GAO Report Finds SEC Failures

Poor communication and a lack of consensus at the top of the Securities and Exchange Commission, plus failures by SEC staffers, caused the agency to bungle its appointment of the head of a new accounting oversight board, the General Accounting Office said in a report Thursday.

The GAO, Congress’ investigative arm, came down especially hard on former SEC Chief Accountant Robert Herdman. But it also criticized outgoing SEC Chairman Harvey L. Pitt and his four fellow commissioners for lapses prior to their Oct. 25 decision, on a 3-2 vote, to name former federal Judge William H. Webster to head the Public Company Accounting Oversight Board.

The 32-page report, however, also made clear that Pitt was not aware before the vote of details of Webster’s role as a director of U.S. Technologies Inc., a high-tech company that fired its auditors last year, a month after they warned of poor financial controls at the firm.

U.S. Technologies’ stock has since collapsed and its chairman, C. Gregory Earls, was charged with fraud in a criminal complaint unsealed Thursday by the U.S. attorney’s office in Manhattan. He allegedly took $13.8 million of investor proceeds meant for the company and diverted it to his personal use. Earls and the company also were sued for fraud by the SEC.

Amid backlash from the Webster appointment, Pitt resigned Nov. 5 and Herdman quit Nov. 8. Webster stepped down Nov. 12 as chairman of the accounting panel.

Two Democratic congressmen said Thursday that the Webster debacle illustrates a lack of commitment by the White House and congressional Republicans to the corporate-reform goals of the sweeping Sarbanes-Oxley legislation enacted July 30.

“The SEC, whose power was to be enhanced by this new law, is in fact weaker now than it was ... before the president signed the bill,” said Rep. Barney Frank (D-Mass.) of the House Financial Services Committee.

President Bush last week promised to more than double the SEC’s budget. But Frank said Bush was talking about the 2004 budget year. Meanwhile, the agency is on what Rep. Edward J. Markey (D-Mass.) called “a starvation diet.”

A spokeswoman for Rep. Michael G. Oxley (R-Ohio), co-sponsor of the reform law and chairman of the House Financial Services Committee, said Frank and Markey’s comments represented “an unfortunate and unfair partisan attack.”

“They wanted Harvey Pitt out. He’s out,” she said, “and now they complain about a lack of leadership at the SEC.”

Under Sarbanes-Oxley, the SEC faced an Oct. 28 deadline to fill the accounting board. Pitt expected SEC commissioners to approve a slate of nominees by the end of September, leaving a month for a background investigation, the GAO said.

However, the commissioners stumbled in their efforts to reach a consensus on a chairman and the process dragged out longer than expected, the report said.

Pitt and Herdman met with Webster on Oct. 15 and asked whether he would take the job, the report said. At the meeting, Webster asked that the SEC examine its records on U.S. Technologies to make sure that his role there didn’t pose problems.

However, it wasn’t until Oct. 24, the day before the vote, that Herdman followed up on Webster’s suggestion. He learned of U.S. Technologies firing its auditor but “deemed that the information would not affect Judge Webster’s nomination” and decided not to pass it along to Pitt and the other commissioners or the SEC general counsel.

The GAO recommended that the agency develop a better plan for screening candidates.