Arthur Levitt Remembered

Four Personal Commentaries on the Longest-Serving SEC Chairman in U.S. History

By Ned Regan, Dennis R. Beresford, Philip D. Ameen, and Barry C. Melancon

In Brief

Some Call Him a Hero

During Arthur Levitt’s long and distinguished career, which culminated in an eight-year term as SEC chairman, he has been heralded as a champion of the individual investor and characterized as out of touch with reality. He has even been accused of outright attempts at grandstanding.

The CPA Journal asked four individuals whose relationships with Levitt and the SEC run the gamut from close and personal to indirect and professional to share memories and thoughts about the man, his career, and his contributions. The following commentaries range from laudatory to critical, but all express respect for Levitt’s legacy of service.


Public Servant Without Parallel

By Ned Regan

Former SEC Chairman Arthur Levitt’s father, Arthur Levitt, Sr., preceded me as New York State comptroller. His term ended December 31, 1978, and mine began January 1, 1979.

I met Arthur Levitt, Jr., for the first time when I had been state comptroller for about a year, and thereafter we would see each other occasionally. He chaired the American Stock Exchange, an organization I had to work with because the state comptroller is the sole trustee of the New York State pension fund, which in the early 1980s had an annual cash flow of $4 billion, much of it invested in the stock market. When I left the pension fund in 1993, it had $65 billion in assets; that amount has since grown to $130 billion of pension assets for more than one million people. I am also a former trustee of the Financial Accounting Foundation (FAF), which selects FASB and GASB members and evaluates their work. So Levitt, Jr.’s path and mine continued to intersect.

For years, FAF trustees had come primarily from industry. Levitt wisely advised that more of them should represent the public interest, and consequently five new trustee positions were created specifically for individuals who fit that definition: John H. Biggs, chairman, president, and CEO of TIAA-CREF, for example, and David S. Ruder, law professor at Northwestern University.

When I heard that Levitt was named SEC chairman I thought, “What a perfect match!” Public service and public policy were always very strong interests of his.

I did not know Levitt’s predecessor well, so I cannot make comparisons. But I do know that Levitt is unique in style, drive, and focus. I cannot think of anyone else who could have converted that position into the highly responsible “bully pulpit” that it has become. Among the many strengths that served him well during his tenure as SEC chairman, I would point out the following:

  • His interest in protecting the small investor, which became his verbal centerpiece when discussing the need to protect the markets. He understood that if the small investor was spooked, the markets would suffer. In addition, the SEC oversees the mutual fund industry, and I’ve heard that he has told mutual fund boards—figuratively pounding on the table—that they “must represent shareholders, the individual shareholder, with a passion.”
  • His insistence on accurate financial reporting and on fair disclosure. He has enabled corporate audit committees to function better and receive expert advice from truly independent outside auditors.
  • His understanding that the U.S. markets are unique in the world and the engine of our economy. Obviously, many people have contributed to the enduring strength of our markets, but Levitt’s contribution is clear. I find it no coincidence that his tenure as SEC chairman paralleled a long economic boom.

    I knew Arthur Levitt, Sr., quite well, and now, whenever I hear Arthur Levitt, Jr., talk about the small investor and the individual investor, his father’s words echo in my head. Let me explain: When I was state comptroller, Levitt, Sr., would admonish me to remember the taxpayer—he was absolutely passionate about his duty to take care of the little guy. Occasionally, my job as state comptroller would require me to make news announcements on the radio, and sometimes Levitt, Sr., would call me up afterward and reprimand me, saying “You didn’t mention the taxpayer once!” And then—click!—he would hang up the phone. His son has clearly inherited that same passion for serving the public.

    Yet Levitt, Jr., does not lack the ability to enjoy life. For example, he is an avid and accomplished photographer and loves the outdoors. Every year, he leads a group on an outdoors trip—mountain-climbing, river-rafting, or horseback-riding, for example—and about six years ago I had the pleasure of being invited. We rotated jobs and worked quite hard as part of the team. I particularly enjoyed the nightly fireside talks, and Levitt obviously enjoyed them, too—wide-ranging discussions about politics and policy that were stimulating and challenging, and enhanced my own knowledge.

    Arthur Levitt, Jr.’s impact on the country has been something like that: stimulating, challenging, and an honor to participate in. Even if I had not had the pleasure of being Levitt’s colleague and friend, I know that our lives are better for having had him as a public servant.


    Ned Regan is the president of Baruch College at the City University of New York.


