January 7, 2000
Major Business News
SEC Report Says Pricewaterhouse Violated Conflict-of-Interest Rules
By ELIZABETH MACDONALD and MICHAEL SCHROEDER
Staff Reporters of THE WALL STREET JOURNAL
The Securities and Exchange Commission said a yearlong review of auditor
conflicts of interest at PricewaterhouseCoopers LLP turned up massive
violations.
The report, which was released by the agency Thursday, says about half of
the Big Five firm's 2,700 partners, including 31 top executives, owned
investments in corporate audit clients, in violation of the SEC's auditor
independence rules.
All told, the report found 1,885 staffers committed a total of 8,064 violations;
45% of the infractions were carried out by partners who work on audits of
public companies.
The report said a large percentage of the violations came about because of
the July 1998 merger between Price Waterhouse and Coopers & Lybrand, in
which each firm's staffers owned investments in the other's audit clients. But
"an even larger portion is not" a result of the merger, the report said. It added
that the infractions stemmed from "widespread" noncompliance, which reflects
"serious structural and cultural problems in the firm."
Most of the infractions involved stock or holdings in individual mutual funds
that the firm audits.
Continuing Investigation
The SEC said it is most troubled by the new report's finding that random tests
indicated 76% of the firm's partners failed to report at least one violation.
SEC Enforcement Chief Richard Walker declined to say if the SEC would
pursue cases against individual partners. The investigation is continuing, he
said.
The report is yet another embarrassing black eye for
PricewaterhouseCoopers, and comes at a time when the SEC fears auditors
have gone soft on corporate audits. The SEC demanded the review as a
result of its earlier censure of PricewaterhouseCoopers in January 1999. In
that matter, the agency uncovered 70 instances in which Coopers & Lybrand
LLP employees, (primarily in the firm's Tampa, Fla., office), and Coopers's
retirement plan continued to own stock in the merged firm's audit clients after
the union was completed.
So far, the SEC hasn't brought any similar conflict-of-interest cases against
other Big Five firms. But according to a Dec. 9 letter, SEC Chief Accountant
Lynn Turner has asked Charles Bowsher, chairman of the accounting
industry's Public Oversight Board, to conduct a "special review" of the other
firms' compliance with the rules. In an interview, Mr. Bowsher said he
expected the reviews to begin later this year, and that they will be overseen by
an independent consultant and a law firm.
Cites 'Honest Failure'
For its part, in a confidential letter circulated Wednesday to staffers,
PricewaterhouseCoopers's chairman, Nicholas Moore, and Chief Executive
Officer James Schiro said that "the vast majority of [the] infractions resulted
from an honest failure to appreciate the importance of compliance, failure to
check" restricted investments, and a "lack of understanding of the intricacies
of the rules."
Of the 2,159 audit clients in which investments were held, the firm said it
believes none have been told by the SEC that their books need to be
reaudited. "At no time was the integrity of our audits compromised," said
Kenton Sicchitano, PricewaterhouseCoopers's global managing partner of
regulatory and independence issues in an interview. Mr. Sicchitano noted the
new report "has been a catalyst for us to make sweeping changes to our
processes." Among other things, the firm has installed a state-of-the-art
computer system that lets it compare employees' investments with restricted
holdings.
But there is a growing backlash from accountants against the SEC's regulatory
crackdown. Accounting executives who asked not to be named adamantly
maintain they have built tough fire walls around their auditing practices, and
that the SEC's circa-1934 independence rules haven't kept up with the firms'
evolving push into every market niche under the sun.
Other accountants say the rules are unduly harsh. For example, the rules have
forced spouses and dependents of PricewaterhouseCoopers's staffers to
dump investments in audit clients, thus creating large tax bills in the process;
many spouses have even been forced to quit their jobs at audit clients. At the
same time, SEC rules prohibit accounting-firm employees from setting up
blind trusts to ensure they're in compliance with the rules.
"The rules need to be modernized," says Barry Melancon, president and chief
executive officer of the American Institute of Certified Public Accountants.