Mr. Insider, SEC's Pitt, Looks Isolated - TheStreet

Just as auditors and Wall Street analysts are having their reputations trashed, so too are the top regulators in Washington, who are increasingly faced with the perception that they have dragged their heels in the crackdown on conflicts of interest.

The backlash against the

Securities and Exchange Commission

, and specifically its chairman, Harvey Pitt, intensified when Common Cause, a government watchdog group, called last Friday for Pitt's resignation.

"The American public deserves an impartial Securities and Exchange Commission that safeguards the public interest and investor confidence," Common Cause President Scott Harshbarger said. "Instead, Mr. Pitt has demonstrated a pattern of actual and apparent conflict of interest."

The group's call for Pitt to step down stemmed primarily from a meeting late last month between Pitt and KPMG Chief Executive Eugene O'Kelly. The accounting and consulting firm KPMG remains the target of an investigation by the SEC for its alleged participation in a strategy to overstate

Xerox's

(XRX) - Get Report

earnings by $3 billion.

Pitt has refuted O'Kelly's claim that the two discussed a possible SEC enforcement action against Xerox, and has said he will avoid such meetings in the future. But to some observers, the meeting showed that Pitt has not yet made the transition from advocate of private clients to guardian of public trust.

Mr. Insider

As a securities lawyer for more than 20 years, Pitt represented more than 100 corporate clients, including all the major accounting firms. In 2000 he was part of a lobbying campaign that proposed accounting firms regulate themselves, rather than be subject to oversight from the SEC. He also claimed that there was no evidence that consulting services performed by accounting firms presented a conflict of interest.

Upon taking office in 2001, he promised accountants a friendlier SEC and offered lighter sanctions to companies that cooperated. But the ill-timed softer stance prompted criticism among investors and industry professionals alike, particularly in the wake of

Enron

and recent events at

Merrill Lynch

(MER)

.

The SEC was placed in an embarrassing position last month when New York State Attorney General Elliot Spitzer said he was launching a probe into the conflicts between investment banking and research at Wall Street brokers. An investigation of this nature would normally fall under the jurisdiction of securities regulators.

"It looks like Spitzer is going to be the one to resolve this, jumping ahead of the SEC, and that doesn't look good," said Roy Smith, a professor at the New York University business school.

Defiance

So far, though, Pitt has been defiant, telling reporters at an SEC conference that he has "already dealt with that" and that "there's no basis for that request."

Accountants disagree. Edward Ketz, a professor at Penn State's Smeal College of Business, said he began to feel Pitt should step down because of his initial evaluation of the Enron bankruptcy.

"He gave a speech analyzing what he thought the problems were, and it was shortly after I read that speech that I thought he should resign," Ketz said. "He didn't dig down deep in terms of the ethical and moral problems of what took place at Enron and Andersen, and it gave me the feeling that he didn't get it."

Julia Grant, professor of accounting at the Weatherhead School of Management, said Pitt's resignation would go at least some of the way to restoring public trust.

"If we don't have confidence in the markets, they can't work right, and if there's something there that erodes the confidence, it needs to be fixed," she said. "

If Pitt can't satisfy the questions and answer them, he should step down."

Accountants believe that Pitt won't depart anytime soon. "As long as he has a thick skin and can accept the criticism, I think he will probably stick around for a while," Ketz said.

Independent Gestures

Short of resigning, experts say, Pitt will need to do something to demonstrate that he is independent of these firms, though what that would amount to exactly is unclear.

"You also don't want him taking actions just to prove that he is independent," noted Paul Chaney, associate professor of accounting at Vanderbilt University.

Of course, not everyone believes that Pitt has done anything wrong, other than to show poor judgment at times.

Amar Budarapu, head of the U.S. securities practice group for the law firm Baker & McKenzie, said that just because Pitt had clients in the accounting industry in the past and advocated their positions, it doesn't necessarily mean he is incapable of being impartial and doing the right thing.

"It's not as if his clients are still paying him, and it's not as if his job is to defend his clients," he said.

Others say the problem isn't Harvey Pitt but the system itself.

"The top regulators consistently have more in common with the industry than they do with the 'woman on the street,'" said Walter Schubert, chair of the finance department at La Salle University. "As a result, they can better identify with the industry than with the typical person their agency is designed to protect. It is unclear to me how this problem gets fixed."