    The Best SEC Chairman Ever

    By Dennis R. Beresford

    I first met Arthur Levitt in September 1993, only a few weeks into his tenure as SEC chairman, when he visited the FASB offices for the first time. Such a visit to the FASB offices was rare, and it clearly signaled to us that Levitt considered high-quality financial reporting to be an SEC priority. It also showed that he recognized the key role that FASB plays in ensuring high-quality reporting and the need for the SEC to support its efforts. I am proud to say that we enjoyed a close and highly cooperative working relationship throughout the remainder of my term at the board.

    A mere review of the titles of some of Levitt’s many speeches reveals the great personal involvement he had with accounting and auditing matters:

  • CPAs and CEOs: A Relationship at Risk
  • The Importance of High Quality Accounting Standards
  • A Declaration of (Accounting) Independence
  • The “Numbers Game”
  • Quality Information: The Lifeblood of Our Markets.

    In those speeches, and in other statements, Levitt emphasized the importance of the accounting profession to the efficient functioning of capital markets. Nevertheless, he admonished the profession to improve itself and laid out concrete recommendations for doing so. For example, in his now famous September 1998 “Numbers Game” speech, he spelled out specific initiatives dealing with audit committees, audit effectiveness, earnings management, and auditor independence. He then jawboned AICPA leaders and others to deal with these matters, and warned that the SEC would do so itself if the private sector failed to deliver. I’ll let other writers deal with these topics—I would rather focus on those that were near and dear to FASB.

    Stock Compensation

    When Levitt was appointed as SEC chairman, accounting for stock options was already the hot topic at FASB. At his confirmation hearing, Levitt expressed an attitude of neutrality and a desire to let FASB do its job on accounting for options. Nevertheless, FASB members were concerned about Levitt’s appointment because he had previously worked with groups that opposed FASB on this controversial topic.

    The board reached a final decision on the stock options project in December 1994, and throughout the final deliberations Levitt remained neutral, in stark contrast to other SEC commissioners, who called for FASB to either completely drop the project or significantly compromise its proposal (which was to record the value of options as an expense). Levitt insisted on being kept well informed about the board’s deliberations but did not try to pressure us to adopt a particular position.

    When Levitt met with board members in late 1994, he told us that congressional legislation to override a FASB standard that would require expense recognition was inevitable. He went on to say that the SEC would not be able to support FASB against such congressional activity and that the board had to decide whether stock option accounting was important enough to jeopardize private sector control of accounting standards-setting. Shortly thereafter, FASB chose to adopt the approach now specified in Statement 123, which requires disclosure of the effects of options but not recognition of the expense.

    I strongly believe that FASB made the right decision, and that Levitt handled the matter appropriately, and I was disappointed to read in the December 21, 2000, New York Times that he now regrets “persuading” FASB to back down on its proposal: “I doubt that Congress would have come up with the votes to roll it back.” Most board members were convinced that Congress would act, based on information from a number of sources besides Levitt. Moreover, FASB had virtually no support from its various constituencies on the project, and even courageous leaders cannot completely ignore their followers.

    General Support for the FASB Process

    Although the stock options episode is not remembered fondly by FASB members, it had the effect of sensitizing Levitt to the fragility of private sector standards-setting. He seemed to compensate for his position on stock options by strongly supporting the board’s general activities over the next several years. This attitude was summarized well in an October 1997 speech:

    It is compellingly clear to me that the objectivity and fairness of standards-setting can only be guaranteed if the process is insulated from political agendas, special interests, and bureaucratic convenience. If that independence is compromised, or perceived to be compromised, we would pay a heavy price in declining investor confidence in the markets.

    During the stock options project, the board received strident criticism from the business community and other groups, including major accounting firms and other typically supportive constituents. Levitt perceived, correctly, that the trustees of the Financial Accounting Foundation (FAF), FASB’s parent organization, had not been sufficiently active in defending the board against political and other pressures.

    At that time, most of the FAF trustees were nominated by sponsoring organizations such as the AICPA, the Financial Executives Institute (FEI, now Financial Executives International), the Institute of Management Accountants (IMA), and the Association for Investment Management and Research (AIMR). Levitt met with the trustees and encouraged them to broaden FAF membership and appoint more individuals with a public-interest perspective. Although he recognized that CFOs of large companies and senior partners of accounting firms make important contributions to the standards-setting process, he also felt that FAF membership needed to be better balanced in order to change the perception that the trustees were simply echoing the general criticisms of the business community rather than defending FASB’s independence.

    The trustees took Levitt’s concerns very seriously and proposed certain membership and other changes; however, they were unwilling to accept all of his suggestions and cede control of the FAF to the SEC. When Levitt then charged that the FAF was unwilling to make meaningful changes in its operations, several months of bitter debate ensued. A compromise was finally reached in which the corporate and public accounting communities relinquished some of their seats to allow participation by more individuals not tied to sponsoring organizations. The first new members under this structure included a former SEC chair, a former Federal Reserve governor, and a former U.S. comptroller general.

