PricewaterhouseCoopers Settles SEC Auditor Independence Case


PWC and Its Broker-Dealer Affiliate to Pay a Total of $5 Million Avon Settles SEC Enforcement Action, Agrees to Restate

Washington, D.C., July 17, 2002 -- The Securities and Exchange Commission today announced a settled enforcement action against PricewaterhouseCoopers LLP (PwC) and its broker-dealer affiliate, PricewaterhouseCoopers Securities LLC (PwCS), for violations of the auditor independence rules. The auditor independence violations span a five-year period from 1996 to 2001 and arise from (1) PwC's use of prohibited contingent fee arrangements with 14 different audit clients for which PwCS provided investment banking services, and (2) PwC's participation with two other audit clients, Pinnacle Holdings Inc. and Avon Products Inc., in the improper accounting of costs that included PwC's own consulting fees.

The SEC's order finds that, by virtue of PwC's independence violations, the firm caused 16 PwC public audit clients to file financial statements with the SEC that did not comply with the reporting provisions of the federal securities laws. The order also finds that, in connection with the improper accounting of its consulting fees, PwC caused two of those clients to violate the reporting, recordkeeping, and/or internal controls provisions of the federal securities laws. PwC and PwCS agreed to pay a total of $5 million and PwC agreed to comply with significant remedial undertakings as a result of its settlement with the SEC. PwC also agreed to cease and desist from violating the auditor independence rules and to be censured for engaging in improper professional conduct.

"An auditor's objectivity is critical to the financial reporting process," said Stephen M. Cutler, the SEC's Director of the Division of Enforcement. "Impairment of an auditor's independence undermines that process and erodes public confidence in our capital markets.

"This case demonstrates the heightened risk of an audit failure when an accounting firm assists in and approves the accounting treatment of its own consulting fees," Cutler said. "Faced with that situation here, PwC lacked the objectivity and impartiality required of an independent auditor."

The SEC's order finds that PwC's independence violations involved 16 separate audits of 16 public companies:

  • From 1996 to 2001, PwC and one of its predecessors, Coopers & Lybrand, entered into impermissible contingent fee arrangements with 14 public audit clients. In each instance, the client hired the audit firm's investment bankers, either PwCs or Coopers & Lybrand Securities, to perform financial advisory services for a fee that depended on the success of the transaction the client was pursuing. These fee arrangements violated the accounting professions' own prohibition against contingent fee arrangements with audit clients and violated the SEC's independence rules. As a result, the SEC found that PwC lacked the requisite independence when it performed audits for these 14 public companies.
  • In 1999 and 2000, PwC participated in and approved of the improper accounting of its own non-audit fees by two public audit clients, Pinnacle and Avon:
    • In 1999 and 2000, while accounting for a 1999 acquisition of certain assets of Motorola, Inc., PwC assisted Pinnacle in establishing more than $24 million in improper reserves and in improperly capitalizing approximately $8.5 million in costs, including $6.8 million in fees paid to PwC for consulting and other non-audit services that should have been expensed. In April and May 2001, Pinnacle restated its accounting for the 1999 acquisition, and in December 2001, the SEC issued a settled cease and desist order against Pinnacle. See In the Matter of Pinnacle Holdings, Inc., Exchange Act Release No. 45135 (Dec. 6, 2001).
    • In the first quarter of 1999 and in its 1999 audit of Avon's financial statements, PwC assisted in and approved of Avon's improper accounting of an impaired asset that included PwC's non-audit consulting fees. In April 1999, after nearly three years and an investment of approximately $42 million, Avon stopped an uncompleted order-management software project that PwC consultants had attempted to develop for Avon's internal use. Instead of writing off all of the project's costs in the first quarter of 1999, however, Avon improperly retained $26 million, which was comprised mostly of PwC's own consulting fees. PwC participated in and approved of Avon's improper accounting, and also contributed to Avon's misleading disclosures concerning the accounting.
    • For both Pinnacle and Avon, the SEC found that PwC failed to exercise the objective and impartial judgment required by the independence rules.

In consenting to the SEC's order, PwC agreed to perform significant remedial undertakings designed to prevent the type of independence violations found in the order. Among these undertakings, PwC agreed to:

  • review new fee agreements for non-audit services before they are entered into with audit clients, to ensure that any "value added" fee arrangements do not violate the independence rules;
  • require an "independent reviewing partner" appointed from among PwC's Risk Management partners to:
    • review audits of SEC-registrants in which the audit client capitalizes PwC non-audit fees, to ensure that the accounting for those fees complies with the accounting rules and that the audits were performed in accordance with generally accepted auditing standards, including the independence rules;
    • perform the audit procedures required by the AICPA SEC Practice Section for certain other audits that will be identified by considering risk factors that include the relationship and magnitude of PwC audit and non-audit fees; and
  • provide annual training for all PwC professionals on auditor independence issues.

Simultaneous with the issuance of the order in this case, the SEC brought a settled enforcement action against Avon for failing to properly value costs that it had capitalized in connection with the software development project. Avon agreed to cease and desist from violating the reporting and recordkeeping provisions of the federal securities laws and to restate its financial statements to appropriately reflect the complete impairment of the project in the first quarter of 1999. See In the Matter of Avon Products, Inc., Exchange Act Release No. 46215 (July 17, 2002).

Contacts: Stephen M. Cutler    (202) 942-4500

Contingent Fee Violations

Wayne M. Carlin     (646) 428-1510
Barry W. Rashkover     (646) 428-1856

Pinnacle Violations

William R. Baker, III     (202) 942-4570
Brian A. Ochs     (202) 942-4740

Avon Violations

Paul R. Berger     (202) 942-4560
Timothy N. England     (202) 942-7109

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Last modified: 7/17/2002