SEC Fines Pricewaterhouse Coopers $5M in Pinnacle and Avon Violations

MIAMI-In the harshest punishment of an accounting firm this year following the Arthur Andersen scandal, the Securities and Exchange Commission has fined PricewaterhouseCoopers LLP (PwC) and its broker-dealer affiliate, PricewaterhouseCoopers Securities LLC $5 million for violations of the auditor independence rules.

The London-based firm neither admitted nor denied wrongdoing in the settlement which involved Sarasota, FL-based Pinnacle Holdings Inc., a national cell phone-site developer, and Avon Products Inc. of New York, according to a prepared statement from the SEC.

The SEC complaint charges the accounting firm helped Pinnacle set up $24 million in improper reserves of which Pinnacle capitalized $8.5 million in costs, including $6.8 million in fees paid to PricewaterhouseCoopers for consulting and other non-audit services that should have been booked as expenses.

The action occurred in 1999 and 2000 while Pinnacle was accounting for a 1999 acquisition of certain assets from Motorola, Inc., the complaint says.

In April and May 2001, Pinnacle restated its accounting for the 1999 acquisition and in December of the same year, the SEC issued a settled cease and desist order against Pinnacle.

The SEC order finds PricewaterhouseCoopers’ independence violations involved 16 separate audits of 16 public companies.

Additionally, from 1996 to 2001, the firm and one of its predecessors, Coopers & Lybrand, contracted illegally for contingent fees 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,” the SEC order says.

“These fee arrangements violated the accounting professions’ own prohibition against contingent fee arrangements with audit clients and violated the SEC’s independence rules.”

Besides the fine, PwC also agreed to stop violating the auditor independence rules and be censured for engaging in improper professional conduct.

“An auditor’s objectivity is critical to the financial reporting process,” Stephen M. Cutler, the SEC’s director of the agency’s enforcement division, says in the prepared statement. “Impairment of an auditor’s independence undermines that process and erodes public confidence in our capital markets.”

Cutler says the Pwc 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.”

He says, “Faced with that situation here, PwC lacked the objectivity and impartiality required of an independent auditor.”