    FASB members strongly supported the FAF reorganization. With its new composition of trustees, the FAF has been effective in helping the board deal with subsequent challenges, such as political intervention on the accounting for derivatives project and the internationalization of accounting. While the SEC-FAF discussions became more acrimonious than I felt was necessary, the outcome was excellent: A more balanced FAF membership was achieved without allowing the SEC to control the appointments.

    Internationalization of Accounting

    The 1990s saw a great deal of discussion in the accounting profession about global accounting standards. The SEC became involved in at least two ways. First, the International Accounting Standards Committee (IASC) asked the International Organization of Securities Commissions (IOSCO) to endorse the use of IASC standards for companies registering securities in markets anywhere in the world. As the leading member of IOSCO, the SEC must now decide what to do about this request.

    Second, in order to increase its listings of foreign corporations, the New York Stock Exchange (NYSE) asked the SEC to consider loosening its requirement that all foreign companies selling securities in the United States must either prepare financial statements using U.S. accounting principles or reconcile their foreign accounting to U.S. GAAP. When the SEC initially resisted this matter, the NYSE went directly to Congress to pressure the SEC to “keep our markets competitive.”

    Levitt had to walk a narrow line. On one hand, he wanted to be supportive of the IASC’s efforts because improved global financial reporting promotes efficient capital markets. On the other hand, he didn’t want to lower the quality of financial reporting in the United States or undermine FASB’s ongoing activities. In several speeches, he encouraged the IASC but also made clear that it had to produce standards roughly equivalent to those in the United States before they would be acceptable to the SEC.

    In remarks delivered in May 1997, Levitt said:

    Commission acceptance of international standards is not a foregone conclusion. It bears repeating that while harmonization is a desirable goal for the United States, our standards are already accepted in capital markets throughout the world, and their quality is unmatched. We can only accept a framework that will enhance, rather than diminish, the strength and stability of U.S. capital markets.

    Early in the SEC’s consideration of international standards, Levitt communicated specific objectives: Any international standards must be comprehensive, of “high quality,” and rigorously interpreted and applied. Even though he further explained the idea of high quality by saying that standards must result in comparability and transparency as well as provide for full disclosure, many observers were left with the impression that the SEC would accept nothing short of standards virtually identical to U.S. GAAP.

    The jury is still out on international accounting standards, but Levitt seems to have successfully laid the groundwork by encouraging global efforts without undermining FASB or other U.S. accounting activities. Last year, he played a leading role in the restructuring of the IASC, insisting on a mainly full-time board with most of the same operating procedures and checks and balances present at FASB.

    The SEC is presently considering whether and how to revise its registration requirements for foreign companies in consideration of improved IASC standards. The ultimate decision by Levitt’s successor and other SEC commissioners will determine whether the work toward internationalization over the past five years or so will be fruitful.

    A Lasting Impact

    In the January 22, 2001, Barron’s, business journalist Alan Abelson called Arthur Levitt “the best SEC chairman ever.” Based on my own 30 years of experience working with the SEC, I certainly agree with that assessment. No SEC chair has ever devoted as much personal attention to accounting and auditing matters, and Levitt’s efforts have been uniformly positive. The changes he has been directly responsible for and the many potential changes that he has encouraged from the accounting profession will continue to make an impact for years to come.


    Dennis R. Beresford, CPA, is the Ernst & Young Executive Professor of Accounting at the J.M. Tull School of Accounting, University of Georgia. He was FASB chair from 1987 to 1997. Previously, he was the national director of accounting standards for Ernst & Young.


    Looking Forward to a New Era at the SEC

    By Philip D. Ameen

    From my position as vice president and comptroller of General Electric, I am enormously interested in accurate financial statements, audited by reliable, independent auditors. GE invests hundreds of billions of dollars annually in a variety of enterprises, in the form of both temporary investments and business acquisitions. Reliable financial statements are fundamental to this activity, and reliable financial statements are routinely audited.

    From another perspective, GE’s market capitalization has exceeded a half-trillion dollars at least in part because the investment community knows that our financial statements are reliable. It is certainly true that we invest based on expectations of future cash flows or economic returns and that we will pay the same amount for cash flows in a far less regulated environment than in the highly regulated U.S. market. We can and do adjust for accounting, but to make those adjustments all we need is to understand the approach used. For us, a reasonable hypothesis is that the benefits of the extraordinary U.S. regulation of accounting principles and audits have not remotely justified the costs. I know former Chairman Levitt and many of his staff well enough to say that we simply disagree on this issue. Given that his views are available in the public record, I’m glad to have an opportunity to share my views on the correct role for regulation.

