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Tyco Is Urged To Drop Auditor

SEC's probe of partner, vote against PwC cited

Aug 15, 2003 | Boston Globe

Several corporate governance and accounting specialists yesterday called on Tyco International Ltd. to fire its auditor, PricewaterhouseCoopers LLP, following a finding by the Securities and Exchange Commission that the Boston-based partner in charge of the conglomerate's annual review account violated federal securities laws and professional standards.

They said the SEC's action which is part of an ongoing investigation that may implicate other accountants who worked on the Tyco assignment underscored the vote at the company's annual meeting, when shareholders representing 23 percent of the firm's shares voted against reappointing PricewaterhouseCoopers.

At the annual meeting, Edward D. Breen, Tyco's chairman and chief executive, agreed to have the firm's newly installed board of directors look into the request, but promised no immediate action.

Corporate activists said the 23 percent vote against the incumbent auditing firm was a huge signal of discontent, when such proposals typically garner nearly 100 percent of the vote in favor of management's recommendation.

"This is a company that should be doing everything it can to restore investor confidence, and one of those things should be replacing the auditor," said Michael Garland, corporate transactions coordinator at the AFL-CIO Office of Investment, which oversees the union's many investments as an institutional shareholder. "The shareholder vote shows that their confidence in the auditor is shaken, and the SEC's action even though it only involves the lead audit partner validates their concerns."

Said Lynn Turner, a former accountant at the SEC and director of the Center for Quality Financial Reporting at Colorado State University, "When you've got one out of every four shareholders challenging the integrity of the auditor and raising a question about the integrity of the financial statements, it's probably time to change auditors."

At the annual meeting March 6, Breen said the appointment of new PwC partners to handle Tyco's account represented "a pretty radical upgrade" in the service his company was receiving, adding, "Clearly, we will address this as the year goes on." In a recent interview with The Wall Street Journal, Breen said two of his rules for fixing a troubled company is to "Stand well back from the ethical foul line" and to "move quickly on management changes."

A Tyco spokesman could not respond to inquiries yesterday because of the blackout affecting New York and other cities.

Tyco's former CEO, L. Dennis Kozlowski, and former finance chief, Mark Swartz, are charged by Manhattan District Attorney Robert Morgenthau with looting the firm of hundreds of millions of dollars in unauthorized compensation and stock. Both have pleaded not guilty, and a trial is slated for this fall.

The SEC found that Richard P. Scalzo, the engagement partner for PwC who worked at the Boston office, "recklessly" disregarded numerous signs that Kozlowski and Swartz were abusing company loan programs and awarding big executive bonuses.

He didn't challenge management's explanations for the payments, or perform additional auditing tests that might have uncovered the fraud, the agency found. Scalzo's actions enabled the company to file false financial statements for four fiscal years, according to the SEC.

According to the settlement, Scalzo neither admitted nor denied the charges, though he is barred from auditing publicly traded companies.

Neither Scalzo nor his attorney could be reached for comment.

The company's failure to address PwC's shortcomings concerns some Tyco shareholders. "I couldn't believe they were keeping Pricewaterhouse back in the spring at the annual meeting and I can't believe they're keeping them now," said Greg A. Kinczewski, general counsel at Marco Consulting Group, a Chicago firm that advises benefit plans and represented 4.9 million shares at the time of the annual meeting.

In 2001, Tyco paid PricewaterhouseCoopers $13.2 million in audit fees, $3.6 million for computer services, and $18.1 million for consulting, according to SEC filings.

Still, other analysts said there might be some logic to retaining PwC. Nell Minow, editor of the Corporate Library, an independent research firm specializing in corporate governance, agreed with Tyco's strategy thus far.

"I'm not sure Tyco has to dump PricewaterhouseCoopers," she said. "I'm not sure that anybody else has a better record. As tempting as it is, there are issues in the litigation that argue in favor of keeping them as the audit firm and finding out what went wrong. There couldn't be anybody more powerfully motivated to put things right."

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