Controversy Brews over PWC's Audit Independence

August 5, 2002 ( - Now that IBM has just shelled out $2.7 billion for PWC's consulting business, several institutional investors are now questioning if PricewaterhouseCoopers LLP (PWC) can still perform audits free of IBM influences.

Among the critics is New York Comptroller H. Carl McCall, sole trustee of the New York State Common Retirement Fund, which holds 5.6 million IBM shares, according to a Wall Street Journal report.

The California Public Employees Retirement System (CalPERS) and TIAA-CREF Investment Management, which manages teachers’ pensions, line up with McCall. “IBM’s continued use of Pricewaterhouse as auditors will cast doubt about the independence of future audits,” McCall, a Democrat, told the Journal.

For their part, PWC and IBM say they won’t have a problem. IBM officials say the computer maker is large and complex so they don’t want to lose PWC’s familiarity with their operations. The Securities and Exchange Commission (SEC) agreed.

The SEC’s decision this week not to challenge IBM’s retention of PricewaterhouseCoopers came in the form of a “no-action” letter signed by SEC Chief Accountant Robert Herdman.

The H-P Deal

Nearly two years ago, when PricewaterhouseCoopers was in talks with Hewlett-Packard Co. to sell the same consulting unit for $18 billion, the then-chairman of the SEC, Arthur Levitt, advised H-P to terminate PricewaterhouseCoopers as its auditor, which it did.

In the IBM matter, SEC staff members based their decision on certain distinctions between the proposed H-P deal and the one with IBM, noting the agency’s overriding interest in ensuring that the accounting firm get out of the consulting business.

For instance, the SEC noted that the accounting firm’s partners wouldn’t be receiving any stock, as they would have under the H-P deal that broke off in late 2000.

Other critics include Institutional Shareholder Services Inc., which advises large shareholders on proxy and corporate-governance matters.