We have yet to find a significant case where the company did not move in the direction of the chief executive's home.

- Ken Patton
 

Integrity Violations Uncovered at PricewaterhouseCoopers

Washington - Nearly half the partners at accounting giant PricewaterhouseCoopers LLP reported violating rules prohibiting them from owning stock in companies they audit, and many more such lapses went unreported, a review led by an independent consultant has found.  The Securities and Exchange Commission, which made the consultant's review public on Thursday, said its investigation of New York-based PricewaterhouseCoopers is continuing.

A year ago, the firm agreed in a settlement to conduct the review and create a $2.5 million education fund after the SEC alleged that some of its accountants compromised their independence by owning stock in corporations they audited.  PricewaterhouseCoopers promised at the time to take steps to ensure that it didn't happen again.

As a result of the new inquiry, 5 partners of the firm and a slightly larger number of other employees had been dismissed, and other employees were disciplined but not fired, a PricewaterhouseCoopers managing partner, Kenton J Sicchitano, told The New York Times in Friday's editions.  He declined to give names.

In light of the disappointing results of the review, the SEC said Thursday it has asked an accounting industry oversight board to sponsor similar independent reviews at other accounting firms.  The SEC has been stressing the need for accounting firms to be more independent of the companies they audit.  The watchdog agency's rules explicitly forbid accountants from owning stock in their audit clients.

Lynn Turner, the SEC's chief accountant, called the report by the independent consultant, New York attorney Jess Fardella, "a sobering reminder that accounting professionals need to renew their commitment to the fundamental principle of auditor independence."  Fardella and his 4-person team found some excusable mistakes by the accounting firm but also "laxity and insensitivity to the importance of independence" and "serious" problems of corporate structure and culture.  The report found:

Nearly half the firm's 2,698 partners, or 1,301, reported having committed at least one violation of the auditor independence rules while 153 of them admitted to more than 10 each.  Of a total 8,064 violations reported by those involved, 81.3% were by partners and 17.4% by managers.  Nearly half of the reported violations were committed by partners who perform services related to financial audits of companies.  Almost half the reported violations involved direct investments by the PricewaterhouseCoopers professionals in securities, mutual funds, bank accounts or insurance products related to client companies.

In addition, Fardella's team did random checks that found that 77.5% of the firm's partners failed to report at least one violation they committed.  That means an estimated 86% of the 2,698 partners had at least one violation, the report said.

Dave Nestor, a spokesman for PricewaterhouseCoopers, said he had no comment on the report but provided a copy of a letter sent Wednesday by chairman Nicholas G Moore and chief executive James J Schiro to the firm's partners.  The letter termed the Fardella report "embarrassing to our firm and to all of us as partners" and said that, "Equally important, it may also raise questions and concerns among our clients and our people."

However, the executives added that the violations of the independence rules cited by the report, while unacceptable, "did not in any way impair the professional objectivity and integrity" of the company's audits.  "We are determined to do everything possible so that neither our firm nor our clients ever again suffer from independence-related problems," Moore and Schiro wrote.  "To facilitate this, we have established expansive new policies and procedures to address previous infractions and to prevent future ones."

The SEC appointed Fardella in March 1999 to supervise the internal review after it censured PricewaterhouseCoopers for alleged violations of the independence rules.  In its settlement with the SEC, the firm agreed to set up the $2.5 million education fund, to be used to enhance awareness in the accounting profession of the independence rules.

PricewaterhouseCoopers, created from the July 1998 merger of Price Waterhouse LLP and Coopers & Lybrand LLP, neither admitted nor denied wrongdoing in agreeing to the settlement.  Under the accord, the firm also agreed to be censured, to improve its procedures for monitoring adherence to the independence rules and to conduct the internal investigation supervised by Fardella.

Source: NandoTines 7 January 2000 © Nando Media and Associated Press

Ceasefire

In a battle with the SEC over rules aimed at blocking conflicts of interest, the big accounting firms have reached an uneasy truce.  It may not last for long.

New York - After heavy lobbying, the "Big Five" accounting firms were unable on November 15th to foil an effort by the Securities and Exchange Commission (SEC), America's main markets regulator, to prohibit consulting and auditing services from operating under the same roof.  Instead, after intense negotiations and under an SEC threat of an imposed settlement, 4 of the 5 largest audit firms agreed to a big concession.  In exchange for less onerous prohibitions on their employees investing in companies audited by the firms, it was agreed that company proxy statements will now include information about how much the company has paid its auditors for non-accounting work.

Consider this item essential reading.

Controversy over the standards of accountants, as opposed to accounting standards, has risen at a time when the consulting arms of the big accounting firms have put into sharp relief how much more valuable their type of service has become than that of their traditional bean-counting parents.  Even without the SEC's attentions, this has caused big cultural problems.

