VideoIt has not been a particularly good week for professional services firm PricewaterhouseCoopers, as two of its former auditing partners were barred by the Securities and Exchange Commission from practicing as accountants.
On Wednesday, the commission settled charges against Richard P. Scalzo, the former PwC engagement partner responsible for the firm's audits of Tyco International Ltd.
Earlier in the week, the SEC settled charges and barred Warren Martin, a former PwC partner, from auditing the books of publicly traded companies. That ban stems from Martin's audit work for MicroStrategy Inc., a company which announced a massive financial restatement in 2000.
The regulatory agency's order again Scalzo, who audited Tyco's financials from fiscal years 1997 through 2001, found that he recklessly violated the antifraud provisions of the federal securities laws and engaged in improper professional conduct.
"The commission's order finds that multiple and repeated facts provided notice to Scalzo regarding the integrity of Tyco's senior management and that Scalzo was reckless in not taking appropriate audit steps in the face of this information," the SEC asserted.
According to the commission, those facts were sufficient that, by the end of Sept, 1998, Scalzo should have reevaluated the risk assessment of the Tyco audits and performed additional audit procedures. Among those procedures: additional audit testing of certain executive benefits, executive compensation, and related party transactions. "Scalzo did not take sufficient steps in these regards," the SEC's asserted in its order.
As a result, the SEC barred the one-time auditor of Tyco from practicing as an accountant.
The commission also noted that Scalzo recklessly violated the antifraud provisions of the federal securities laws because PwC had erroneously issued an audit report stating that the firm had conducted an audit of Tyco's financial statements "in accordance with auditing standards generally accepted in the United States of America." The SEC said Scalzo was responsible for those statements, and, at the time those statements were made, he was reckless in not knowing that the Tyco audits had not been conducted in accordance with GAAS.
"Investors rely on auditors and are betrayed when auditors fail to conduct diligent audits," said Thomas C. Newkirk, associate director of enforcement at the SEC, in a statement. "In this case, senior management was looting the company, and Scalzo was confronted with numerous warning signs about management's integrity. Scalzo is not being sanctioned because he did not discover the looting; he is being charged because he did not look despite these warnings."
On Monday, the SEC settled with Martin, the PwC audit partner, for his role in the revenue recognition scandal at MicroStrategy. In April 2000, the company restated its results for the three years ended 1999.
The commission said Martin failed to develop adequate audit evidence for MicroStrategy's revenue recognition; failed to consider properly language and dates in MicroStrategy's contracts that conflicted with the company's revenue recognition; failed to consider properly concerns raised by PwC personnel that should have alerted Martin to the audit failures; and relied on unprobed and untested management representations.
Martin agreed not to practice as an accountant, with a right to apply for reinstatement after two years.
In May 2001, PwC paid $55 million to settle a class-action shareholder lawsuit related to its MicroStrategy audits.
Junk Default Rate Falls
Further proof that the economy is rebounding.
Companies with lousy credit ratings are not defaulting as frequently as they did in the past.
The global speculative-grade corporate bond default rate came in at 5.8 percent in July, down from 6 percent in June, according to Moody's Investors Service.
What's more, the credit rating agency predicted that the default rate may decline more in 2004 than it had previously predicted.
Moody's said it now expects the global junk bond default rate to end the year at 5.9 percent, and fall to 4.9 percent by July 2004. "July's forecast marks a significant reduction in the forecasted default rate, which, for much of 2003, had predicted little improvement," Moody's noted.
The more optimistic forecast is the result of both lower actual defaults than expected over 2003 thus far, along with a marked improvement in rating activity for speculative-grade rated issuers, Moody's said.
There have been, on average, 7.5 defaults per month -- lower than the nine defaults per month Moody's forecast at the beginning of the year.
Also, credit rating actions for speculative-grade rated issuers have shown improvement over the past year. As proof: The downgrade-to-upgrade ratio has fallen to 2.5:1 for the 12 months ended July, compared to about a 4:1 ratio at the beginning of that period.
"In addition to improving fundamental credit quality, a very receptive high-yield bond market has probably helped to lower the default rate somewhat," said David T. Hamilton, Moody's director of default research. "These market conditions have made high-yield refinancings easier."
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