Herrera Fights To Hold Accounting Firms Accountable For Abetting Corporate Fraud In California
City Attorney's Brief in State Appeals Court Reasserts PricewaterhouseCooper's Cover-Up of Fraud by Old Republic Title Co.
SAN FRANCISCO (Dec. 18, 2002) -- In a case that could determine whether independent auditors who knowingly conceal their clients' fraud may be held accountable under California state law, San Francisco City Attorney Dennis Herrera today filed a brief appealing a lower court's decision last year that false financial statements submitted by PricewaterhouseCoopers on behalf of Old Republic Title Company were immaterial because regulators at the State Department of Insurance may not have acted if the company's fraud had been reported. Herrera's brief reasserts a mountain of evidence -- virtually unchallenged in the trial court -- that PricewaterhouseCoopers issued clean audit opinion letters for Old Republic for ten years, abetting Old Republic in a systematic fraud that siphoned off millions in unclaimed escrow funds, overstated corporate income and cheated taxpayers of funds that should have been paid to the State of California. The City's brief also contends that the state Department of Insurance did have authority to act -- and would have acted -- if PricewaterhouseCoopers had told the truth in its audit opinions.
"Independent auditors have a unique responsibility in the business world that is vitally important to America's economic well-being," Herrera said. "We have seen that responsibility corrupted in similar book-cooking antics by Enron, Arthur Anderson and others -- and we're all paying the price for it today. The lower court's decision in this case marks a new and dangerous low-point in financial integrity that, left unchallenged, would declare business auditing practices an ethics-free zone. It would turn corporate watchdogs into corporate lapdogs, undermining investor confidence in California companies."
According to the brief filed in the State Court of Appeal today, Old Republic Title ignored California's Unclaimed Property Law, which requires abandoned escrow property to be transmitted to the state if left dormant for a certain number of years -- a process known in this case as escheating unclaimed escrow funds. Instead, the company routinely swept the money into its own general fund. According to the City and County of San Francisco's brief, Old Republic's debt for its ongoing violation of escheat laws, including interest, has ballooned to some $17 million as of 1998.
Herrera's brief further notes that PricewaterhouseCoopers routinely issued "clean" audit opinion letters for Old Republic as the company's independent outside auditor between 1989 and 1998, despite the accounting firm's full knowledge that:
• Old Republic was acting in flagrant violation of state escheat laws
• Old Republic never disclosed its escheat debt to state regulators, and
• Old Republic's reporting practices unlawfully inflated its corporate earning reports.
In each instance, PricewaterhouseCoopers's failure to act ethically -- and its deliberate effort to obfuscate the lawless conduct of its client -- runs afoul of "Generally Accepted Auditing Standards" that serve as guiding principles for accounting professionals. More seriously, PricewaterhouseCoopers's conduct violates the California False Claims Act and constitutes unlawful, unfair and fraudulent business practices under the state Unfair Competition Law.
"PricewaterhouseCoopers knew Old Republic ignored state escheat laws for years, yet chose to remain silent as its client essentially stole millions of dollars that should have been turned over to the state," said Chief Deputy City Attorney Therese Stewart. "More seriously, PricewaterhouseCoopers issued clean, unqualified audit letters that actually aided Old Republic in hiding its wrongdoing -- from masking stolen trust account funds to committing regulatory fraud. PricewaterhouseCoopers' fraud in this case is just as wrongful as Old Republic's, and we don't intend to let PwC off the hook."
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