A federal magistrate judge in Ohio has concluded that PricewaterhouseCoopers withheld evidence in an accounting fraud trial brought by an audit client.

According to The New York Times, United States Magistrate Judge Patricia A. Hemann recommended a default judgment against the accounting firm for failing to turn over evidence sought by Telxon Corporation, which makes bar code readers. Hemann's report, completed in July, was unsealed Thursday and provided to The New York Times by a lawyer in the case.

The newspaper reported that the firm found multiple versions of documents in different places very late in the proceedings. "In some cases, it is difficult to avoid the conclusion" that PricewaterhouseCoopers "engaged in deliberate fraud," Hemann wrote. She also wrote that "there is strong evidence that documents have been destroyed, placing plaintiffs and Telxon in a situation which cannot be remedied."

The judge's recommendation goes to U.S. District Court Judge Kathleen O'Malley, who will order that the lawsuit proceed to consider damages if she adopts the magistrate judge's report, according to Jeffrey Zwerling, who represents shareholders. “Our experts tell us we have damages for that period of $139 million,” he said.

According to court papers, both sides battled for months over whether PricewaterhouseCoopers was required to produce certain papers related to its audit work at Telxon. The magistrate judge's report stemmed from motions filed by both Telxon and shareholders that the accounting firm should be sanctioned for failing to follow discovery rules.

"PricewaterhouseCoopers respectfully disagrees with the magistrate judge's report and recommendation,” the firm said in a statement. “We have filed extensive objections with the district court judge to the magistrate judge's recommendation. We acknowledge an error in discovering and producing documents in the litigation later than that should have occurred. At the same time we believe that our objections to the magistrate judge's recommendation are well founded."

Even if the district court judge rejects the magistrate judge's findings, they may hurt the firm's reputation, said Arthur W. Bowman, editor of Bowman First Alert, an accounting industry newsletter. "What the big four, the final four, use for differentiation now is, they are higher quality than the competition," Bowman said. "PricewaterhouseCoopers is one of those using that kind of strategy, and this kind of occurrence will destroy that."

Shareholders filed suit against Telxon after a restatement of earnings in 1998. The company settled the shareholder lawsuit last year, then filed a lawsuit against PricewaterhouseCoopers on the claim that the firm did not follow generally accepted accounting standards when it conducted its audits. Shareholders filed a separate lawsuit contending the firm approved improper financial statements.