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."
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
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.