Synopsis

The Waste Management and Sunbeam audits demonstrated to the SEC just how tolerant auditors had become of their clients’ aggressive accounting. In 1997, an anonymous letter to the SEC prompted an investigation that uncovered 8,064 independence violations by PricewaterhouseCoopers (PwC) partners and employees. More than half of the firm’s 2,700 U.S. partners—including 6 of the 11 partners responsible for the firm’s independence policies—owned investments in the firm’s audit clients. SEC chairman Arthur Levitt decided to use his remaining time in office to reforming the SEC’s auditor independence requirements.

Discussion Questions

1. What was the nature of PricewaterhouseCoopers’ 8,064 independence violations? What actions did Barry Melancon and the AICPA take in response to PwC’s violations?
2. In what ways did SEC chairman Arthur Levitt propose relaxing auditor independence requirements in 2000? In what ways did Levitt propose tightening auditor independence requirements?
3. How did the AICPA and the leaders of the Big Five accounting firms respond to Chairman Levitt’s independence proposal? What events motivated Levitt and the auditors to compromise?
4. How did Levitt succeed in significantly reducing the consulting services performed by public accounting firms for their audit clients?
5. According to SAB No. 99, under what circumstances might quantitatively small misstatements be considered material?

Additional Resources

Final Rule: Revision of the Commission’s Auditor Independence Requirements. U.S. Securities and Exchange Commission, 5 February 2001.