PricewaterhouseCoopers, world's largest accounting firm, has taken a risky public stance in favor of better, more thorough and more detailed audits.
In recent advertisements, the firm has promised to take a tougher stance with clients and resign if it cannot resolve concerns about a particular audit.
It is a gamble strongly favored by those who want accounting firms to be more aggressive with their corporate clients, to weed out fraud before investors suffer catastrophic losses. And it distinguishes the firm from its three most important competitors among the largest accounting firms.
But it is still a gamble. PricewaterhouseCoopers has begun to outline a yardstick by which its own performance will be judged, and if it falls short, the firm could find itself singled out for special criticism in a profession that came under heavy fire in 2002.
“The talk is great, and if they walk the talk, it will be a tremendous move that will clearly differentiate them from any of the other big firms,” said Lynn Turner, the former chief accountant for the Securities and Exchange Commission. “It will be a tremendous gain for investors as well. But let's see the walk first.”
The talk has been evident in recent full-page newspaper advertisements in which PricewaterhouseCoopers has stated its willingness “to ask the tough questions and tackle the tough issues.” The firm further pledges, “In any case where we cannot resolve concerns about the quality of the information we are receiving or about the integrity of the management teams with whom we are working, we will resign.”
But PricewaterhouseCoopers faces a significant challenge from continuing public scrutiny of its past work. For instance, it approved financial disclosures at Tyco International despite the company's use of “aggressive accounting that, even when not erroneous, was undertaken with the purpose and effect of increasing reported results above what they would have been if more conservative accounting were used,” according to a report filed by Tyco on Monday with the S.E.C. Tyco also said it was reducing previously reported earnings by $382 million.
The approval of technically permissible — but perhaps misleading — “aggressive accounting” shows the difficulty the firm faces in bridging what John J. O'Connor, a vice chairman at PricewaterhouseCoopers, called the “expectations gap” between what investors want from audits and what auditors do. Mr. O'Connor said the firm planned to close that gap.
“We are looking at the type of qualitative reporting that we can do,” he said, so that investors would be informed of just how aggressive or conservative the assumptions behind a company's financial disclosures were. For now, he said, “we are clearly starting with the audit committees and management.”
The firm has also put together ethical guidelines that, while not new, have not been codified before. The code of conduct tells employees confronted with difficult judgment calls to consider, among other things, “Does it feel right?”, “How would it look in the newspapers?” and “Can you sleep at night?”
The questions illustrate that many of the decisions auditors are called on to make are not strictly dictated by the rules.
“That's the issue,” said Charles A. Bowsher, a former comptroller general of the United States and head of the Public Oversight Board that used to supervise ethics and disciplinary issues for the accounting profession. “In each case, unfortunately, you've got to look at the facts. I'm a great believer that if you have a client who's pushing the envelope too far too many times — and I believe that is how Arthur Andersen got into trouble — then the auditor should resign from the account.”
Mr. O'Connor says that if the firm's accountants ask themselves these questions and are uncomfortable with the answers — even if a client's preferred accounting complies with generally accepted principles — they should not sign off on the books. In recent months the company has resigned from several clients, he added, but he would not identify them.
Auditors do not often resign. According to Auditor-Trak, a service of Strafford Publications, an Atlanta-based publisher of legal and business information services and accounting industry data, 348 accounting firms resigned from clients in 2002 through Monday, with firms indicating in 59 cases that the reasons were concerns about independence or a company's practices or concerns by a company about the auditor's standards. The four largest firms resigned from 80 clients, and PricewaterhouseCoopers accounted for 13 of those. In 2001, there were 286 resignations, 88 of them by the four largest firms and 22 by PricewaterhouseCoopers.
But the data may understate how often companies and auditors part ways over accounting disputes because it is in neither side's interest to make such disagreements public. Executives do not want their companies to suffer the increased scrutiny and decline in stock price that would probably follow an auditor's resignation, and accounting firms do not want to attract the attention of lawyers looking for grounds for securities lawsuits.
If PricewaterhouseCoopers does provide audits that give more information to investors, Mr. Turner said, it may actually help shield the firm from such lawsuits.
“The way an accounting firm has to manage its risk if it's going to be successful — and none of them have been in the last three or four years — is you have to be sure that whoever you have out there on the audit team is identifying the problems,” he said. Finding the problems will be easier the more thorough the audit is, he added.
The other large accounting firms have responded to general criticism of the accounting profession with marketing campaigns of their own, but none have gone as far as PricewaterhouseCoopers and some oppose the firm's proposals, Mr. Turner said.
“Will PWC be able to bring the profession along?” he asked. “The proof is going to be in the pudding.”