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    PricewaterhouseCoopers and the audit of Tyco: legal responsibility to shareholders?

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    In debating the following, please make sure to cite any sources used and where they are used.

    1. "How" you arrived at your answer(s)
    2. "What" facts and sources you reviewed and considered
    3. "Why" your response is the best one from all the alternatives


    "Accounting firms should be liable to pay stockholders if they give a company a clean audit and it goes bankrupt within a year. "

    Having accurate financial information is critical to the success of a business. There are two different components of accounting; financial and management. Financial accounting deals with the preparation of the financial statements and other information for outsiders such as stockholders and creditors. Management accounting deals with the preparation of such items as; cost analyses, profitability reports, budgets, and other information for insiders (management & other company decision makers). Regardless of which of these two are used, all accounting information should be accurate, objective, consistent over time, and comparable to information supplied by other companies. (Bovee, Thill & Mescon, 2005, p. 406)

    Looking at the generally accepted accounting principles (GAAP) you would think that all accounting firms would be on the up and up and provide accurate financials. The GAAP was created to provide a common set of standards and procedures for companies and were approved. Unfortunately, there is plenty of room within GAAP for dishonest accountants to distort figures. So, even when a company uses GAAP, financial statements still need to be closely examined. Sometimes, a company's executive has been known to restate the financials to improve their bottom line. With corruption, conspiracy, and concealment at the very top levels of management, it could be hard for an accounting firm to identify problems. Even with the most diligence, management can 'fix' the books to report what they want them to say.

    When looking at the accountability of an accounting firm, in my opinion, I think that the answer to this question is both yes and no. Because everything is not black and white, there are several factors that could affect the outcome. Depending upon the situation, the liability could or could not be on the accounting firm. In some instances, the company also holds responsibility for fraudulent actions. In other instances, the accounting firm holds the responsibility. In July 2002, Weiss Ratings showed that accounting firms gave a clean bill of health to 42.1% of the public companies that subsequently filed for bankruptcy between January 1, 2001 and June 30, 2002. (www.weissratings.com)

    I found an example where there were fraudulent actions of both the company and accounting firm was under close analysis. This example works well with supporting my opinion in that there are occasions where the accounting firm and the company were responsible. The company Tyco - - the executive management team intentionally covered up and fraudulently adjusted the financials for their own benefit. They used aggressive accounting to inflate their financials by nearly $600 million in 2002. The CEO, Dennis Kozlowski, withheld information from investors and he and ex-finance chief, Mark Swartz, were accused of awarding themselves $150 million in cash, Tyco shares and loan forgiveness without board authorization. The accounting firm that Tyco used was PricewaterhouseCoopers. They allegedly were aware of the situation and did nothing. However, the company was not charged with any criminal charges, only recklessness. Richard Scalzo was the financial auditor for PricewaterhouseCoopers who was assigned to Tyco. He saw warning signs and still approved their audits. (www.usatoday.com) When looking at this example, I feel that both the accounting firm and the company are liable to pay stockholders. Even though the company did not go bankrupt, the actions are an example of where individuals in authoritative positions took advantage and did not do the right thing. Because of this, it cost the company and investors millions. Each of them should be accountable for paying the stockholders back for the monies they lost. I also think that the accounting firm should be held a little more liable because they are in a position where their processes and standards should be upheld and Mr. Scalzo should have investigated the 'warning signs'.

    I would say that the accounting firm of PricewaterhouseCoopers would not have been liable if the financial auditor would have done the right thing. Mr. Scalzo should have thoroughly investigated the situations and reported his findings. Accounting firms have a responsibility to report accurate and concise information, regardless if it can be detrimental to a company. It is sad to say that there are companies that intentionally 'hide' or 'fix' the books in their favor. In some cases, the accounting firms do not detect the deliberate actions. However, when they believe suspicious actions are taking place, they have an obligation to do the right thing.


    Engen, J., (2003) Tyco Director Says, "I've Fallen Off the Cliff. Retrieved, September 19, 2005, from


    McCoy, K., (2003). SEC sanctions accounting exec in Tyco case. Retrieved, September 19, 2005, from


    Mescon M.H., Bovee C.L., Thill J.V., (2005). Excellence in Business. Upper Saddle River, NJ Pearson Prentice Hall Publications.

    Weiss Ratings Inc., (2002). As prepared for dissemination to the U.S. Senate. Retrieved, September 19, 2005, from http://www.weissratings.com/worsening_crisis.asp

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    Solution Preview

    PricewaterhouseCoopers is fully responsible for the acts of Mr. Scalzo.

    1. Auditor independence is important because it protects the integrity, efficiency and uprightness of the auditor and does not allow complicity to creep in. Also auditor independence is deemed to be important for ethical discharge of duties, impartiality and the freedom to criticize aberrations when they occur. Mr. Scalzo seems to have violated this principle.

    2. Tyco case raises several issues about independence of auditors. What led PriceWaterhouse to hide frauds, which they were supposed to expose? What led them to hinder prosecution, which they were supposed to assist in? Why did they hush up anomalies, which they were supposed to point out? There was a concerted effort to protect employees, suppress facts and destroy records.

    3. As far as the reputation of Tyco is concerned, there is a fiduciary relationship, which a client enjoys with its auditor. In future reputed clients will not return to it, companies will not trust it and those who care about their own integrity will avoid it. In the corporate world where companies are answerable to their shareholders, companies will avoid tainted companies like Tyco to protect their own reputation, esteem and respect.

    PriceWaterhouseCoopers is fully responsible for the loss suffered by the shareholders. In general, from the ethical perspective both the auditing firm and the company to which it surrenders its independence are equal partners in the felony, but it is the auditing company, which suffers most of the consequence. True, shareholders of Tyco suffered but if the SEC finds that if the compromised its independence with Tyco, then the PriceWaterhouse Coopers did not have to close down but Tyco will suffer heavy losses. This is because large auditing firms are hired because they have a huge reputation. They are paid a premium for it and when the reputation goes, the firm goes too.

    The SEC, for example, is committed to increased ownership of its regulatory duties. The commission has announced that it will be mandating accelerated and more comprehensive disclosure of financial information to investors, outlining further protections for investors, and enforcing SEC rules and regulations more swiftly and aggressively. Public companies also face a new set of rules governing how they get listed on U.S. stock exchanges, following the late 2002 compensation scandal at the NYSE. PriceWaterhouseCoopers is fully responsible for the loss suffered by the shareholders.

    But the most concrete development has been on the legislative front. June 1, 2004 is the deadline for compliance with most significant aspects of the Sarbanes-Oxley Act (the Act). Companies large and small currently are scrambling to take stock of their internal controls, find independent directors to sit on audit and compensation committees, and understand the full scope of the Act. This seriously affects the profitability of your ...

    Solution Summary

    The 1745 word response details the responsibility of auditors to shareholders in the case of PriceWaterhouseCoopers and the audit of Tyco.