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Probe targets Hub office of Tyco auditor

New York investigators are focusing on the Boston offices of PricewaterhouseCoopers LLC to try to determine which auditors knew about the alleged loan abuses that form the backbone of the criminal indictment against former Tyco International Ltd. executives L. Dennis Kozlowski and Mark Swartz, according to several people familiar with the inquiry.

New York City prosecutors have charged Kozlowski, the former chief executive, and Swartz, the former chief financial officer, with looting more than $600 million from Tyco, much of it through company loan programs for relocation and a tax payment on stock options. In court Friday, lead prosecutor John Moscow said Tyco's outside auditor, PwC, knew about most of the transactions that make up the case against Kozlowski and Swartz but didn't say whether the individuals were partners, less senior auditors, or a mix.

A spokeswoman for the district attorney's office in New York couldn't be reached to comment. In the past, she has declined to comment on the status of the investigation.

Meantime, despite the investigations into Tyco and its relationship with PwC, Tyco said in a proxy statement filed last week that it would ask shareholders at next month's annual meeting in Bermuda to re-appoint PwC as its outside auditor. The world's largest accounting firm, PwC, took in fees of more than $50 million last year from Tyco, mostly for various tax and audit services, according to the proxy statement.

Tyco spokesman Gary Holmes said PwC has made major changes to the way it's handling Tyco. PwC ''provided additional resources to the account, added senior personnel to the audit team, and, in 2003, will have a new engagement partner and concurring partner on the account,'' Holmes said.

''Under these circumstances and given their deep knowledge of the company, we believe they will do a very good job auditing our books.''

Over the past year, the accounting industry has come under fire for failing to uncover abuses at the companies they are supposed to audit. Arthur Andersen, the auditor for Enron Corp., went out of business after the Houston energy trader filed for bankruptcy amid allegations of corrupt leadership.

To shore up investor confidence in corporate America, Congress last year passed the Sarbanes-Oxley Act, which among other things reinforced the need for outside accountants to remain independent from the senior management of companies they audit.

PwC has said it is cooperating with investigators, and the firm is not facing criminal charges. Indeed, last October, Moscow said the district attorney's office was not considering pressing charges against PwC or its auditors at that time.

At this point, a key line of inquiry aims to determine exactly which auditors in Boston knew about the loans, and prosecutors are operating under the assumption that these auditors had an obligation to alert Tyco's board of directors to the transactions, according to the people familiar with the inquiry. At this point, no individuals have been notified that they are targets of the investigation.

''Whatever the DA may be investigating, we have been and continue to cooperate,'' PwC spokesman Steven Silber said.

A large part of the prosecutors' case against Kozlowski and Swartz alleges they took loans without the knowledge of the board, as required. PwC asserts that while its auditors knew about some of the loans, its auditors had no way of knowing they were made without proper board approval.

''We don't dispute assistant district attorney Moscow's assertion that PwC was aware of some of the loans, but had no knowledge that any loans or bonuses were unauthorized by the company or its board of directors.''

Asked whether the auditors should have notified the board, Silber said: ''I have no comment beyond that.''

Charles Stillman, Swartz's attorney, and Stephen Kaufman, Kozlowski's attorney, are expected to argue at trial that PwC's knowledge of the transactions indicates their clients did nothing untoward.

Jay Lorsch, a professor at Harvard Business School, said the Sarbanes-Oxley act was passed partly to underscore that auditors are obligated to report to board members activities they see as questionable.

''The audit committee is in charge of the outside auditors, not management. But there is such a strong tie with management, that maybe things were not being communicated as fully as they should have been,'' Lorsch said.

Opinions differ on the degree of legal responsibility. Paul Healy, also at Harvard Business School, said that even before Sarbanes-Oxley, outside auditors ''did have an obligation to provide information to the audit committee. I do not know if that was a legal obligation.'' John C. Coffee Jr., a Columbia Law School professor specializing in corporations, securities regulations, and white-collar crime, said that since 1995 auditors have had a legal duty to report unlawful activity to management and the audit committee.

''They have to go to the audit committee unless it is clearly inconsequential,'' he said.

Of the more than $50 million PwC took in from Tyco last year, $16.3 million was for the fiscal year audit and reviews of quarterly financial statements; $11.6 million for tax work; $11.3 million for non financial statement audits required for due diligence in mergers and acquisitions; $9 million for audit work in foreign countries; and $2.7 million to design a financial information system.

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