What were they thinking? The recent Securities & Exchange Commission report on PricewaterhouseCoopers said that nearly half of its 2,700 partners violated the law by owning investments in companies audited by their firm, the world's largest auditor. Clean and reliable corporate financial figures are absolutely essential to the efficient functioning of the stock and bond markets. The SEC report that Pricewaterhouse violated the rules on conflict of interest is but the latest evidence of the erosion of independent auditing.
PricewaterhouseCoopers partners complain that the conflict-of-interest rules are too byzantine to understand, much less follow. Perhaps so. But since the 1930s, SEC rules and accounting standards have been left to the accounting firms to administer. The SEC butts in only if something is amiss. So why didn't the PricewaterhouseCoopers partners set up a clear set of do's and don'ts and enforce it? We don't know.
We do know that the prospect of growing rich quickly by investing in Internet startups is tempting many professional people to bend the rules. Some activities are risky but benign. In New York City, landlords are accepting options in Net startups in lieu of rent. They're taking a chance on big paper gains while sacrificing current rental income. Fine. But auditors investing in the very same companies they are required to vouch for? That's a no-brainer.
Accounting is an arcane art that people often find stupefyingly boring. But transparent, trustworthy numbers are critical to the U.S. financial system. It allows the markets to work and sets the country apart from the crony capitalism of others. The PricewaterhouseCoopers violation of conflict-of-interest rules is no small matter.