The U.S. Securities and Exchange Commission, stepping up its enforcement of auditor-independence rules, accused PricewaterhouseCoopers LLP and some of its partners and managers of buying stock in 70 companies, many of which were audit clients. The conflict-of-interest case, the agency's largest so far, "is an important piece in the picture that has emerged in the past few months over lack of attention to accounting standards, all of which has contributed to serious financial reporting problems in the marketplace," according to Richard Walker, the SEC's head of enforcement.
Firm to Establish $2.5 Million Fund PricewaterhouseCoopers didn't admit or deny the findings, but agreed to be censured by the SEC, to establish a $2.5 million education fund for accountants, to improve internal procedures and to conduct an internal investigation supervised by an outsider named by the SEC.
PricewaterhouseCoopers was formed by the July 1998 merger of Coopers & Lybrand LLP and Price Waterhouse LLP. According to the SEC, between 1996 and 1998, Coopers & Lybrand's compliance procedures failed to detect 35 instances in which 11 professional employees primarily in the firm's Tampa, Fla., office bought stock in companies for which the firm provided audit and other services.
The SEC also alleged that Coopers & Lybrand's companywide retirement plan owned stock in 45 publicly held audit clients. Some of those violations involved the merged company.
In a statement, the firm said, "A few individuals in Coopers & Lybrand's Tampa office circumvented the firm's controls by withholding information, and, in the case of the pension fund, violations occurred because required procedures were not followed."
The statement continued, "The firm accepts responsibility for these incidents and has agreed to the terms of the settlement. We and our clients will benefit from the additional measures we will take to make sure that this does not happen again."
Campaign Against Accounting Fraud The SEC's move is one of a growing number of actions involving Big Five accounting firms and public companies as part of a campaign against accounting fraud. Enforcing auditor-independence rules has been a major initiative of the new SEC chief accountant, Lynn Turner. He recently sent a letter to the Independence Standards Board, a panel of SEC and accounting officials, expanding the SEC's review of independence issues to include possible violations in which accounting firms invest in mutual funds that they audit.
The case could prove an embarrassment for PricewaterhouseCoopers's top executive, James Schiro, who sits on the Independence Standards Board. Speaking on behalf of Mr. Schiro, firm spokesman David Nestor said, "This was a failure of individuals and not of the organization. We take our policies and our reputation for integrity and our professional responsibilities very seriously." Mr. Nestor said, "Three people are no longer with the firm because of this."
The SEC's Mr. Walker said the magnitude of the violations makes this an unusual case. "I can't recall a situation in which we've seen a firm that has held stock in 70 different clients." The SEC wouldn't identify the public companies that are "victims" in the matter.
However, Sykes Enterprises Inc., a Tampa, Fla., provider of information-technology services, said in a statement that the SEC notified Sykes in mid-December that PricewaterhouseCoopers, its auditor, and in violation of the SEC's independence standards because an audit-firm staffer owned Sykes securities.
A Sykes spokesman said, "Obviously, selecting another auditor would be an option, and that is being investigated."