    A large segment of the public, whose understanding of financial reporting runs no deeper than the cover of

    Fortune magazine, believes there to be a systemic problem in financial reporting. After all, who is in a better position than SEC Chairman Levitt to know whether such a widespread problem exists?

    Of course, financial reporting isn’t perfect and cannot be perfect until we can foretell the future. Too much of accrual accounting necessarily reflects pure guesses about the unknown. On the other hand, financial reporting is much more endangered by the quickly emerging irrelevance of delayed periodic reporting than it is by malfeasance and audit failures. It is certainly time to question whether the extraordinary costs of debating, preparing, defending, and auditing our periodic financial statements have outstripped any possible benefits. In fact, some weeks or months before those financial statements were issued, the market compared an earnings release to First Call’s consensus forecast, rewarded or penalized accordingly, then shifted its attention to the next quarter. While the earnings release is validated by the financial statements, those statements are not directly responsible for economic decisions.

    Because financial statements are prepared by management and reflect a report card on management’s performance, there is a bias toward making the numbers look good. On the other hand, management uses these same reported data when making critical business decisions, so there is also a powerful bias toward absolute accuracy. A financial statement user dedicated enough to take the necessary hours to read a company’s complete financial statements is certainly sensitive to the tensions underlying those statements. But to assert that the reporting system simply feeds back the numbers Wall Street expects is naïve, even before considering the altogether capable job done by independent auditors.

    Even apart from Levitt’s “Numbers Game” speech, I and many of my peers believe the quality of accounting and reporting has declined in recent times. If our impression is accurate, we should explore the causes. I submit that motivation to meet estimates—the “Numbers Game”—is far down the list. I recently heard that there are now 100,000 pages of authoritative accounting literature, all of it stored in a chronological fashion that makes retrieval difficult. One need only look at the interpretations of FASB Interpretation No. 44, a complex document in its own right, to see an example of the problem. I believe that complexity itself is a likely cause of reporting degradation.

    At GE, we use a quality process called Six Sigma. At the risk of oversimplifying the details, I’ll share some benchmarks. Six Sigma performance is equivalent to 3.4 defects per million opportunities. Automation and simplification of processes are absolutely key to this level of performance, because only in highly automated processes can improvement exceed about 3.5 Sigma—approximately 10,000 defects per million opportunities, or a 1% defect rate. Applying this process to SEC enforcement cases, financial statements appear to be prepared at approximately 4 Sigma, although the true defect rate is certainly higher than the level that ends up in enforcement actions. The relevant lesson of Six Sigma is that complex processes—in this case, accounting rules—inexorably lead to higher defect rates. In Six Sigma terms, the eroding reporting performance that my peers and I are witnessing is a quite natural consequence of increasingly complex rules.

    SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, is an example of this phenomenon in the making. I believe that 99% of the objective of that statement could easily have been achieved at 10% of its cost. Achieving that last increment of theoretical purity has yielded accounting that is so incredibly complex that my peers and I have struggled to achieve something close to what the rules require—and we are not confident that we have actually achieved it. The statement has all of the attributes of the failed SFAS No. 96.

    To some degree, SFAS No. 133 epitomizes what I see throughout the accounting profession. Rules are becoming very complex and fact-specific. An associate who happens to be an attorney observed wryly that we accountants live by an oral case law—impossible to know completely, impossible to research, and rife with inconsistency. Solving the “problem du jour” with a “staff announcement du jour” creates a world in which accountants and auditors are more librarians than professionals, and creates such a plethora of possible analogies that multiple-choice accounting is inevitable. I reflect sadly sometimes about the state of the profession when our best and brightest are flinging EITF and SEC staff speech references at each other instead of grappling with concepts.

    Although I say this at risk of incurring the wrath of some of my peers, I’m not sure we ever lived in a nirvana where our professional judgment was respected. Having coherent, consistent, retrievable rules would at least narrow the discussion of what alternatives are and are not in play under a given circumstance. This objective is important both in the short term, for achieving compliance, and in the long term for defining the types of professionals needed to keep the profession alive and moving forward.

    Obviously, our regulators must become a part of any long-term solution, not a principal source of the problem, and that solution will demand a longer-term view from Washington. For example, if the SEC disagrees with a registrant’s accounting, the “cure” ought to be clear disclosure of the policy, not restatement. I believe the SEC should withdraw every staff position, whether promulgated in SABs, announcements, cases, or speeches. Staff have unique access to a wide variety of registrant experience that is valuable for the authoritative standards setters—the Emerging Issues Task Force (EITF) and FASB. But the SEC should, as a matter of unwavering policy, respect the professional judgments of those bodies, even when the staff’s short-term preference is for a different answer.

