PricewaterhouseCoopers, world's largest accounting firm, has agreed to pay $1 million to settle federal regulators in US on allegations that it engaged in improper professional conduct in its audit work — the second time in less than a year it has been cited for that alleged infraction.
PricewaterhouseCoopers neither admitted nor denied wrongdoing in the settlement that the Securities and Exchange Commission announced Thursday. As it did last July in a similar accord with the SEC, in which it paid $5 million, the firm also agreed to be censured and to make changes in how it operates. That case involved audits of 16 companies from 1996 to 2001.
At issue in the new case is PricewaterhouseCoopers' 1997 audit of SmarTalk TeleServices Inc., a provider of pre-paid phone cards and wireless services which the SEC says is now bankrupt. Because the auditing firm failed to adequately account for a $25 million reserve fund, SmarTalk filed with the SEC an annual report “which contained materially false and misleading financial statements,'' the agency said.
David Nestor, a spokesman for New York-based PricewaterhouseCoopers, said the firm is pleased that the issue is resolved.
“We are fully complying with all provisions of the agreement, including the requirement that an outside consultant review (the firm's) previously-adopted revised policies and procedures for preserving work papers,'' Nestor said.
Nearly a year after now-fallen Arthur Andersen LLP was convicted on obstruction of justice charges for destroying reams of Enron audit documents, alleged violations by other big firms in the scandal-tainted accounting industry continue to be cited.
In January the SEC sued another Big Four accounting firm, KPMG LLP, alleging that it fraudulently allowed Xerox Corp. to manipulate accounting practices to fill a $3 billion gap, thereby satisfying investors about its financial performance. The agency is seeking injunctions, repayment of auditing fees and unspecified civil penalties. KPMG has defended its 1997-2000 audits of Xerox's financial statements and has called the SEC's accusations unfounded.
Antonia Chion, an associate enforcement director at the SEC, called the latest PricewaterhouseCoopers action an example of the agency's “intention to adopt a new enforcement model — one that holds an accounting firm responsible for the actions of its partners.''
“It also highlights the firm's failure to maintain the integrity of its audit working papers,'' Chion said in a statement.
Under the settlement, PricewaterhouseCoopers agreed to establish new policies for preserving documents and to hire an independent consultant to review its computer software system.
The SEC also alleged that Philip Hirsch, who had been the lead audit partner for SmarTalk, engaged in improper professional conduct. Hirsch, who neither admitted nor denied the allegations, consented in a settlement to be barred from auditing publicly traded companies for at least a year, with the right to apply for reinstatement after that.
Hirsch's attorney, Geoffrey Aronow, declined comment.
In the July 2002 case, the SEC alleged that PricewaterhouseCoopers broke rules meant to ensure that auditors remain independent from the companies whose books they oversee.
As a result of the rule violations, the SEC found that 16 clients of the accounting firm submitted financial statements from 1996 to 2001 that didn't comply with federal securities laws. The violations were said to be related to PricewaterhouseCooper's approval of clients' accounting treatment of costs that included the accounting firm's own consulting fees.
Also, the SEC said that PricewaterhouseCoopers entered into improper fee arrangements with the audit clients, in which the companies hired PricewaterhouseCoopers' investment bankers to provide financial advice for a fee that depended on the success of the transaction the company was pursuing.
The new board created by Congress last year to ovesee the accounting industry, which has the power to discipline accountants, recently decided it also will establish new standards for auditors governing quality control, professional ethics and their independence from audit clients. The SEC on Wednesday formally approved the appointment of William J. McDonough, president and chief executive of the Federal Reserve Bank of New York, as chairman of the oversight board.