Heads Roll at Consulting Giant in Wake of SEC Investigation

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Heads Roll at Consulting Giant in Wake of SEC Investigation
S. McVey - January 17th, 2000

Event Summary

In a document filed on January 6, the Securities and Exchange Commission reported that global audit and consulting firm PricewaterhouseCoopers LLP violated auditor independence rules and engaged in improper professional conduct. Independence rules prohibit tax and audit firms from making direct investments in companies they audit. The findings were made by Jess Fardella, an independent consultant appointed by the SEC in March 1999, who supervised an internal review by PwC. PwC agreed to conduct the review after it was censured by the SEC in January 1999 for similar violations. According to the 122-page report, PwC partners were the primary offenders of the independence rules, though other employees also contributed to the problem. PwC acknowledged the SEC findings reveal "widespread independence non-compliance that reflected serious structural and cultural problems in the firm."

Market Impact

The findings of its ongoing PwC investigation will provide the SEC considerable leverage as it implements similar reviews at the other big audit firms. Contrary to what is popularly known, the management consulting divisions of firms like Ernst & Young, Deloitte & Touche and Arthur Andersen are subject to the same restrictions that govern their sibling audit divisions. As the SEC replicates its review at other firms, it will find that some are better prepared than PwC. For instance, Ernst & Young has taken measures to ensure compliance at an early stage, writing clauses into new employee agreements to clarify firm policy. E&Y has gone a step further by announcing its intention to separate entirely from its consulting side and selling it to integrator Cap Gemini (See TEC News Analysis article: "Cap Gemini Eyeing Ernst & Young Business Unit" December 13th, 1999). Regardless of whether the proposed sale proceeds, the possibility demonstrates the sacrifice firms are willing to make to avoid conflicts of interest. As the Big Five grow even bigger, it is likely that others will take similar steps to preserve ethical standards.

User Recommendations

The SEC revelation should raise important questions for users who may be evaluating service providers. Apart from the ethical line that is crossed when an auditor uses confidential information about a client, intentionally or otherwise, to play the stock market, the case reveals a flaw that has immeasurable impact on a firm's ability to deliver. PwC's structural and cultural problems highlighted in the report have grave implications for companies who expect to have the best available resources on their projects. Unlike firms like Andersen Consulting, PwC organizes the world into several geographic regions, each containing its own ERP practice, supply chain practice, and so forth, as well its own income statement. The partners in charge of the practices must sometimes barter for consultants from other regions when staff shortages exist for a given engagement. Partners who are asked to donate staff are reluctant, since doing so can prevent them from manning potential projects within their own regions. Instead of taking a global view of its project slate, PwC undermines its global objectives in this endless tug and pull.. Users need to be aware of this often overlooked fact and ask the proposal team to confirm resource availability for the project.

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