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SEC Paying Ex-Chairman to Help Audit Regulator, Documents Show

Feb. 5, 2020, 9:45 AM

Former SEC Chairman Harvey Pitt is being retained by his former agency through 2024 to advise it on strengthening governance of the Public Company Accounting Oversight Board, almost two decades after his mishandling of the audit regulator’s startup led to his departure.

The Republican is doing the work through his Washington-based consulting firm, Kalorama Partners LLC, according to his contract. Bloomberg Law obtained the document through a Freedom of Information Act request recently fulfilled by the Securities and Exchange Commission, which oversees the PCAOB and appoints its members.

The firm is being paid $125,000 for the work, according to the contract, which lists Pitt as the only person essential to the work’s completion.

Pitt, a lawyer who once represented Enron Corp. auditor Arthur Andersen LLP, was appointed to the SEC by President George W. Bush in 2001. He announced his resignation on Election Day in 2002 amid outrage over his selection of William Webster as the PCAOB’s first chairman. Webster, a former FBI and CIA director, had led the audit committee of a company accused of fraud.

The 2002 Sarbanes-Oxley Act created the audit board and enacted other corporate governance reforms to restore trust in financial reporting after accounting scandals led to the collapse of Enron and WorldCom Inc.

Barbara Roper, director of investor protection for the Consumer Federation of America, called the selection of Pitt a slap in the face to those who care about protecting investors and the role of the board.

“Could you find a less credible person for that job?” said Roper, who sits on the SEC’s Investor Advisory Committee. “It’s hard to imagine how you could.”

Partnering With Pitt

The SEC contacted and considered other firms for the job before deciding on Kalorama Partners, said Natalie Strom, a spokeswoman for agency Chairman Jay Clayton, a Republican-leaning independent.

“The matter for which Mr. Pitt has been engaged is ongoing,” Strom said in a statement to Bloomberg Law. “We note that Mr. Pitt has served the Commission well for many decades.”

Clayton, in a brief interview, told Bloomberg Law that the SEC hired Pitt as part of its normal contracting process. He said he hasn’t talked to Pitt about any possible recommendations the former chairman made about the PCAOB.

Pitt could not be reached for comment.

The PCAOB declined to comment and deferred question’s about Pitt’s work to the SEC.

A whistleblower letter that PCAOB employees sent to the SEC last year described problems at the regulator after an overhaul of its leadership and the departure of most senior staff.

The current board, led by Chairman William Duhnke, inherited a PCAOB that struggled to adopt audit standards and lost the public’s trust after former employees leaked confidential details about the regulator’s inspection plans to auditing giant KPMG LLP.

Governance Checkup

Kalorama Partners is reviewing the audit board’s corporate governance policies and practices and recommending changes to them, according to the contract. The firm also has agreed to give the SEC expert testimony in “any ensuing litigation or dispute involving corporate governance-related policies and practices” at the PCAOB, the contract said.

The contract, which went into effect in July 2019, runs until June 2024. The document ties payments to various milestones, such as drafting and finalizing recommendations for governance policies and procedures. The SEC didn’t answer a question about how much work Kalorama Partners has done thus far.

A few months after the commission hired Kalorama Partners, Clayton announced that Republican SEC Commissioner Hester Peirce would head the agency’s efforts to coordinate with the PCAOB.

The involvement of Peirce and Pitt has drawn questions from Senate Democrats, who have pushed the SEC for more information about their work following a Wall Street Journal story. Picking Pitt “seems unwise,” Sens. Sherrod Brown of Ohio and Jack Reed of Rhode Island wrote in an October 2019 letter to Clayton. Brown is the top Democrat on the Senate Banking Committee.

It’s not the first time the SEC has contracted with Pitt’s firm. Kalorama Partners has received $321,700 in contract spending obligations from the SEC dating to 2015 during the Barack Obama administration, for expert witness services, according to Bloomberg Government data.

Kalorama Partners has six people listed on its website as team members. The group includes managing director Robert Herdman, the SEC’s chief accountant from 2001 to 2002. He helped select Webster for the PCAOB chairmanship.

Uniquely Qualified

Former Republican Commissioner Daniel Gallagher called Pitt’s involvement in the appointment of the first PCAOB chairman an unfortunate episode but said that doesn’t disqualify him from this contract. Rather, his experience with both regulators makes him among the most qualified for the job, he said.

“It is such a unique entity, the PCAOB. Having a nuanced understanding of the legal construct of the PCAOB, and how it operates, and its mission, and the whole evolution of it is so important that if you added that to the requirements for this type of consultancy, I can’t imagine that there are too many people that would satisfy the bill. And Harvey is definitely one of them,” Gallagher said.

Gallagher also dismissed concerns that Pitt’s past work for large accounting firms would influence his work today for the SEC.

“He’s got to pay attention to who the client is, what their mission is, and what types of results they are trying to drive to. And that’s certainly not going to be loosening standards or creating loopholes for the accounting industry.”

—With assistance from Daniel Snyder.

To contact the reporters on this story: Andrew Ramonas in Washington at aramonas@bloomberglaw.com; Amanda Iacone in Washington at aiacone@bloombergtax.com

To contact the editors responsible for this story: Bernie Kohn at bkohn@bloomberglaw.com; Michael Ferullo at mferullo@bloomberglaw.com

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