In light of the Securities and Exchange Commission's report that auditors at PricewaterhouseCoopers of New York compromised their independence with their mutual fund and other securities holdings, the SEC might cite other accounting firms for putting their independence in question, said accounting industry lawyers and executives.
No matter how prestigious and formidable the accounting firm a fund company has hired, mutual fund complexes must conduct due diligence of their own to determine whether their auditors are indeed independent, industry executives said, following the SEC report.
"The auditing committee of the firm being audited, including mutual funds, must communicate with the auditing company," said Roy Van Brunt, director of Ten Eyck Associates, a law firm in Washington, D.C. whose clients include the Big Six accounting firms.
The SEC's report earlier this month reproached some 1,300 partners and senior managers at PricewaterhouseCoopers for holding securities of firms and mutual fund shares of fund complexes that PwC audited. The SEC said these extensive holdings compromised the accounting firm's independence.
The SEC's scrutiny of PwC has direct bearing on the mutual fund industry, since "PW audits some 60 percent, perhaps as much as 80 percent of the mutual funds in the U.S.," said Van Brunt.
As a result of the SEC's year-long investigation into PricewaterhouseCoopers, which is continuing, PwC has invested $30 million to create a software-based compliance system, said David Nestor, a spokesperson for PricewaterhouseCoopers.
PwC installed its new compliance system in July, Nestor said. PwC senior managers and higher, including partners, must report, to the system, all existing and new stock and mutual fund holdings by themselves and their families within five days of their purchases, Nestor said. The system will alert the securities holder of any investments that conflict with the company's business, he said.
This policy has stopped many senior PricewaterhouseCoopers executives from holding mutual funds or securities, said a consultant at the firm. Since PwC audits so many of the mutual funds sold in the U.S., especially the leading fund companies with high-performing funds, it has been frustrating for the accountants there to avoid or to pull out of investments that do well, he said.
"These SEC rules are outdated and complex," the consultant said. "I think they will find the same issue with other firms."
Deloitte & Touche, Arthur Andersen and KPMG, all of New York, have implemented similar compliance systems to that of PricewaterhouseCoopers in response to the SEC investigation, said spokespeople at all three firms.
"KPMG has rigorous procedures and policies in place which we take very seriously and continually monitor and improve," said George Ledwith, a spokesperson for KPMG. Ledwith declined to disclose details of KPMG's compliance procedures.
Most other accounting firms, however, do not maintain databases with which to continually monitor compliance, said Van Brunt.
"Most firms simply annually circulate a certification form," he said.
If the SEC cracks down on other accounting firms, this lax attitude toward independence should be a concern to a fund company, he said.