Consultants have grown to dislike sharing their higher profits with their lower-yielding audit partners.  Arthur Andersen and Andersen Consulting completed a bitter divorce in the summer for this reason.  As well as monetary differences, "you begin to have two different businesses with two conflicting cultures: one to deal with investor protection, transparency, and reliability, and another aligned with the operational success of the company you are serving," says James J Shiro, chief executive of PricewaterhouseCoopers (PWC), one off the Big Five.

A deal to sell PWC's consulting operations to Hewlett-Packard collapsed on November 13th after HP decided it could no longer afford the price and PWC would not charge less.  For PWC, the SEC's compromise decision means that it has time to consider other options for its consulting arm without having to sell it under regulatory pressure.  But the split will still happen one way or another.  "The markets will drive all firms to [this decision]," says Mr Shiro.

Another outcome of the new SEC rules, says Robert Monks, a veteran shareholder activist, will be an increase in lawsuits against auditors by private investors.  The plaintiffs will be able to use as a starting-point all the concerns that have been raised by the SEC, which will increase the chances of winning damages against a negligent accounting firm.

At the heart of the accounting firms' defence to the SEC was the claim that there is no conflict of interest arising from auditing and consulting taking place within the same firm - which they claim is supported by the failure of the SEC to produce any concrete evidence.  But can this possibly be true?

Max Bazerman, an organisational behaviourist at Harvard Business School, says that to ask for proof is to ask the wrong question.  There is growing evidence of bad auditing, he claims.  The right question is, why is it bad?  According to Mr Bazerman, it is not due to corruption, but because auditors are human (sic).  If they are investing in an audit client, or can profit from consulting with it, or even if they are hoping to be rehired as an auditor, it is "psychologically impossible for them to be independent."

Mr Bazerman believes that the only way to ensure truly independent audits is to remove the incentive to be rehired.  Auditors should be appointed on an uncancellable 5-year contract, and then be prohibited from reappointment for the following 5 years.  But do shareholders really want this?  After all, say sceptics, they currently have the right to vote out an auditor and they almost never do.  But that is probably an indictment of the unthinking support for management decisions displayed by far too many institutional shareholders.

Source: The Economist 18 November 2000

But Qualified to Do What?

I don't mean to single Pricewaterhouse out in particular - as the Enron debacle (and others) have abundantly made clear, just because an accountant audits the books, this does not guarantee safety.  In the case of the Flat Rock Forests Trust, even auditors would not certify the figures.  Yet the Trustee didn't think this was at all noteworthy.  (Or maybe they DID - maybe this was one of the reasons why they refused to have a final unitholder meeting?)

From My Journal

29 April 1999: A fellow Flat Rock unitholder called and told me he had seen a notice in The Dominion of intent to remove from the Companies Office Register several of the Flat Rock associated companies.  These companies had all been voluntarily put into liquidation by the receiver.  The receiver had been appointed, not by the trustee, but by the bank who had lent the trust manager money to do whatever it was he did with the money he borrowed (using the trust’s forests as collateral).

Since these companies are part of an ongoing investigation by the Serious Fraud Office, I was a bit surprised that the liquidator, PricewaterhouseCoopers, was intent on removing them from the register.  When PWC removed our own company from the Companies Office register, they notified us of their immediate intent to destroy all our records in their archives.  (We asked for them all instead.  They’re what’re now taking up all the space at the Overseas Passenger Terminal, necessitating us having to secure overflow storage at the Space Station.)

I called the liquidator and asked that the companies stay registered as at least some of the unitholders intend to file suit after the SFO investigation concludes.  I was told that the SFO investigation was of people, not companies.  There was no reason to keep the companies around and, if I had doubts, I should have my solicitor call.  I called one of the other unitholders who had his solicitor call.  His solicitor was told that the liquidator (PriceWaterhouseCoopers) could destroy the records if they chose, no matter how many people wrote in and asked them not to.

Terralink's Receivers under Fire in Court

by Chris Barton

Receivers for failed state owned enterprise Terralink have come under fire in the High Court - accused of not getting the best price for the Government, acting improperly in the sale process, and of being unlawfully appointed.

In an interim injunction sought against first defendants Gary Traveller and Richard Agnew of PricewaterhouseCoopers to stop the sale of Terralink, the court heard on Friday that unsuccessful bidder Ocilla Investments was given no opportunity to increase its indicative offer of $5.5 million for the mapping business.

There was also evidence of a $7.5 million bid by a Hamilton-based Sterling Mortgage and Finance Company which was higher than the price paid by the successful bidder, a consortium of New Zealand Aerial Mapping (NZAM) and Animation Research.

