Pricewaterhousecoopers Llp Auditors' Independence Issues & Violations

SEC Concerned with Changes in the Public Accounting Profession

The SEC and the former Chairman Arthur Levitt Jr. were extremely concerned that the public accounting firms were violating the auditors independence rules addressed through the Securities Exchange Acts. Auditing firms now had dual citizenship in public companies: (1) they issued opinions on audited financial statements and (2) they participated in various consulting engagements for those same companies. Levitt's solution was to split auditing and consulting. The former Chairman was concerned that the public would lose confidence in the financial markets ...... and the whole system would be jeopardized.

Public Accounting Revenues vs. Consulting Revenues by 1999

By 1976, audit fees accounted for approximately 70% of total revenue earned by any accounting firm in general. According to the Public Accounting Report, an Atlanta newsletter, the auditing and assurance services revenues dropped to 30% and tax services business accounted for 19% of the total revenues earned in 1999. Mathematically speaking, this means management consulting services accounted for approximately 51% of the total revenue being earned in 1999 by public accounting firms.

Fact: According to The Business Journal's Book of Lists, PwC had $75 million in South Florida billings in 1998 to place third among accounting firms.

SEC Auditors' Independence Rule

The independence rules require that auditors refrain from investing in companies that they audit, to ensure objective, truthful reporting and opinion. The rule applies to all auditors, their relatives, spouses, dependents, non-dependents, and, in some cases, associates must disclose all holdings.

On the September 25, 2002 issue of BusinessWeekOnline.com, the Accounting Wars Powerful auditor-consultants are the target of Arthur Levitt's crusade articles defined "Independence to mean, CPAs cannot audit their own or their partners' work.........clear and honest information is dependent on the CPAs independence......an auditor must not have any financial stake in the health, or even survival, of a client company."

There are those in the profession that believe this rule is archaic and does not hold any value in today's financial world. Barry Melancon, President and CEO of the American Institute of Certified Public Accountants stated, "The SEC has a right to expect the profession to adhere to the rules; however, the profession has a right to expect the regulatory environment to remain modern."

Fact: In 1933, when Congress first required public financial reports, lawmakers debated whether audit fees would taint auditors' independence.

PriceWaterhouseCoopers LLP

PriceWaterhouseCoopers LLP is a public accounting firm formed through a merger between Coopers & Lybrand LLP and Price Waterhouse LLP, which was consummated on or about July 1, 1998.

Fact: The merger resulted in making PwC the largest accounting firm in the world.

The SEC Targets the C&L Tampa Office for possible violations

During 1997, the SEC received an anonymous letter from a whistle blower at the Southeast Regional Office in Miami. The letter alleged that audit staff in the Tampa office of C&L owned stock in the companies they were auditing, which clearly violated the SEC's independence rule. In 1998, the SEC ordered an investigation into the allegations of auditor conflicts of interest at Coopers & Lybrand's Tampa office, now known as PwC.

Fact: Upon merging, both accounting firms (partners and staff) were required by the independence rule to divest all shares owned in companies audited by each other. The independent study revealed that this never took place and in fact PwC had committed an independence violation at that location.

SEC Charges PwC with Auditors' Independence Rules

The "auditor independence" issue came to the forefront on January 14, 1999. The SEC issued an Opinion and Order Pursuant to Rule 102(e) of the Commission's Rules of Practice In the Matter of PricewaterhouseCoopers LLP (Securities Exchange Act of 1934 Release No. 40945) ("Order"), which censured PwC for violating auditor independence rules and improper professional conduct. PwC agreed to a complete internal review supervised by an independent person or firm to be appointed by the SEC and to report any additional violations.

Fact: Although no violations compromised or impaired any of the PwC audits it did trigger an investigation of the remaining Big Five by the Public Oversight Board.

PwC had taken the position that the independence issue was a result of the merger and a one-time breakdown in the internal system.

Fact: The independent report concludes......the numbers of violations alone, as PwC acknowledges, reflect serious structural and cultural problems that were rooted in both its legacy firms (PW and C&L); although a large percentage of the reported and unreported violations is attributable solely to the Merger, an even larger portion is not; thus, the situation revealed by the internal investigation is not a one-time breakdown explained solely by the merger.

Independent Consultant Review Regarding PwC's Violations

On March 1999, the SEC appointed independent consultant Mr. Jess Fardella of Lankler Siffert & Wohl LLP to supervise PwC's internal review of potential independence violations by the firm.

The SEC issued the independent consultant's report citing PwC with 8,064 violations and that a substantial number of PwC professionals (mostly partners) had attributed to the independence violations.

Facts uncovered from the independent consultant's report:

1. Of 8,064 reported violations, 81.3% were reported by partners and 17.4% by managers; 45.2% of the violations were reported by partners who performed services related to audits of financial statements.

2. Approximately half of the PwC partners had self-reported at least one independence violation. The average number of violations was approximately five; 153 partners reported more than 10 violations each.

3. Approximately half of the reported violations were based on direct investments in securities, mutual funds, bank accounts, or insurance