SEC Sanctions Accounting Exec In Tyco CaseAug 14, 2003 | USA TODAY In an embarrassment for accounting giant PricewaterhouseCoopers, federal regulators sanctioned one of the firm's partners for "recklessly" approving fraudulent audits of embattled conglomerate Tyco International.
The Securities and Exchange Commission permanently barred Richard Scalzo, a partner in PricewaterhouseCoopers' Boston office, from auditing publicly traded firms. Scalzo was Tyco's lead outside auditor for 1997-2001, an era when then-CEO L. Dennis Kozlowski and then-CFO Mark Swartz allegedly looted more than $600 million from the firm via improper bonuses, loans and stock sales.
Though not directed at PricewaterhouseCoopers as a whole, the sanction is a new public relations black eye as it continues defending its Tyco audits. Last month, Tyco bowed to the SEC by restating its results back to 1998 a move the accounting firm had called unnecessary.
Separately, PricewaterhouseCoopers won a victory Wednesday when Manhattan District Attorney Robert Morgenthau, the New York prosecutor whose office is preparing to try Kozlowski and Swartz, announced that Scalzo's Tyco work, though reckless, would not prompt criminal charges.
According to the SEC, "repeated facts provided notice to Scalzo regarding the integrity of Tyco's senior management" during the Kozlowski regime, yet "Scalzo was reckless in not taking appropriate audit steps."
Scalzo accepted the sanction without admitting or denying the charges. His office directed calls to PricewaterhouseCoopers spokesman David Nestor, who said "we support and respect his decision" to settle the case. Nestor said Scalzo will remain a partner at the firm.
"We continue to stand behind the work we did for Tyco and to believe it was in accordance with professional standards in place at the time," he added.
Nonetheless, Thomas Newkirk, the SEC's associate director of enforcement, said in a statement that Scalzo approved Tyco audits despite "numerous warning signs" about potential improprieties.
The SEC order cited several transactions involving Tyco's Key Employee Loan Program, which the firm said was created to help its executives pay taxes on awards of restricted stock. However, working papers for Tyco's 1997 audit signaled the fund was also used to pay for a wine cellar, tax and registration on a BMW auto and expenses at the Waldorf Astoria Hotel in New York City.
The SEC also said one of Scalzo's desk files showed Kozlowski, Swartz and another Tyco executive borrowed more than $50 million from the loan program in 1998 to exercise company stock options that they sold back to Tyco through an offshore subsidiary.
"Scalzo is not being sanctioned because he did not discover the looting," said Newkirk, "he is being charged because he did not look despite these warnings."