The consortium's unconditional bid comprised two parts - the bulk for the SOE's assets and a smaller amount for good will.  The indicative offer for good will was reduced after the consortium conducted due diligence.

Justice John Priestley, who reserved his decision, temporarily suppressed publication of the agreed purchase price.

Like Sterling Mortgage, Ocilla was led to believe by PricewaterhouseCoopers it had reached a shortlist of 6 or 7 out of the 90 parties bidding and would be able to proceed to due diligence.  Ocilla, bidding in a joint venture with South African mapping firm GeoSpace International, is also seeking damages in excess of $4 million.

Sterling Mortgage managing director David Braithwaite is not yet making a claim against the receivers but advised by letter on 10 May his dissatisfaction with the sale.

Act MP Stephen Franks has also jumped into the fray.  Writing to the Primary Production select committee, which has previously considered matters relating to Terralink, Mr Franks calls for an investigation into the circumstances of the sale and conduct of the receivership.  "Parliament should be seen to be vigilant in relation to allegations of preference or favouritism or any substantial transaction which is not clearly competitive or contestable," said Mr Franks in his letter.  "It seems to me that the committee should give disappointed potential buyers an opportunity at least to explain their concerns, and to test the contention that the value of Terralink would have been damaged by due diligence."

Terry Sissons, acting for the receivers, said Ocilla had signed a confidentiality agreement with Terralink on 31 March which stated the receivers could negotiate with other parties and "sell any or all of those assets to another person" or withdraw them from sale.  An information memorandum on April 9 stated: "The receivers may at any time negotiate with one or more parties and enter into a contract without prior notice to any or all interested parties.  Furthermore, the receivers reserve the right to terminate at any time further participation in the process."

Mr Sissons pointed out that both Ocilla's $5.5 million bid and Mr Braithwaite's $7.5 million bid were non-binding and subject to conditions.  He said on 4 May that the receivers entered into an unconditional agreement to sell Terralink's geospatial business to NZAM and Animation Research.  But on 8 May receiver Gary Traveller told the Business Herald no sale had been made.  On 11 May, he notified all interested parties of the sale and issued a press release saying the consortium's offer was the best offer they were likely to receive.

The receivers also gave notice that Terralink's remaining 195 employees had had their contracts terminated and been offered jobs by the new owners in a company to be called Terralink International.

Ocilla's statement of claim said the receivers were in breach of the Fair Trading Act by unilaterally changing the sale process without notice and selling without using the competitive bid procedure.  Mr Sissons said the fact the receivers did not tell Ocilla they were in separate negotiations with the consortium was not misleading or deceptive in law.  He also pointed to case law which said parties to commercial negotiations are not barred from the use of silence or a refusal to disclose matters as part of their bargaining process.

Richard Phillips, acting for Ocilla, argued Terralink was insolvent when it granted a debenture to the Minister of Finance on 28 November.

Evidence, originally obtained by the Herald under the Official Information Act, showed officials several weeks prior had advised the shareholding ministers that no more money should be advanced to the ailing SOE and that liquidation was the preferred option.  At the time, Terralink was struggling to complete a subcontract with EDS which was part of the Land Information New Zealand (LINZ) Landonline project - a computerisation of survey plans and titles, itself behind schedule and over budget.

The minutes noted: "that if the company was to be put into receivership, it would be in order to protect the valuable part of the business and isolate the EDS contract, which is continuing to incur losses and create risks for the company."

Despite the advice, the Government advanced $1.5 million to Terralink on 30 November - the first instalment of a $2.5 million short term credit facility the SOE said it needed to keep it trading.  But by 18 December, less than 3 weeks later, minutes of cabinet committee meetings show ministers had received a draft report from Mr Traveller - at the time a special manager appointed to monitor the company - advising them not to provide any additional funds and to put the company into receivership.

Mr Philips argued that because Terralink was insolvent, a debenture should never have been granted and because only part of the $2.5 million was advanced the company remained insolvent.  The statement of claim said "the debenture should be regarded as a sham and a device by which the receivers could be appointed rather than a liquidator."

Mr Philips said as the debenture was invalid, so too was the appointment of the receivers and therefore the sale to by the receivers to the consortium.

Mr Sissons said a requirement of the debenture was a certificate of solvency which was supplied by Terralink directors to the Crown on 30 November.  He said the court should not entertain any allegation that the debenture was a sham when neither Terralink directors nor the shareholding ministers were present.

Lucy Riddiford, acting for the second defendants NZAM and Animation Research, said any injunction preventing the sale due for settlement on 31 May would leave employees of Terralink with contracts of employment but no jobs.  She said there was a risk too the employees would seek alternative employment, which would diminish the value of the assets.

Source: nzherald.co.nz 28 May 2001

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