Failed Audit: The Humiliation of PricewaterhouseCoopers
(The New York Times, 24 March 2000)
MICROSTRATEGY'S reputation may survive its accounting fiasco. But what about its auditors?
PricewaterhouseCoopers is the accounting firm that first certified and then rejected MicroStrategy's financial statements. It is the firm that helped the company write a news release explaining the changes, and then helped it write another news release explaining that the first release was completely wrong on a crucial point.
The tale of how that came to be raises questions about both the firm's competence and its commitment to being an independent auditor whose word can be trusted when it certifies that financial statements comply with the rules.
Briefly, here's what happened: MicroStrategy, a software and Internet company, became a Wall Street darling thanks in part to rapidly rising revenue.
It now turns out that the company was, for at least two years, not in compliance with the primary rule on revenue recognition for software companies, Statement 97-2, which was issued by the American Institute of Certified Public Accountants in 1997. But to know that you had to understand the rule and have access to the company's contracts with its customers. There was no way to know that from reading the public financial statements.
The PricewaterhouseCoopers office in McLean, Va., certified the 1998 and 1999 financial statements. There is no indication that it sought guidance from experts at the firm's national office who deal with tricky accounting issues.
Things might have continued as they were had MicroStrategy not gotten a little cute. In October and again in January the company announced unusual deals that increased revenue for the quarters just ended. Each deal involved MicroStrategy's selling to a customer that simultaneously sold something else to MicroStrategy.
That smelled funny to Howard Schilit, who runs the Center for Financial Research and Analysis. He put out two reports critical of the company. Forbes magazine followed with an article raising similar questions.
And that is how one of the world's great auditing firms discovered there was a problem. An accountant in the national office of PricewaterhouseCoopers read the Forbes piece, according to one person involved in the affair, and called the local office with questions. Meetings followed, and MicroStrategy soon said its accounting was wrong.
But MicroStrategy's mea culpa, which was approved in advance by PricewaterhouseCoopers, cited the wrong accounting literature. It pointed to a relatively new statement from the Securities and Exchange Commission that had nothing to do with the issue. That offended some people at the S.E.C., and soon MicroStrategy issued a clarification.
Bulls on MicroStrategy think the company can flourish without dubious accounting. Time will tell.
But for PricewaterhouseCoopers, which was embarrassed a few months ago by the disclosure that many of its partners ignored rules barring them from having financial relationships with audit clients, the questions are more pressing. Was the local office unfamiliar with Statement 97-2? Why did the national office not become involved before the audit was completed? After the accounting was fixed, who signed off on the misleading explanation?
David Nestor, a spokesman for the accounting firm, declined to answer those questions, saying they related to confidential client affairs. But he did say that concerns about offending a client or losing an account played no role. "We don't compromise on audit quality," he said.