Pressure on as government takes oversight responsibility.

IF you thought Congress was getting tough with accountants by imposing more stringent regulation and oversight, watch out. Tougher penalties may be ahead.

A partner of PricewaterhouseCoopers LLP, once the Tiffany of accounting firms, has been banned for life from auditing public companies by the Securities and Exchange Commission. He is accused of leading a team that issued faulty audit reports for troubled Tyco International from 1997 to 2001.

Two days prior to that, the SEC barred another former PricewaterhouseCoopers partner from auditing public companies for at least two years for his shoddy audit work for Micro Strategy Inc.

The lifetime ban is "rare if not unique" for regulators and shows that the government is going after accountants who appeared to be playing ball with management in cooking the books, asserts Douglas Carmichael, the newly appointed chief auditor for the powerful Public Company Accounting Oversight Board.

The board was mandated by the Sarbanes-Oxley law, which took oversight away from the accounting profession and placed it in the hands of the government.

John C. Burton, who was chief SEC accountant from 1972 to 1977, maintains that the SEC is stepping up sanctions against individual accountants because the accounting profession apparently "hasn't been listening" to the clarion calls from investors.

The public has lost its trust in accountants and wants the government to clean up financial reporting, spurred in part by huge frauds at Enron Corp., WorldCom Inc and Adelphia Communications Corp., according to both Carmichael and Burton.

Carmichael says that the SEC's vigorous action isn't only "decisive but much swifter than in the recent past" when government regulators generally took several years to land on accountants the agency thought were wearing blinders to corporate fraud.

'No loopholes'

Tyco last month restated its results back to 1998 while PricewaterhouseCoopers paid $55 million to settle a class-action shareholder lawsuit over its MicroStrategy audits. The MicroStrategy case had been investigated for a while by the SEC while the agency moved swiftly in imposing sanctions against the individual accountant in the Tyco investigation. Both of the punished accountants neither admitted nor denied wrongdoing.

PricewaterhouseCoopers has either denied improper actions in the audit work or insisted that it was also taken in by fraudulent or incompetent management.

The SEC isn't commenting on whether the actions against individual partners presage even tougher action. Both Carmichael and Burton said they wouldn't be surprised if the SEC's enforcement-division director, Stephen M. Cutler, plays even harder ball with accountants in the future.

In recent years, the SEC has hesitated to land on accounting firms and their partners unless it could be clearly shown that senior management was involved in the faulty audit. In a recent speech, Cutler said that the SEC might have been holding accounting firms "to a lower standard rather than to the high standards that their special role demands."

In both the MicroStrategy and Tyco cases, the SEC accused the punished partners of either accepting management's assertions about questionable financial reports or failing to do standard audit checking procedures, such as asking for confirmations from all parties who do business with the company being audited.

The actions against the two PWC partners "is a clear message to auditors that the partner in charge of an audit is accountable for what happens" during the audit, maintains Carmichael. Burton, who in the mid-1970s barred KPMG, then known as Peat Marwick, from practicing before the SEC for six months because of five faulty audits, asserts that "the accounting profession now has to stand up and be counted" as to where it stands on corporate fraud.

Accounting firms must either clean up all their audits or they can try to out-tough regulators by continually denying any wrongdoing by the firm. Burton isn't sure which strategy the firms will adopt. But he is sure that the government and the accountants "are a long way from solving these types of problems."

Carmichael says he hopes that the more stringent rules soon to be issued by the accounting oversight body he works for will eliminate the need for tough sanctions against individual accountants in the future.

"The PCAOB will be working hard to prevent" lack of auditor oversight into corporate malfeasance, he says. "Prevention is always better all the way around and can help inspire investor confidence and help investors achieve their objectives" in the stock market.

Lee Berton, who writes a column for Bloomberg News, is a financial writer and consultant to the accounting department of City University of New York's Baruch College.