FOR IMMEDIATE RELEASE 2000-4 Independent Consultant Finds Widespread Independence Violations at PricewaterhouseCoopers Washington, DC, January 6, 2000 -- The staff of the Securities and Exchange Commission today made public the report by independent consultant Jess Fardella, who was appointed by the Commission in March 1999 to conduct a review of possible independence rule violations by the public accounting firm PricewaterhouseCoopers (PwC) arising from ownership of client- issued securities. The report finds significant violations of the firm's, the profession's, and the SEC's auditor independence rules. On January 14, 1999, the Securities and Exchange Commission, in an investigation that remains ongoing, issued an Opinion and Order Pursuant to Rule 102(e) of the Commission's Rules of Practice In the Matter of PricewaterhouseCoopers LLP (Securities Exchange Act of 1934 Release No. 40945) ("Order"), which censured PwC for violating auditor independence rules and improper professional conduct. Pursuant to the settlement reached with the Commission, PwC agreed to, among other things, complete an internal review supervised by an independent person or firm appointed by the Commission and to report to the Commission staff any additional instances in which PwC partners or professionals owned securities of public audit clients of PwC in contravention of applicable rules and regulations concerning independence. Mr. Jess Fardella of Lankler Siffert & Wohl LLP was appointed by the SEC to supervise PwC's internal review. The independent consultant's report discloses that a substantial number of PwC professionals, particularly partners, had violations of the independence rules, and that many had multiple violations. The review found excusable mistakes, but also attributed the violations to laxity and insensitivity to the importance of independence compliance. According to the independent consultant's report, PwC acknowledges that the review disclosed widespread independence non-compliance that reflected serious structural and cultural problems in the firm. The independent consultant's report summarizes results of the internal review at PwC, which included two key parts: PwC professionals were requested in March 1999 to self-report independence violations; and the independent consultant randomly tested a sample of the responses for completeness and accuracy. Almost half of the PwC partners -- 1,301 out of a total of 2,698 -- self-reported at least one independence violation. The 1,301 partners who reported a violation reported an average of five violations; 153 partners had more than ten violations each. Of 8,064 reported violations, 81.3% were reported by partners and 17.4% by managers; 45.2% of the violations were reported by partners who perform services related to audits of financial statements. Almost half of the reported violations involved direct investments by the PwC professional in securities, mutual funds, bank accounts, or insurance products associated with a client. Almost 32% of reported violations, or 2,565 instances, involved holdings of a client's stock or stock options. Six out of eleven partners at the senior management level who oversee PwC's independence program self-reported violations. Each of the 12 regional partners who help administer PwC's independence program reported at least one violation; one reported 38 violations and another reported 34 violations. Thirty-one of the 43 partners who comprise PwC's Board of Partners and its U.S. Leadership Committee self-reported at least one violation. Four of these had more than 20 violations; one of these partners had 41 violations and another had 40 violations. The random tests of the self-reporting process summarized above indicated that a far greater percentage of individuals had independence violations than were reported. Despite clear warnings that the SEC was overseeing the self-reporting process, the random tests of those reports indicated that 77.5% of PwC partners failed to self-report at least one independence violation. The combined results of the self-reporting and random tests of those reports indicated that approximately 86.5% of PwC partners and 10.5% of all other PwC professionals had independence violations. The independent consultant's report identifies key weaknesses in the systems PwC had used to prevent or detect independence violations: * reporting systems relied on the individuals themselves to sort through their own investments and interests for violations; * efforts to educate professionals about the independence rules and their responsibilities to the client to comply with the rules were insufficient; * resolution of reported violations were not adequately documented; and * reporting systems did not focus on the reporting of violations that were deemed to be resolved before annual confirmations were submitted. PwC is implementing a new system that requires all partners and managers to report all investments and that regularly subjects the self-reporting to audit. The independent consultant's report concludes: . . . the numbers of violations alone, as PwC acknowledges, reflect serious structural and cultural problems that were rooted in both its legacy firms [Price Waterhouse and Coopers & Lybrand]. Although a large percentage of the reported and unreported violations is attributable solely to the Merger, an even larger portion is not; thus, the situation revealed by the internal investigation is not a one-time breakdown explained solely by the Merger. Nor can the magnitude of the reported and unreported violations be attributed simply to less familiar Independence Rules such as those pertaining to brokerage, bank and sweep accounts. At least half of the reported and unreported violations consisted of interests held by a reporting PwC professional himself or herself, and most of the violations arose from either mutual fund or stock holdings . . . . . . . Independence compliance at PwC and its legacy firms was dependent largely on individual initiative. This system failed, as PwC has acknowledged . . . . Particularly as accounting firms have grown larger, acquired more clients and provided more services, and as investment opportunities and financial arrangements have increased in number and complexity, well-designed and extensive controls -- as reflected in the SEC's order in this matter -- are needed both to facilitate Independence compliance and to discourage and detect non-compliance. Securities and Exchange Commission Chief Accountant Lynn E. Turner said, "This report is a sobering reminder that accounting professionals need to renew their commitment to the fundamental principle of auditor independence." The violations discussed in the independent consultant's report came to light as a result of a Commission-ordered review, after professional self-regulatory procedures failed to detect such violations. As a result, at the SEC's request, the Public Oversight Board will sponsor similar independent reviews at other firms and will oversee development of enhancements to quality control and other professional standards. # # #