Washington (May 27, 2003) -- PricewaterhouseCoopers agreed to pay $1 million to settle Securities and Exchange Commission charges of improper professional conduct in connection with PwC’s audit of SmarTalk TeleServices Inc.'s 1997 financial statements.

The firm didn’t admit or deny any wrongdoing. The SEC censured PwC for engaging in "improper professional conduct" for failure to adequately audit a $25 million restructuring reserve established in 1997 by SmarTalk, a now-bankrupt provider of pre-paid telephone cards and wireless services. The SEC said PwC also failed to adequately audit amounts charged against the restructuring reserve at year-end 1997. As part of the settlement, PwC also agreed to establish and maintain policies and procedures to preserve working papers intact and to retain an independent consultant to review its software system.

"This case is an example of the Division of Enforcement's intention to adopt a new enforcement model - one that holds an accounting firm responsible for the actions of its partners," said Antonia Chion, an Associate Director of Enforcement. "It also highlights the firm's failure to maintain the integrity of its audit working papers."

The SEC said PwC, through former employee Philip Hirsch, the audit engagement partner, failed to comply with Generally Accepted Auditing Standards in the conduct of its audit. After the audit was completed and after Hirsch left the firm, the SEC said PwC identified potential issues with SmarTalk's 1997 financial statements and its audit and became aware of a class action lawsuit alleging accounting fraud against SmarTalk. The SEC said PwC later made undocumented revisions to its working papers and discarded other documents relevant to its audit with the knowledge of several partners. In November 1998, SmarTalk restated its 1997 financial statements and its financial statements for the first two quarters of 1998, reversing the entire $25 million restructuring reserve and expensing most of the operating costs that had previously been charged against the restructuring reserve.

The SEC also settled charges against Hirsch for improper professional conduct. Without admitting or denying the SEC's findings, Hirsch agreed to be barred from practicing before the Commission as an accountant for a year.

-- WebCPA staff

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