Securities and Exchange Commission Chairman Harvey L. Pitt, who resigned last night, relied heavily during his 14 months in office on a friend and former accounting industry executive, Robert K. Herdman.
Herdman, who Pitt brought in to be the agency's chief accountant, became controversial for the role he has played in helping Pitt select former FBI director William H. Webster to head a new accounting oversight boardPitt asked Herdman to determine whether Webster's having been head of the audit committee of a company accused of fraud would cause problems if Webster were named to head the new board.
Now Herdman is raising concerns among some SEC staffers because he is considering hiring a former colleague at the accounting firm Ernst & Young to be SEC liaison to the new private-sector board.
Critics are concerned over whether the board will provide tough and independent oversight of auditors. They have charged that Pitt and Herdman are too close to the accounting industry, which each denies. Herdman was a partner at Ernst & Young for more than a quarter of a century before joining the SEC just over a year ago. The two became close during Pitt's years as a private lawyer, when he represented Ernst & Young and other major accounting firms.
One way the SEC will provide guidance, and possibly seek to influence the accounting board's operations, is through the liaison office. Don Neebes, a partner at Ernst & Young and Herdman's friend, is one of three finalists for the newly created position, SEC sources said.
In a telephone interview yesterday, Neebes confirmed that he applied for the job, and that he is discussing with Ernst & Young his possible retirement from the firm. "I haven't signed anything yet," he said.
He would not comment on whether, if he were to get the job, he would try to have his Ernst & Young pension money put into a trust while he is at the SEC and returned to Ernst & Young when he left government.
Agency sources say Neebes is exploring that idea to comply with rules that forbid SEC staff from retaining financial ties to firms the agency regulates. Several lawyers in the SEC yesterday said they did not think such an arrangement would comply with the rules because Neebes would still be tethered financially to his former private-sector firm.
Congress gave the SEC the right to review and approve or reject the accounting board's budgets, standard-setting and disciplinary actions. An SEC source said the new office that Neebes is a candidate to run will have three other accountants and a lawyer on its staff to handle SEC work generated by the new board.
Final interviews with the three candidates will take place in the next few days, sources said. SEC spokesmen would not say who the other two top candidates are.
The selection of a liaison to the board -- a potentially critical position as the new group tries to shape its role in overseeing accounting firms -- again focuses attention on the enormous role Herdman plays as the SEC struggles to convince investors that it will be an aggressive cop against financial fraud.
Pitt, who was appointed SEC chairman by President Bush in August 2001, and Herdman are very close, sources said.
In his first major speech -- to a gathering of the accounting industry -- Pitt praised Herdman.
"Most of you know Bob, so you know that there are no superlatives that exceed Bob's capabilities and professionalism," Pitt said. "I am confident that, with Bob's leadership, the commission will make sound decisions, in a respectful, affirmative way, not in a demeaning, demanding or demonizing way. You may not always like what we say, but you will always like the way we say it."
The two have worked closely together on the SEC's strategy for the new accounting board, sources said. Herdman was present in many of the interviews with potential appointees to the board, during which he often advocated positions supported by the accounting industry, sources said.
When Webster told Pitt on Oct. 16 that there might be questions about his position as head of the audit committee as U.S. Technologies Inc., a Washington firm that is now insolvent and under investigation, Pitt asked Herdman to look into the matter, SEC sources said.
Webster said yesterday that he didn't know what the SEC looked at before he was told they found nothing that would impede his appointment.
The SEC has declined to detail what Herdman did to check on Webster's involvement with U.S. Technologies. Herdman has not returned phone calls on the subject.
One source familiar with Herdman's conversations with commissioners said Herdman checked SEC records and talked with SEC enforcement staff to see if U.S. Technologies was under investigation.
According to SEC sources, Herdman informed Pitt that Webster's involvement with U.S. Technologies posed no problem. Neither of them passed on that assessment to the other four commissioners before they voted on Webster's nomination. Webster's connection to U.S. Technologies was not mentioned in a press release to the public announcing Webster's appointment to head the new board.
He "found no problem," said the source. "He should have put his finding in a memo to the commissioners, but he didn't," the source said.
The other SEC commissioners learned of Webster's ties with U.S. Technologies in the newspaper nearly a week after the vote.
The oversight board has been marred by accusations that the process of selecting its members was politicized, secretive and heavily influenced by the accounting industry, which opposed giving the chairmanship to retirement-fund executive John H. Biggs. Biggs advocated fundamental changes in the way auditors do business. Pitt and Herdman drove the selection process, favoring Webster.
More than a week later, the SEC approved Webster as chairman, with Pitt and two other Republicans voting in favor of his nomination and the two Democrats opposed.
Some staff members in the SEC and in Congress are concerned by the close ties Herdman and Pitt have to Ernst & Young and the rest of the accounting industry. One of Herdman's top picks for the job of being the SEC overseer of the new board strikes them as another example of poor judgment by Herdman.
Ernst &Young recently has had troubles of its own. The Federal Deposit Insurance Corp. sued the firm over audits of the failed Superior Bank last year, and the SEC warned three Ernst & Young auditors that they may face civil for their roles in the audit of Cendant Corp. Earlier, the SEC filed civil charges against the accounting firm, alleging that it violated SEC rules in the late 1990s by engaging in business deals with PeopleSoft Inc., which it also audited.