VideoWith the holidays fast approaching at the end of 2001, Harvey Pitt, then chairman of the Securities and Exchange Commission, was presiding over a collapse in investor confidence. That fall Enron had imploded in one of the most spectacular finance scandals in memory, and it looked increasingly as though its auditor, Arthur Andersen, had been careless — or perhaps even complicit — in some of the energy company's most questionable dealings.
In the midst of this, Pitt recalls, the Financial Accounting Foundation (FAF) informed the SEC — by phone — that it had settled on a new nominee to replace Edmund Jenkins, the outgoing chairman of the Financial Accounting Standards Board. Pitt claims he cannot recall the candidate's name. However, it was probably G. Michael Crooch, then and now a FASB member, who confirms he was a candidate at the time. Like Jenkins, Crooch was a veteran of Arthur Andersen, and had succeeded Jenkins as head of the firm's professional-standards group.
That was the group involved in ordering the shredding of Enron-related documents, although those instructions were issued on October 12, 2001 — more than 14 months after Crooch left Andersen for FASB in July 2000. As Pitt recalls it, however, the nominee had been involved in some way in the Enron audit. "It was a nonstarter," he says.
Pitt balked at the FAF's selection, and its 11th-hour phone call. "I told them this was not sufficient notice, and no way were we going to approve it," says Pitt, who adds he sent the FAF back to the drawing board. Four months later, the FAF formally announced a new nominee, current FASB chairman Robert Herz, then a senior partner with PricewaterhouseCoopers.
Fast forward to December 11, 2006, when the FAF notified the SEC that it would reappoint Herz, and appoint or reappoint six FAF trustees, at the start of the new year. There is no evidence that the SEC objected to any of the candidates, who are all now in position. But the 19-day notice, coming just before official Washington all but shut down for the holidays, apparently prompted the SEC to demand a more formal process for vetting future FAF and FASB candidates. Earlier this week, that move raised questions in the media about whether the SEC was grabbing for more power over FASB.
Not so, says SEC spokesman John Nester. The Sarbanes-Oxley Act, he says, "requires us to certify the standard setter every year, in terms of its capacity and capability to perform in that role."
In a two-page memo to the SEC written March 9, the FAF confirms the SEC's new mandates, including the regulator's time line for reviewing candidates for FASB and its parent, the FAF. In addition, the memo states that the SEC has the power to nominate candidates to FASB and the FAF, and has the right to interview candidates during the selection process. "In order for us to fulfill [our] congressional mandate," says Nester, "we look at a number of things, including corporate governance."
Pitt notes that even before Sarbox, both he and his predecessor, Arthur Levitt, had direct input into the appointment of FASB members. "I would describe this as much ado about nothing," he says of the recent debate. But other observers, including one current FASB member, fret that the memo may chip away at FASB's independence.
In its new agreement, the SEC "goes a great deal further [than before] in its involvement in the selection process," says Edward Trott, who is set to retire from FASB this year. In the past, the SEC "suggested" candidates, he says, but it never sought to formalize its power to nominate or interview. He says that while the SEC has always had statutory authority to set accounting standards, the regulator looked to the private sector to provide an "independent" perspective on accounting issues. Trott worries that the new formal process will open the door to more political tinkering with standard-setting, either directly from the SEC or indirectly from Congress.
Former FASB chairman Jenkins told CFO.com that he, too, was alarmed by media reports earlier this week. "I am very concerned that this new protocol provides the basis for Congress — which has the responsibility to oversee the SEC — to get more directly involved with FASB, and I think it's a step in the wrong direction." (Jenkins also told CFO.com that he could not confirm Pitt's account of Herz's selection as his successor, but agreed that the SEC was involved in FASB nominations.)
The Securities Act of 1934 gives the SEC oversight over accounting standard setters and the accounting rules used in public company financial filings. But it was Sarbox that sought to ensure FASB's independence by switching its funding source from audit firms, which had a vested interest in the accounting industry, to the SEC. In a post-Sarbox policy statement issued in 2003, the SEC emphasized "the importance of the FASB's independence" to ensure that accounting rules are free from bias, and explained that Sarbox requires the SEC to evaluate the organizational structure, operations, and procedures of FASB and the FAF.
Without defining the term, the statement mentioned that the SEC should receive "timely notice" of potential appointments, but confirmed that the "final determination" for overseeing, funding, and appointing members to FASB still rests in the hands of the FAF.
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