Questions Raised about Auditor Independence
July 26, 1999
Shareholders of four Fidelity funds are being asked to reconsider approval of PricewaterhouseCoopers of New York as the funds' independent auditor in light of new revelations that raise questions about the independence of the accounting firm in its role as auditor to the funds.
Investors of the Fidelity Balanced Fund, Fidelity Global Balanced Fund, Fidelity Low-Priced Stock Fund and Fidelity Puritan Trust were originally asked to ratify reappointment of PricewaterhouseCoopers as auditor to the four funds at a shareholder meeting on July 14th. But voting on the auditor's appointment was postponed by the Boston-based fund company when Fidelity executives and members of the board of directors were informed of the results of an internal PwC review that revealed a potential conflict of interest.
According to a revised proxy statement filed by Fidelity on July 15, a manager within the consulting unit of PwC's Boston office owned shares of the Fidelity Puritan Trust. Although the manager was employed within the consulting unit of PwC and had no direct ties to the firm's fund auditing business, SEC regulations as well as accounting standards prohibit partners, certain officers and managers of audit firms from owning shares in companies to which the firm serves as independent auditor. These regulations and standards exist to assure the objectivity of the auditing firm, say industry accountants.
Sometime after May 17, 1999, the date Fidelity mailed its original proxy statement and ballot to fund shareholders, Fidelity officers and board members were informed by PwC of the apparent conflict, according to Fidelity spokesperson Anne Crowley.
"That holding was inconsistent with the standards for accountant independence," said Crowley. The accounting firm's review also revealed that other PwC employees had at some time held shares in each of the three other Fidelity funds but no longer did so. A PricewaterhouseCoopers' spokesperson declined to comment on the matter.
Though the PwC manager sold his shares of Fidelity Puritan on June 15, 1999, Fidelity felt it was in the best interest of shareholders to disregard the first vote approving the funds' auditor and give shareholders, provided with the new information, a chance to recast their votes. The Fidelity shareholder vote is now scheduled for August 6th.
Auditor independence has become a pressing issue for the accounting industry in general and for PricewaterhouseCoopers in particular. In January, PwC reached a settlement with the SEC in a case regarding its independence without admitting or denying wrongdoing. The SEC charged that PwC had violated SEC rules regarding auditor independence in more than 70 instances in which employees and even the firm's pension fund had invested in the securities of various PwC audit clients. In settling the charges, PwC agreed to several conditions including hiring an independent person to investigate potential conflicts. It also agreed to establish a database of audit clients and the infrastructure necessary to prevent PwC employees from investing in shares of those clients. The SEC also mandated PwC pay $2.5 million to fund the establishment of an accounting industry auditor independence education program.
PwC is not the only fund auditing firm under scrutiny regarding the auditing of Fidelity's mutual funds. In March, Deloitte & Touche reached an agreement with the SEC regarding the firm's becoming independent auditor for 56 of Fidelity's 243 funds. (MFMN 4/5/99) According to the agreement reached with regulators, certain key Deloitte personnel were required to shift directly- held assets out of those Fidelity funds for which Deloitte was to become auditor.