    I urge the new SEC chair and his or her staff to be patient: The future of the profession is at stake; impatience and retroactive, sweeping changes and pronouncements are dysfunctional, disruptive, and represent a significant long-term threat to financial reporting.

    One critical point stands out about our beleaguered profession. Tens of thousands of accurate financial statements are filed annually. A few hundred contain errors of any significance. Any rational evaluation would celebrate the system that permits us to understand each other’s performance to this degree.

    For the new SEC chair, leading that celebration, even to the point of occasional cheerleading, is critical to remaining as good as we are. I urge cheerleading in lieu of the dysfunctional finger-pointing and ill-founded accusations of the last two years. Together, we and our regulator share an enormously exciting opportunity—keeping our reporting system relevant in an instant-information world. We must turn to face that opportunity together.


    Philip D. Ameen, CPA, is vice president and comptroller of General Electric Company.


    Within a Shared Mission, Agreeing to Disagree

    By Barry C. Melancon

    An uninformed outsider looking at last year’s debate about auditor independence between the SEC and CPA profession might ask, “Why all the fuss? Isn’t independence the hallmark of the CPA profession?” The answer of course is “yes.” Auditor independence is a core value of our profession—the profession’s strongest means for protecting the public interest. But our duty and ability to protect the public interest extend far beyond independence. Which brings us to the heart of the recent disagreement between the accounting profession and the SEC, a difference in view: new world versus old world.

    The accounting profession sees a shift from traditional in-house company users of historic financial information to investors and others that will demand up-to-date, reliable financial information on a “24/7” basis. The public insatiability for that information dramatically changes how the information flows to investors, as well as the accounting profession’s role in the marketplace. In contrast, the SEC sees the role of the auditor as virtually unchanged from its traditional function, which is rooted in the Exchange Acts of the 1930s. The SEC sees any movement from that model of the CPA as a threat to the profession’s ability to protect the public interest. Consequently, the profession strongly disagreed with a notion embodied in the SEC’s proposed rule: that severely restricting other types of work that a company’s audit firm is allowed to do for that same company is only one way to protect the public interest.

    I think the real threat to the public interest lies in a reporting system that is fast becoming obsolete in our technology-driven economy. The accounting profession is indeed committed to protecting the public interest by meeting the needs of all individuals who make financial decisions in the new economy. To do that effectively, the profession and the SEC urgently need to discuss how information gets reported, what gets reported, and how quickly the information needs to be reviewed. Unfortunately, we have not been able to formulate a 21st century reporting model with the SEC because its focus on auditor independence during the last two years drove all other issues into the background.

    During Arthur Levitt’s term as SEC chairman, he and I had numerous discussions about the principles underlying the SEC’s proposed rule and the direction in which the economy and the accounting profession are headed. Not only did we in the profession see the proposed rule as trapping accountants into an outdated role but also, after drilling down into the proposal, we concluded the proposal was a move away from self-regulation and toward more government regulation—something the profession has always opposed. Inevitably, many of the discussions Levitt and I had were intense. I think he and I would agree that far too much of our debate took place in the media instead of face to face.

    A primary thrust in all the AICPA’s negotiations with the SEC over the proposed rule was our effort to protect smaller firms from any “ripple effect” that could result from the adoption of the SEC’s final rule by the state boards of accountancy. In the end, the changes we were able to negotiate ensured the protection of small firms. We also battled to protect the profession’s quest to serve client needs—regardless of firm size—through a broad range of services, particularly consulting and information technology services.

    Last year, during the final 60 days of the rule-making process, the AICPA persuaded the SEC to accept significant changes to the proposal, despite lingering and fundamental differences of opinion. We negotiated resolutely for a rule that preserves the accounting profession’s system of self-regulation and ensures that the profession is able to meet the long-term needs of the information age and the new economy. Ultimately, the effectiveness of the new rule will be determined by how the SEC staff interprets it during the years to come.

    Our debate aside, I applaud Levitt for his passion and commitment to public service. During his tenure—the longest in SEC history—he fought tenaciously for the rights of the small investor and the improvement of the capital market system in the United States. Those are goals that the accounting profession has always shared. Furthermore, Levitt brought a breadth of experience and knowledge to the helm of the SEC that would be an asset to all our federal officials.


    Barry C. Melancon, CPA, is the president and CEO of the AICPA.

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