitt outlined a Securities and Exchange Commission plan to form a new public entity that will be empowered to perform investigations, bring disciplinary proceedings, publicize results and restrict individuals and firms from auditing public companies.

The SEC would decide whether conduct should be pursued as violations of law (in which case the SEC would handle it), or pursued as violations of ethical and/or competence standards (in which case they would be handled by the private sector regulatory body). Disciplinary proceedings governed by the public entity should proceed expeditiously, he said, and disciplinary actions should be subject to SEC oversight.

There should be a reform of the current peer review process that avoids firm-on-firm review, said Pitt. The new process should replace the current triennial firm-on-firm peer review with more frequent monitoring of audit quality and competence designed to produce better audits in the future. There should be a permanent Quality Control staff, composed of knowledgeable people unaffiliated with any accounting firm. The staff should be deployed and overseen by the new publicly dominated body and its staff.

“We are at the early stages of this proposal, and many details remain to be worked out,” said Pitt at a Washington, DC, press briefing. “The SEC will carefully review this and other proposals regarding a system of public sector regulation to ensure that it addresses our concerns with the current system.”

Pitt said the SEC is actively and aggressively investigating Enron and its auditor. “Our investigation will be thorough, and will deal effectively with any wrongdoing that may have occurred.”

The inadequacies of the country’s disclosure and financial reporting system are much more visible after Enron’s failure, he said, and the “need for change cannot be ignored any longer.

“Our system of periodic disclosure, for example, is old and not good enough. Today, disclosures are made not to inform, but to avoid liability,” said Pitt. “We need to move to a system of ‘current’ disclosure. The present system, which has been in effect for 67 years, doesn’t provide for current disclosure. Financial disclosures are dense, impenetrable. We have called for plain English financial statements.”

Pitt added that corporate governance issues and the role of audit committees are also in need of review. “We need more prompt action by the FASB, the nation’s accounting standard setter. And, we at the SEC need to improve the way we oversee our disclosure and financial reporting system.

“Finally, there is a need for reform of the regulation of our accounting profession. We cannot afford a system, like the present one, that facilitates failure rather than success… We have had far too many financial and accounting failures… Somehow, we must put a stop to a vicious cycle that has been in evidence for far too many years.”

©Copyright 2002 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.