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Tyco Auditor Barred From Checking Public Companies' Books

Aug 12, 2003 | AP Federal regulators Wednesday permanently barred a partner in big accounting firm PricewaterhouseCoopers from auditing public companies, for allegedly "recklessly" issuing fraudulent audits of troubled Tyco International Ltd.

The Securities and Exchange Commission announced the settlement with Richard Scalzo, a partner in PricewaterhouseCoopers' Boston office who is remaining in that position. Scalzo neither admitted nor denied wrongdoing in agreeing to the settlement, which does not include any fines.

In a separate announcement Wednesday, Manhattan District Attorney Robert Morgenthau said no criminal charges will be brought against PricewaterhouseCoopers for its auditing of Tyco. Morgenthau, whose office has been investigating the firm's audits as well as Tyco itself for the past year, said Scalzo's behavior was not up to professional par but also did not rise to criminal levels.

Morgenthau's office has filed criminal charges against former top executives of Tyco, has obtained grand jury indictments and has moved to freeze hundreds of millions of dollars of their assets.

The SEC had alleged in an administrative proceeding that Scalzo, who oversaw Tyco's audits for fiscal years 1997 through 2001, "recklessly violated" the antifraud provisions of the securities laws and engaged in improper professional conduct.

"Multiple and repeated facts provided notice to Scalzo regarding the integrity of Tyco's senior management and . . . Scalzo was reckless in not taking appropriate audit steps in the face of this information," the SEC said.

Thomas Newkirk, the SEC's associate director of enforcement, said investors rely on auditors and are betrayed when they are not diligent.

"In this case senior management was looting the company, and Scalzo was confronted with numerous warning signs about management's integrity," Newkirk said.

Scalzo's attorney, Richard Spinogatti, declined to comment on the case.

Bermuda-based Tyco has been trying to clean up its balance sheet and right itself since last year, when a criminal investigation led to a federal indictment against former CEO Dennis Kozlowski. Kozlowski, former chief financial officer Mark Swartz and former chief counsel Mark Belnick have all pleaded innocent to charges of looting the conglomerate of hundreds of millions of dollars.

On Tuesday, a state judge in New York City refused to throw out a grand larceny charge against Belnick, who is accused of accepting a $12 million bonus in 2000 in exchange for persuading the SEC to end an investigation into accounting problems at Tyco. The judge also declined Belnick's request to dismiss six other counts that accuse him of falsifying business records.

PricewaterhouseCoopers, one of the Big Four accounting firms, has recently defended its audits of Tyco. Last month Tyco which makes a range of products including coat hangers, trash bags, sophisticated medical devices and electronic circuitry restated its financial results back to 1998. Before the restatement, PricewaterhouseCoopers auditors had advised the company that one wasn't needed, but they were overruled by the SEC.

David Nestor, a PricewaterhouseCoopers spokesman, said Wednesday that Scalzo is remaining a partner of the firm.

"Mr. Scalzo has agreed to an SEC settlement. We support and respect his decision," Nestor said. "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."

On Monday, a former partner in the firm agreed to a professional suspension of at least two years to settle the SEC's allegations that he failed to fully exercise his duty as auditor in approving improper accounting by MicroStrategy Inc. The SEC had alleged that Warren Martin, who had been PricewaterhouseCoopers' lead audit partner for MicroStrategy, placed "almost exclusive reliance" on what the company's management told him, even when that contradicted other information available to him. Martin neither admitted to nor denied wrongdoing in the settlement, which allows him to apply for reinstatement after two years.

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