Review Finds Half of Partners at PricewaterhouseCoopers Violated Stock Rules

WASHINGTON — Nearly half the partners at accounting giant PricewaterhouseCoopers LLP reported having violated rules prohibiting them from owning stock in companies they audit, and many more such lapses went unreported, a review led by an independent consultant has found.

The Securities and Exchange Commission, which made the consultant’s review public on Thursday, said its investigation of New York-based PricewaterhouseCoopers is continuing.

A year ago, the firm agreed in a settlement to conduct the review and create a $2.5 million education fund after the SEC alleged that some of its accountants compromised their independence by owning stock in corporations they audited.

PricewaterhouseCoopers promised at the time to take steps to ensure that it didn’t happen again.

PricewaterhouseCoopers promised at the time to take steps to ensure that it didn’t happen again.

Five Partners Dismissed

As a result of the new inquiry, five partners of the firm and a slightly larger number of other employees had been dismissed, and other employees were disciplined but not fired, a PricewaterhouseCoopers managing partner, Kenton J. Sicchitano, told The New York Times in Friday’s editions. He declined to give names.

In light of the disappointing results of the review, the SEC said Thursday it has asked an accounting industry oversight board to sponsor similar independent reviews at other accounting firms.

The SEC has been stressing the need for accounting firms to be more independent of the companies they audit. The watchdog agency’s rules explicitly forbid accountants from owning stock in their audit clients.

Lynn Turner, the SEC’s chief accountant, called the report by the independent consultant, New York attorney Jess Fardella, “a sobering reminder that accounting professionals need to renew their commitment to the fundamental principle of auditor independence.”

Fardella and his four-person team found some excusable mistakes by the accounting firm but also “laxity and insensitivity to the importance of independence” and “serious” problems of corporate structure and culture.

The report found:

—Nearly half the firm’s 2,698 partners, or 1,301, reported having committed at least one violation of the auditor independence rules while 153 of them admitted to more than 10 each.

—Of a total 8,064 violations reported by those involved, 81.3 percent were by partners and 17.4 percent by managers. Nearly half of the reported violations were committed by partners who perform services related to financial audits of companies.

—Almost half the reported violations involved direct investments by the PricewaterhouseCoopers professionals in securities, mutual funds, bank accounts or insurance products related to client companies.

—In addition, Fardella’s team did random checks that found that 77.5 percent of the firm’s partners failed to report at least one violation they committed. That means an estimated 86 percent of the 2,698 partners had at least one violation, the report said.

Dave Nestor, a spokesman for PricewaterhouseCoopers, said he had no comment on the report but provided a copy of a letter sent Wednesday by chairman Nicholas G. Moore and chief executive James J. Schiro to the firm’s partners.

The letter termed the Fardella report “embarrassing to our firm and to all of us as partners” and said that “Equally important, it may also raise questions and concerns among our clients and our people.”

However, the executives added that the violations of the independence rules cited by the report, while unacceptable, “did not in any way impair the professional objectivity and integrity” of the company’s audits.

“We are determined to do everything possible so that neither our firm nor our clients ever again suffer from independence-related problems,” Moore and Schiro wrote. “To facilitate this, we have established expansive new policies and procedures to address previous infractions and to prevent future ones.”

The SEC appointed Fardella in March 1999 to supervise the internal review after it censured PricewaterhouseCoopers for alleged violations of the independence rules.

In its settlement with the SEC, the firm agreed to set up the $2.5 million education fund, to be used to enhance awareness in the accounting profession of the independence rules.

PricewaterhouseCoopers, created from the July 1998 merger of Price Waterhouse LLP and Coopers & Lybrand LLP, neither admitted nor denied wrongdoing in agreeing to the settlement.

Under the accord, the firm also agreed to be censured, to improve its procedures for monitoring adherence to the independence rules and to conduct the internal investigation supervised by Fardella.

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