The Blind Man’s Bluff – Indicted CEO Blames PwC on Backdating

Looks like a shareholder derivative suit in the making. The referrer of this article from CFO.com states the obvious, though, when they remind us, “There are areas of a client-auditor relationship that are tricky.”

I’ve written before about the auditors and options backdating. We have not yet seen a case regarding the auditor’s role litigated. They keep settling, perhaps to hide the extent of their “enabling” behavior. But it’s a well known fact that, as in the case of using using the advice of their outside counsel as a crutch, many companies and their Boards depend much too much on (and often try to deflect accountability and liability to) their “hired guns”. Those “professionals” are, in some cases, willing to sell their opinions for a few million more in fees. Good luck with that to both sides given the current litigious environment…

Indicted CFO: PwC Knew We Backdated
A former finance chief says that because his company shared information with its audit firm about misdated option grants, the feds have no case against him.

“Former executives caught up in the backdating scandal have either deflected blame onto other employees or claimed the practice of assigning an earlier date to a stock option grant is not illegal. Now, the ex-CFO of a defense contractor claims he shouldn’t be charged for fraudulently backdating options because his audit firm knew what the company was doing.

In a motion to dismiss the criminal case against Gary Gerhardt, the former CFO of Engineered Support Systems, his lawyers say the fact that PricewaterhouseCoopers accountants were aware that stock options had been granted “in the money” proves that Gerhardt hadn’t concealed the erroneous grant dates. Hence, “there was no attempt to avoid detection by the public, no attempt to deprive investors or the public of accurate information, and no attempt to defraud investors,” the lawyers wrote in the motion filed with a U.S. District Court in Missouri earlier this week.

The attorneys claim that since the executives shared information about the options dating with PwC, ESSI executives can’t be charged with trying to hide the backdating, as the indictment alleges. Further, because the grand jury was unaware that PwC knew that ESSI had backdated and repriced stock options, its indictment of Gerhardt is invalid, the lawyers added.

The question of whether a company’s audit firm knew about backdating doesn’t matter if shareholders were still kept in the dark, according to investor advocates. “It’s got to be disclosed, it’s a material fact,” says Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware.

PwC was ESSI’s audit firm until the engineering company was acquired by DRS Technologies in 2006. The audit firm does not comment publicly on “client matters,” a PwC spokesman told CFO.com…”