Independence Violations at PricewaterhouseCoopers
PricewaterhouseCoopers (PwC) was involved in a series of independence violations in the late 1990s and early 2000s that resulted in strengthening the independence rules for auditors We discuss these situations in two parts. Part I
On January 6, 2000, the SEC made public the report by independent consultant Jess Fardella, who was appointed by the commission in March 1999 to conduct a review of possible independence rule violations by PwC arising from ownership of client-issued securities. The report found significant violations of the firm’s, the profession’s, and the SEC’s auditor independence rules. Background
On January 14, 1999, the commission 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. Pursuant to the settlement reached with the commission, PwC agreed to, among other things, complete an internal review by Fardella to identify instances in which the firm’s partners or professionals owned securities of public audit clients of PwC in contravention of applicable rules and regulations concerning independence. The independent consultant’s report discloses that a substantial number of PwC professionals, particularly partners, had violations of the independence rules, and that many had multiple violations. The review found excusable mistakes, but also attributed the violations to laxity and insensitivity to the importance of independence compliance. According to Fardella’s report, PwC acknowledged that the review disclosed widespread independence noncompliance that reflected serious structural and cultural problems in the firm. Results of the Independent Consultant’s Report
The report summarizes results of the internal review at PwC, which included two key parts: PwC professionals were requested in March 1999 to self-report independence violations; and the independent consultant randomly tested a sample of the responses for completeness and accuracy. The results are as follows:
Almost half of the PwC partners—1,301 out of a total of 2,698—self-reported at least one independence violation. The 1,301 partners who reported a violation reported an average of 5 violations; 153 partners had more than 10 violations each. Of 8,064 reported violations, 81.3 percent were reported by partners and 17.4 percent by managers; 45.2 percent of the violations were reported by partners who perform services related to audits of financial statements.
Almost half of the reported violations involved direct investments by the PwC professional in securities, mutual funds, bank accounts, or insurance products associated with a client. Almost 32 percent of reported violations, or 2,565 instances, involved holdings of a client’s stock or stock options.
A total of 6 out of 11 partners at the senior management level who oversaw PwC’s independence program self-reported violations. Each of the 12 regional partners who help administer PwC’s independence program reported at least 1 violation; one reported 38 violations and another reported 34 violations.
In addition, 31of the 43 partners who comprise PwC’s Board of Partners and its U.S. Leadership Committee self-reported at least 1 violation. Four of these had more than 20 violations; one of these partners had 41 violations and another had 40 violations. These random tests of the self-reporting process indicated that a far greater percentage of individuals had independence violations than were reported. Despite clear warnings that the SEC was overseeing the self-reporting process, the random tests of those reports indicated that 77.5 percent of PwC partners failed to self-report at least one independence violation. The combined results of the self-reporting and random tests of...
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