Japan, Russia and Now Georgia? PwC Has Local Issues Too

PWC wants a clean balance sheet after Feb. verdict
The accounting firm was “vindicated” on fraud but seeks to undo $10 million verdict for ‘negligent misrepresentation’

Faced with a suit that sought $400 million and its banishment from Georgia, PricewaterhouseCoopers might have been considered lucky when a Cobb County jury in February slapped it with a $10 million verdict but absolved it of fraud and racketeering.

The Big Four accounting firm, however, wants complete vindication and relief from a judgment that deemed it liable for “negligent misrepresentation” in its audits of a company in which two Cobb millionaires had invested heavily…But despite clearing PricewaterhouseCoopers of fraud and racketeering allegations, the jury dunned the accounting firm for $10 million on behalf of the four trusts, finding that PWC was liable for “negligent misrepresentation” in what Barnes and Bowers have described as the largest civil verdict in Cobb County’s history…

I have written before about the way the Big 4 firms are organized on a global basis. They’re a “loose confederation” of locally owned and operated partnerships that pay for the use of a brand name and contractually, but yet voluntarily, agree to follow similar quality and practice standards. The firms are vulnerable to an individual office in a far off country such as Russia or Japan that does not meet the general standards that the firm deems “best practice.” Because of Sarbanes-Oxley and the historical dominance of the US firm in the global organizations, the “best practice” standards were usually dictated by the US unless local laws and regulations (and, more problematically, local customs) superseded. Monitoring compliance, if there was ever a real emphasis on this before Sarbanes-Oxley, was difficult at best and impossible in many cases.

However, it is not often considered that the US firm is also vulnerable to the myriad (actually 51) states and their local laws, regulations and judges. Although each of the firms operate as one legal entity in the US, they are still partnerships and local businesses. In each local office, a Managing Partner is the “King of the Kingdom,” responsible not only for a profit and loss statement, but local client relationships, local partner relations and other staff and administrative issues that can only be handled at a local level and sometimes require and are allowed to have a “local touch.”

How can an individual US office run afoul of local laws and regulations and jeopardize the firm’s “franchise” in that city or state? Some examples:

1)Not adapting general HR and payroll policies and practices to local laws, such as the stricter employment laws in states like California and New York.

2)Not addressing local safety requirements/concerns and ordinances (such as smoking bans) such as exist in New York just because they are not necessary in the majority of offices.

3)Having repeated or egregious lawsuits with a local focus.

4)Having out of town CPAs, who are not locally licensed, work on or sign financial statements/audit reports. Not knowing if everyone who needs to be licensed to work on that office’s clients is currently licensed.

5)Not paying local taxes, fees or other financial penalties on time or at all.

6)Not monitoring local client independence restrictions when out of town auditors/consultants do a substantial amount of work on a major local client.

Although every PwC office, for example, would appear from the outside to run the same in each location, each locality and its local partners put a distinct cultural stamp on their office. These cultural differences range from which local holidays are observed (Martin Luther King Day is bigger in the Northern cities and in Atlanta than everywhere else, for example) to the kinds of social events and holiday activities observed. Having visited many PwC offices during my tenure, I would also say that tone and style are also very different depending on where you go. Larger offices, such as New York, are a multi floor combination of many individual practices and their cliquish teams where no one knows each other and the senior leadership is isolated on a special floor. In a relatively smaller office, such as Atlanta, there’s a combination of legacy PwC and Coopers partners and everyone still knows who is which. A strange face (not that my face is strange, just not known there) was noticed immediately in Atlanta versus in Chicago, where the firm is on several floors and you don’t often see the same faces twice in any week.

For PwC, the merger of Price Waterhouse with Coopers and Lybrand in 1998 had a multiplier effect on the number of existing partner groups and “local customs and practices” in each location that the firm had to monitor. Coopers and Lybrand, was a different kind firm than Price Waterhouse. What I heard was that the Coopers partners were more “small town” and provincially-minded and the Price Waterhouse partners more globally focused and worldly. It was Coopers partners, initially, that brought some significant independence issues with them from Florida that led to the massive investigation of PwC and the consent decree with the SEC that they are still operating under…

The case above in Atlanta for PwC sounds like a doozy, one that probably has more to it than anyone outside the community can imagine. The PwC partners that were involved, both at PwC and at the client (their CFO), are former Coopers partners. It would have been a shame if they had ruined for everyone.