At one of the Securities and Exchange Commission's most contentious meetings in years, the Republican majority yesterday chose former FBI and CIA director William H. Webster to lead a new board to police auditors, over the bitter objections of Democrats who favored a longtime critic of accounting industry practices.
The SEC's two Democratic appointees, Roel C. Campos and Harvey J. Goldschmid, said the 78-year-old former judge and prosecutor lacks the expertise to oversee the accounting industry. Campos called the appointment "a grievous mistake" that could be perceived as a capitulation to the accounting industry and leave a "permanent taint" on the oversight board.
Goldschmid said, "It is a tragedy that the oversight board . . . will begin life under so dark and ugly a cloud."
Denying accusations that he had succumbed to pressure from the accounting industry, SEC Chairman Harvey L. Pitt said, "I care much more about this institution than I care about my personal reputation." Visibly upset, he added, "I am beholden to no one."
The emotional public meeting was critical for Pitt, who faces intense charges from Democrats, investor groups and even Wall Street that he has failed to provide the kind of forceful leadership needed to restore investor confidence after a series of accounting scandals involving Enron Corp., WorldCom Inc. and other companies.
The oversight board was created by Congress in July to police and regulate accounting firms after it was revealed that auditors blessed financial reports that grossly overinflated company profits. But the SEC's efforts to appoint the five board members has been so marred by accusations that the accounting lobby effectively blocked an earlier frontrunner for chairman, John H. Biggs, that the ordinarily measured Senate Banking Committee Chairman, Paul S. Sarbanes (D-Md.), bluntly declared yesterday that "the country would be best served if Mr. Pitt stepped down."
Sarbanes, whose committee oversees the SEC, had previously refrained from joining the Democratic congressional leadership and Sen. John McCain (R-Ariz.) in recommending that Pitt resign or be fired.
Some SEC staffers were also dismayed by the controversy. A lawyer in the agency's enforcement division said colleagues were deeply demoralized by the rejection of Biggs, a retirement-fund executive who has called for changes that the accounting industry opposes. The politicized outcome further "eroded our confidence in our own agency's mission and us being true to our mission" under Pitt, the lawyer said.
The three Republicans who supported Webster have ties to the accounting industry. Pitt represented the major accounting firms while an attorney in private practice. Cynthia A. Glassman joined the commission from Ernst & Young LLP, and Paul S. Atkins worked for PricewaterhouseCoopers LLP.
White House Chief of Staff Andrew H. Card Jr. called Webster this week to encourage him to take the job. Treasury Secretary Paul H. O'Neill and Federal Reserve Chairman Alan Greenspan, whom the SEC was required to consult, supported the appointments, SEC officials said.
Webster's supporters at the agency said he would bring stature and investigative experience to an assignment at the heart of the government's efforts to restore investor trust in the stock markets. In a statement released by the SEC, Webster pledged "to lead a vigorous pursuit of the responsibilities that were charged to us."
Webster has served on audit committees of corporate boards, including that at Anheuser-Busch Cos., the SEC said.
Pitt denied that he had been lobbied by the accounting profession or the Bush administration. Glassman said she voted "based on my own judgment with no outside pressure and with no apologies."
Consumer advocates said that Webster's appointment gave investors little comfort and showed that the SEC is not committed to cleaning up corporate accounting. They noted that unlike Biggs, Webster has not been part of the effort to reform accounting.
The industry has largely written and enforced its own rules and has long resisted regulation.
Noting that the Sarbanes-Oxley Act that created the board mandated that the appointees have "a demonstrated commitment to the interests of investors" and an understanding of auditing, Campos said Webster's appointment could invite a legal challenge.
"It is not right that this commission should jeopardize its position as an independent governmental agency by appearing to sway to the political winds," Campos said.
Goldschmid said that "as a whole, the selection process has been inept." He said that as far as he knew none of the five board members approved yesterday was properly vetted and that he was not told their names until yesterday morning.
Pitt responded to the criticism by saying, "I think tremendous damage can always be inflicted on any agency when people ordinarily of goodwill choose to act adversely to the interests of their own agency."
Goldschmid said that in September Pitt indicated to Biggs that he would support him for the chairmanship.
"I know what took place at that meeting and it isn't worth getting into a refutation of the specifics," Pitt said. "But let it be said that at some point for reasons that I don't understand efforts were begun to create a false impression."
While Goldschmid voted against all five board members to protest the process, Campos dissented only to the choice of Webster.
Former SEC Chairman Arthur Levitt Jr., a longtime critic of the accounting industry, denounced the agency's handling of the appointments.
"Allowing the accounting lobby to exercise a veto over the commission's choices as well as permitting White House involvement in the deliberations of an independent federal agency fatally impairs the board's credibility," he said. "It also shamefully undermines the SEC and its mission since the only commissioners supporting this action have past ties to the accounting industry."
But Sen. Phil Gramm (R-Tex.) and Rep. Michael G. Oxley (R-Ohio), who have sided with the accounting industry in legislative battles, praised the outcome. "Webster is the tough cop that the job demands," Oxley, chairman of the House Financial Services Committee, said in a prepared statement.
The political tide seemed to have turned against the accounting industry as recently as July, when Congress overwhelmingly approved legislation to create the oversight board after corporate scandals sent stock prices plunging, wiping out billions of dollars of shareholder wealth.
The board was intended to replace the industry's system of ethics enforcement and quality control, widely criticized as failures. It has the power to write auditing rules, inspect accounting firms and discipline auditors of companies traded on the stock markets. It shares enforcement power with the SEC, which has the authority to override any of its actions. The first members will determine how aggressively the board takes on its mission.
On key policy issues facing the board, Webster's views, if any, are unknown.
For example, it is unclear whether he wants the board to use its power to write auditing standards to replace those written by the industry. Some accountants say the industry's rules were written defensively to limit auditors' responsibility and liability, enabling them to argue that they followed professional standards even when they overlooked major problems.
Webster gave a hint of his thinking in an interview on CNN, saying that consulting contracts "do not go hand in hand with independent auditing."
Biggs has argued that companies should be required to change auditors periodically, so auditors would know that a competitor would be reviewing their work. He testified that auditors should be prohibited from providing any other services to companies they audit. And he told SEC officials that the oversight board should write accounting rules instead of deferring to the accounting industry, according to a source close to the agency.
Appointed with Webster were:
* Willis D. Gradison Jr., a former Republican congressman who now is a lobbyist at the Washington law firm Patton Boggs LLP. Gradison was president of the Health Insurance Association of America, a major insurance lobby.
* Kayla J. Gillan, former general counsel of the California Public Employees' Retirement system, a giant pension fund that has used its clout as an institutional investor to influence corporate governance and executive compensation. In 1997, BusinessWeek called her the "scourge of underperforming companies." Gillan has testified that auditors should not be allowed to provide any other services to companies they audit.
* Daniel L. Goelzer, who spent seven years as general counsel at the SEC and now practices securities law at the firm Baker & McKenzie. Early in his career, Goelzer, who is also a certified public accountant, worked on the audit staff at Touche Ross & Co., a predecessor of Deloitte & Touche.
* Charles D. Niemeier, chief accountant in the SEC's enforcement division and co-chairman of its financial-fraud task force. Niemeier previously worked at the Washington law firm Williams & Connolly.
Staff writer Anitha Reddy contributed to this report.