Policing the Auditors

There are rumbles in the industry that more than one Big Five accounting firm will be found in violation of independence regulations.

What began as a limited investigation of one of PricewaterhouseCoopers LLP’s (PwC) branches two years ago has turned into wholesale scrutiny of the accounting profession’s biggest players. Publicly, officials at the Big Five are putting on a good face. Still, there are rumbles in the industry that more than one firm will be found in violation of independence regulations.

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

In 1998, the Securities and Exchange Commission ordered an investigation into allegations of auditor conflicts of interest at Coopers & Lybrand’s Tampa office. The resulting report, released in January 1999, pronounced that the office had violated independence rules. PwC agreed to conduct an internal review of its entire compliance system. The SEC’s final report of that review uncovered widespread violations of independence rules. Although no violations compromised PwC’s audits, the SEC asked the Public Oversight Board to conduct an investigation of the remaining Big Five.

“The rules were always out there, but sometimes it takes a high-profile case to bring them back into consciousness,” says a former Arthur Andersen staffer.

While many of PwC’s independence-rules infractions arose from its merger with Coopers & Lybrand, the report indicated there was “widespread” noncompliance unrelated to the merger. Many issues stemmed from mutual-fund investments held by staff members and their spouses. In some cases, individuals related to PwC employees may have to quit their jobs if they hold a financial position in a client company’s finance department–a measure many deem Draconian. Some feel the present business environment leaves even the most vigilant companies vulnerable to undetected violations.

“The SEC has a right to expect the profession to adhere to the rules,” notes Barry Melancon, president and CEO of the American Institute of Certified Public Accountants. But, he adds that “the profession has a right to expect the regulatory environment to remain modern.

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