The types of issues that led to charges weren't particularly distinctive, either. "These cases represent good old meat-and-potatoes deception; there's nothing unusual about them or the number of people involved," says Jack Ciesielski, publisher of the newsletter Analyst's Accounting Observer. Indeed, prematurely or falsely recognized revenues were cited in an average 51 percent of the cases taken in each of the past three years, compared with 50 percent recorded in the COSO Report. Understatement of expenses or liabilities showed up in 18 percent of the COSO cases, compared with an average of 26 percent of those taken between 1998 and 2001.
And what of the ferocious Financial Fraud Task Force? Officially, the SEC has been tight-lipped about the specialized unit, which had no publicized involvement in any case for its first 18 months of existence. But at least one division insider pronounces the task force a mere "publicity ploy," noting that "at most, they can take on only one or two cases at a time," which doesn't make a dent in the total number of potential enforcement actions.
Under any chairman, in fact, tight budgets and low salaries mean the SEC is unlikely to ever take on many more cases or move faster on them. "Congress has in no way given them sufficient resources to be an active watchdog," says Turner. The enforcement division has only 20 to 25 accountants on staff, meaning it can work on only about five major cases at any given time, he says. Simply taking depositions from lower-level accounting staff to gather the ammunition necessary for CFO depositions can last several months, and when a case ultimately gets heard depends on the whims of administrative law judges. Cases can then be appealed to the commission, and beyond that, to a district court.
The Sunbeam case, which the SEC has been investigating since mid-1998, is a classic example of the sluggish process, says Turner: "My guess is they probably won't even get to court until next year."
However, Berger says the task force "has been involved in some very difficult, and what we think may be very important, investigations," declining to provide further details. And Turner notes that the task force has worked on the Sunbeam, Waste Management, and Baker Hughes cases, and is "beginning to get legs." "They've got a lot of interesting cases in the pipeline — the real question is whether Harvey will let them do their job," he says.
The Future of Enforcement
what could really change with a new chairman? There are still many unknowns, including who President Bush will name to fill the four open commissioner slots. Regardless, no one believes the agency is calling the dogs off entirely, even if the task force ultimately fades.
"Financial-fraud cases have consistently taken up about 40 percent of the enforcement division's resources, and I don't expect that to change," says attorney Bruch. Many of the enforcement division's leaders, including Berger and new director Stephen Cutler, are holdovers from the Levitt era and unlikely to switch directions dramatically. Plus, with fewer initial public offerings coming to market, the corporation finance division now has more time to look through regular filings, upping the average company's chance of being reviewed from about 8 percent in 2000 to as high as 25 percent.
And just because revenues are down doesn't mean scrutiny will decrease. Given the rash of write-offs, the SEC is now likely to focus on asset impairments, says Bruch, testing whether restructuring charges are "specific, targeted reserves, or ones that are trying to provide a cushion for earnings down the road," à la Sunbeam's cookie-jar reserves.
As for the new benefits of cooperation, skeptics point out that it will hardly offer automatic protection to anyone who comes forward. "In a typical case, investors lose money and upper management is involved in cooking the books," says Turner. "And in those cases, no matter what, most companies are still going to be afraid to go into the SEC and open the kimono." Adds David A. Zisser, a Denver attorney who has defended more than 100 companies or individuals in SEC cases since leaving the agency in 1981: "Cooperation always helps. The question is whether it helps as much as you'd like it to help." He points out that the logistical situations that make companies seem uncooperative — such as when the SEC is asking for documents a company needs to complete its own investigation, or is pressing issuers to devote more of their limited resources to the collection of evidence — are unlikely to be resolved simply by virtue of a new tone at the top.
And self-policing, after all, isn't such a new idea. Many of Levitt's measures to transform the culture by stepping up pressure on internal auditors have been particularly effective. "Now, when a company is being aggressive, that bubbles right up to the internal audit committee," says Illiano, creating a new spirit of honesty — or fear — among accounting staffs.
A renewed vigilance also seems present among external auditors, which themselves were subject to some unusual enforcement actions recently. In the past year, the SEC has taken action against Big Five auditors in at least three cases and named Andersen specifically for allegedly being complicit in fraud at Waste Management. In fact, the SEC's actions against Andersen resulted in a sizable civil settlement — $7 million — and marked the first time in more than 20 years that the agency had brought such action against a major accounting firm. Only 10 of the 300 SEC financial fraud cases between 1987 and 1997 named auditors at big national firms, and none of them sought action against the firm itself, according to the COSO Report. Curiously enough, the biggest spate of actions against accounting firms, in the late 1970s, occurred during Pitt's tenure as the SEC's general counsel.
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