PwC Chief Faces Possible Probe over Audit Violations
A New Jersey court heard that PwC partners had allegedly held on to shares in its audit client Emcore and so delayed a public offering of the firm in early 1999. Because of this, PwC's 1998 audit of Emcore was in breach of audit independence guidelines and Deloitte & Touche had to re-audit the firm.
The partners held stock in the firm from before the 1998 merger of PriceWaterhouse and Coopers & Lybrand. When the merger was announced, Emcore sought to reassure itself that the newly-formed PwC could act as independent auditors for the firm.
Emcore's chief financial officer Tom Werthan was allegedly told by Coopers' audit partner Brendan Dougher that the firm was "taking all steps necessary to ensure PwC's independence", including ridding itself of Emcore stock and so breaching audit independence guidelines.
But on the day of the PwC merger (1 July 1998), some of the PwC partners - including current CEO James Schiro - allegedly owned an aggregate of 140,000 shares in Emcore common stock.
Emcore alleges that it did not discover this until the audit firm refused to consent to the incorporation of its 1996 and 1997 accounts into its registration statement prior to a public offering in early 1999.
Further disagreements led to Emcore employing Deloitte & Touche to re-audit its 1997 financial statement and so, Emcore believes, delaying its offering.
The spat arose just as the Securities & Exchange Commission was looking into audit independence at PwC. The court heard that, even though PwC self-reported 8,000 breaches of independence guidelines, a shocking 77.5% of partners failed to disclose at least one violation.
Although the partners themselves did not make any misrepresentation about owning stock, the court allowed for discovery - which will include an investigation of the partners' knowledge in such non-disclosures - as "Emcore's allegations about the extent, timing and profitability of these defendants' holdings, and Dougher's repeated inaccurate assurances to the contrary, raise the inference that either the defendant partners or PWC itself chose to actively conceal material facts."
PwC's in-house counsel Walter Ricciardi also faces a tough time after he allegedly maintained that, despite the SEC's findings, Emcore's 1998 audit would remain valid. The court granted Emcore the right to discover Ricciardi's state of mind when he allegedly misrepresented the SEC on the fact that a re-audit would not be necessary.
PWC wanted to dismiss the case, which could involve a claim of millions of dollars. But Judge William Walls rejected the thrust of the firm's arguments.
The full text version of the judgment is available via the Rutgers School of Law website .