Sage Advice
Since leaving the Securities and Exchange Commission in 2001, Arthur Levitt has been busy. In between lecturing and serving on the corporate boards of Carlyle Group and RAND Corp., he has written a book for investors, Take on the Street (Pantheon Books, 2002), about his experiences as SEC commissioner. At the CFO Rising conference, he sat down with CFO editor-in-chief Julia Homer and deputy editor Lori Calabro to discuss his hopes for the SEC going forward and the roles of FASB, the FEI, GAAP, and the auditing profession in improving corporate reporting.
It's obvious from your book that you hold the SEC in high esteem. Have the accounting scandals discredited the agency at all?
No. I think the agency has a reputational core which has been a function of its traditions, of its independence, of the kinds of cases it has brought. Every agency, every chairman, has dealt with scandals that were generated by a previous agency or even under that chairman's administration if he stayed long enough. But that's what we're there for: to deal with scandals, not necessarily to uncover them before they occur.
Do you think William Donaldson is a good choice to head the SEC?
Yes. I think the agency had only one direction to go after he came in. He's experienced enough to avoid some of the obvious pitfalls. And some of his first steps have been very encouraging: he's changed his position on expensing stock options, on fair disclosure, and on some core issues that, in the public's mind, determine whether the chairman is its chairman or is a political chairman.
What advice would you give to Donaldson?
The advice I would give is to restore the morale of the agency as his top priority and manifest in every possible way the primacy of investors among the many constituents that he's responsible for. Investors' interests should be placed above corporate, political, and all other interests. By doing that he can't go wrong.
Do you think that the relationship between the SEC and the Financial Accounting Standards Board could change in any way?
It probably should change. I had different relationships with FASB. When I came in, I had the notion that FASB was to be protected as you'd protect your own child against the barbarians. I fought very hard to protect it and, at the same time, I was very much involved in its proposals and in the kinds of things that it put on its agenda.
When [former Republican senator from Texas] Phil Gramm became head of the banking committee, he urged me to disassociate myself from FASB except as its protector. His argument was, how could I say "hands off FASB" to the Congress and to the White House if I was using FASB to accomplish my own goals in terms of accounting standards? He was probably right: if FASB is to be independent, it should be truly independent.
From the outside, I took the position — as I have today — that FASB needs to totally revise the way it sets standards and the way it is governed. They have a governance body in the FAF that I think is way out of date. It's a constituent body. It represents vested interests rather than the public interest. And now that FASB has independent funding, it should think of better ways to make decisions to make them faster and more responsive to the needs of a much more complicated financial landscape. I think FASB has a very good chairman now in [Robert H.] Herz, and I think its defining moment will come in its willingness to expense stock options.
You wrote in your book that when you look back, your biggest mistake was probably letting the stock-option issue not be resolved. What would you have done differently?
I could have allowed FASB to go ahead with it. I didn't, because I felt that Newt Gingrich [former Speaker of the House of Representatives ] and Joe Lieberman [Democratic senator from Connecticut] would override FASB and in effect close it down. I was wrong: the country had begun to swing back toward the center. I think it would have gone through had I allowed it to. But I consciously persuaded [Dennis Beresford, then chairman of FASB] to back down.
Obviously, FASB is also debating the merits of generally accepted accounting principles versus principles-based accounting these days. How has your thinking changed on that issue?
I would not dismiss certain principles. GAAP is still the best and most useful standard, but it is not the beginning and the end. And just as every audit involves objective judgment, I believe that some principles are important to consider. Relying on a formula has gotten us into trouble.
What do you think of the role of Financial Executives International? Has it been successful in championing the CFO's case, in your opinion?
It's been a mixed bag. During the latter part of the 1990s it stood shoulder to shoulder with the SEC on some issues; on others, it was the Greek chorus representing the business community. But I wouldn't call it as irresponsible as the AICPA. I felt that group did a vast disservice to the interests of the accounting profession, and allowed the public image of the profession to deteriorate in a way that I think was shameless. The people in the Big Four accounting firms are very responsible people, and they looked like a bunch of bandits. I place a large part of the blame on their cheerleading trade group, the AICPA, and its chairman, Barry Melancon.
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