Accounting watchdogs in mess of their own

With the US economy sputtering, George W. Bush's economic team will come in for special scrutiny after this week's election, a time when presidents traditionally make staff changes to prepare for reelection.

The speculation in financial circles has been that economic adviser Lawrence Lindsey or blunt-spoken Treasury Secretary Paul O'Neill would be the first to leave the Bush team.

But based on recent developments, Securities and Exchange Commission Chairman Harvey Pitt appears to be the economic policy player most likely to be on his way out.

Mr. Pitt is caught up in a controversy over whether he withheld relevant information from fellow commissioners – and the White House – when urging the selection of William Webster to chair a new accounting reform board. Mr. Webster, a former FBI and CIA chief, got the job late last month in a contentious 3 to 2 vote.

At the heart of the matter: how Pitt handled Webster's disclosure before he was appointed that he had headed the audit committee of a small company, U.S. Technologies, accused of accounting irregularities and shareholder fraud.

"I was not a competitor for this job. I disclosed everything that I thought would be a possible issue. I believe I acted honorably," Webster told The New York Times last week. He was not available for an interview Monday.

Last week, Pitt was forced to call for an investigation by the SEC's inspector general into his own conduct surrounding Webster's appointment to the Public Companies Accounting Oversight Board. It was an ironic moment for the nation's top corporate cop, a man who this year called on top CEOs to certify the accuracy and completeness of annual reports.

The issues at stake go well beyond Harvey Pitt's career path. The accounting reform board was created by Congress to boost investor confidence in the wake of corporate financial scandals that led to the evaporation of an estimated $5 trillion in stockholder wealth. Some analysts say lack of investor confidence in corporate accounting is still holding down the stock market. Last week, new figures on consumer confidence showed it had sunk to a nine-year low.

HOW President Bush deals with Pitt's performance will also offer a window into the administration's long-term commitment to accounting reform. The oversight panel Mr. Webster heads will face many hurdles as it gets up and running, including the need to hire talented staff and a struggle with the accounting industry over primacy in setting audit standards.

This White House, like any White House, has a limited appetite for officials whose missteps take attention away from presidential policies and achievements. Pitt's alleged missteps came at an excruciating moment, just before a very close election. Removing him before Tuesday might have signaled to voters that the White House had mishandled the cleanup of accounting scandals.

"Under Chairman Pitt's tenure, the SEC has imposed a record amount of fines and has enacted a record number of disgorgements against corporate executives who've been engaged in unethical practices," Bush adviser Karen Hughes said Sunday. But she pointedly noted, "The White House was not involved in the vetting process.... We need to learn all the facts and see the results of the [SEC's] investigation."

Since the SEC is an independent regulatory body, the president cannot fire Pitt. But the president can ask him to resign or can replace him as chairman.

An SEC spokeswoman said Chairman Pitt "will continue to do the job the president and Senate appointed him to do." Earlier, Pitt said he was "proud of real-time enforcement and the staff dedication that makes it possible."

If Pitt stays, the White House can look forward to continued controversy. The Democratic chairman and ranking Republican on the Senate Banking Committee have called for hearings on the Webster appointment later this month.

Pitt riled critics in October when he backed away from naming John Biggs, a pension-fund manager and an accounting industry critic, as chairman of the oversight board. Mr. Biggs thought Pitt had offered him the job and had arranged to leave his current position. Biggs has said that accounting industry executives told him they lobbied against his appointment.

It was in this context that Pitt chose Webster, a prominent member of the Washington establishment and widely viewed as a man of unquestioned integrity. After high-profile jobs under Presidents Carter and Reagan, he has since served on various prominent commissions.

It is unclear how long Webster will stay on the Accounting Oversight Board and continue to be battered in public. Last week he said, "If my leadership would be a problem and a person I respected told me that, then I would reconsider."

He said no such conversation had occurred.