On April 26th the US Securities and Exchange chairman, Harvey Pitt, met Eugene O'Kelly, the new chairman of the "big five" American accounting firm, KPMG. Conor O'Clery reports.

Five days later Mr O'Kelly sent a lengthy e-mail to KPMG employees about the meeting. In his first official act "as your chairman", he said, he had raised with Mr Pitt the case of the SEC's investigation of KPMG.

The SEC is considering filing civil charges against KPMG and some of its partners for their role in auditing Xerox, which last month paid a $10 million (€10.9 million) fine, the largest in history, without admitting guilt, on charges that it falsely overstated earnings by $3 billion over four years.

Mr O'Kelly said in his e-mail that he had warned Mr Pitt that proceedings against KPMG would pose "serious disruption at this juncture in the capital markets", and that he had defended two executives at Xerox who were targeted in the SEC inquiry.

This was high-handed stuff. When the e-mail leaked, there was uproar. SEC chairmen are not supposed to discuss investigations with former private clients. Mr Pitt was a securities lawyer who represented the big five accounting firms before President George W Bush appointed him to head the regulatory body nine months ago.

He was accused of undermining confidence in the markets by meeting former corporate buddies under investigation by his own agency. The government watchdog group, Common Cause, called for Mr Pitt's resignation, saying he had not made the transition from advocate of private clients to guardian of public trust.

Even the conservative Wall Street Journal worried that by eroding his credibility Mr Pitt was helping the "enemies of free markets" to justify more regulation.

Mr Pitt protested that the topic never came up and members of Congress demanded a full explanation in writing from both men. The KPMG chairman then backpedalled and wrote that he had never mentioned Xerox by name, just that a pending matter had been "briefly referenced". Democrats were unconvinced. "We still haven't got to the bottom of this and I don't like the smell of it," said Congressman Edward Markey.

Mr Pitt faced more questions this week when the Washington Post revealed that he had other conversations with firms under SEC investigation, despite advice from senior SEC lawyers. He had met Xerox chief executive Anne Mulcahy and former KPMG chief executive Stephen Butler in December, before the settlement with Xerox, and also the developer Donald Trump in January before the SEC settled a case with Mr Trump's Hotels & Casino Resorts firm. SEC staff had warned Ms Mulcahy not to bring up the inquiry into Xerox but apparently she did and Mr Pitt declined to discuss it.

The SEC chairman said every meeting or conversation was "to help the SEC improve its performance for investors", but that he would vet visitors more carefully in future.

No one has suggested Mr Pitt tried improperly to influence the outcome of the cases concerned, and his enforcement division has been busy issuing fines and restraining orders. However the perception of cronyism persists.

YESTERDAY the SEC accused another "big five" accounting firm, Ernst & Young, with violating SEC rules by entering into lucrative business deals with the software firm, PeopleSoft, that it also audited. Mr Pitt did not participate in the decision as Ernst & Young - which disputes the charge - is also a former client.

In October Mr Pitt appointed the former vice-chairman of Ernst & Young, Robert Herdman, as chief accountant of the SEC. Mr Herdman had appeared before lawyers to discuss the Peoplesoft inquiry last spring. Mr Pitt and Mr Herdman in 1997 worked together on a "white paper" for the American Institute of Certified Public Accountants that dismissed the case for strict new independence standards for auditors in favour of better self-regulation.

Self-regulation has patently not worked - accountancy firms successfully resisted meaningful reform in earlier crises of confidence and auditor complicity is at the heart of the Enron and Andersen affairs. Senator Paul Sarbanes, chairman of the Senate Banking Committee, has proposed a bill to create an oversight body that would limit the consulting work accountants can do to prevent conflict of interest. Former Fed chairman Paul Volcker yesterday said the bill was the only way to protect the public interest over industry perspectives.

Meanwhile, the pressure on Mr Pitt to go is mounting even from some of his fans, who fear that to protect himself he will be tempted, as one critic put it, to show his reforming zeal by hanging some corporations in the public square.