VideoThe recent re-assignment of a top Securities and Exchange Commission official has some SEC insiders wondering if the Commission is putting a muzzle its own members. And it seems one lawmaker may have similar questions about the abrupt transfer of former chief accountant Robert Bayless.
In October, Bayless quietly resigned his post in the Commission's corporation finance division. That division reviews corporate filings, and is often the driving force behind SEC requests for corporate restatements. At the time of his resignation, Bayless told CFO magazine that new SEC Chairman Harvey Pitt had not forced him to step down. He also said his resignation should should not be construed as a sign that the SEC had changed its policy on revenue restatements. "I surely do not want to be used as evidence in a news story suggesting the Commission is going soft," Bayless told CFO.
But CFO has since learned that the staff of Congressman Edward Markey (D-Mass.) is apparently looking into whether the SEC's office of the chief accountant, headed by Robert Herdman, forced Bayless to take a lower-grade position. Since his resignation from the corporation finance office, Bayless has been reassigned as a special advisor to Herdman, chief accountant in the SEC's division of enforcement. Surmises one source close to the SEC: "They (Markey's staff) are probably looking to see if someone inappropriately put constraints on the division of corporation finance."
Bayless, who had gained a reputation for pushing companies to restate earnings following accounting disputes, apparently requested a transfer soon after a blow-up with Deputy Chief Accountant John Morrissey. The source of the alleged disagreement? Sources say Bayless objected to the exclusion of some of his comments in a letter to a corporate issuer.
One insider claims Congressman Markey's inquiry was triggered by an internal memo Bayless sent to his boss, corporation finance division director David Martin (Martin has since left the agency). According to the source, Bayless states in the memo that he was resigning his post due to conflict with Herdman's office. While the actual points of contention are not mentioned in the letter, sourves believe Bayless chaffed at Pitt's mandate for a more corporate-friendly -- and less strident -- SEC (see "Calling Off the Dogs."
Certainly, Pitt has given many indications that he would prefer to work out agreements with companies behind the scenes rather than have them make a public restatement. "I am very much in favor of a vigorous enforcement program," Mr. Pitt said in an interview with The New York Times last fall, "but I am not in favor of having investors barraged by conflicting statements and restatements."
That raises the question: is Pitt in any way pressuring the corporation finance division to limit requests for corporate restatements. And if so, is the SEC Chairman being pressured to keep public restatements to a miniumum? (Pitt was nominated by Pres. Bush and was approved by the Senate Finance and Banking Committee.) To be sure, the raft of recent corporate restatements has undermined investor confidence in corporate accounting -- and roiled the major stock markets.
Bayless did not respond to questions from CFO.com. As of press time, aides to Congressman Markey had not returned CFO.com's calls, either. The SEC also declined to discuss the circumstances surrounding Bayless's transfer. "This is an internal personnel matter," said SEC spokeswoman Christi Harlan, "and we're not commenting on it beyond that."
But according to a source close to the SEC, there is now a definite "chill" within the corporation finance division -- a chill that may led to fewer and fewer requests for corporate restatements. Indeed, the source claims the division is facing increased interference from the the accounting office -- which reports directly to the chairman's office. Says the source: "My concern is that what had been the purview of the division of corporation finance will now be vetted through the Commissionís chief accounting office, which tends to be much more constrained by politics."
Reduced Sway
Sources say such constraint can be seen the the case of the Cornell Companies. Apparently, the division of corporation finance (under acting Chief Accountant Craig Olinger) had wanted the correctional facilities operator to restate its third-quarter earnings for 2001. That source claims the chief accountant's office scotched the request -- even though members of the corporation finance division felt Cornell's numbers merited a restatement.
As it turns out, the corporation finance office was right. In February, Cornell set up its own special committee of independent directors, and later announced it would rejigger earnings for seven quarters. The reason for the restatment? Cornell management wanted to put a 2001 sale/leaseback agreement and a 2000 synthetic property lease onto the company's balance sheet. "In today's market, we believe that the consolidated accounting treatment for the two transactions provides for greater transparency in our financial statements," said CEO Harry J. Phillips, Jr., in a statement.
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