PricewaterhouseCoopers

employees, under investigation for conflicts of interest, overwhelmingly failed to disclose violations of independence rules designed to ensure accuracy and protect investors, according to a report by an independent consultant to the

Securities and Exchange Commission

.

Pricewaterhouse dismissed five partners over the last six months as a result of the independent consultant's review, the firm disclosed Thursday.

The report, made public by the SEC on Thursday, details the results of a review begun in March by

Lankler, Siffert & Wohl

, a New York law firm appointed by the SEC to oversee Pricewaterhouse's self-examination.

These are among the findings:

  • 1,301 of the firm's 2,698 U.S. partners voluntarily reported at least one violation
  • 8,064 violations were voluntarily reported
  • More than 30% of the reported violations involved holding a client's stock or stock options
  • Partners -- those who own equity in the firm -- were responsible for more than 80% of the voluntarily reported violations

The law firm, after randomly reviewing the voluntary responses from 200 partners and 200 nonpartners, found an apparent chasm of discrepancy between the violations reported voluntarily and the violations which Pricewaterhouse's professional staff members -- especially the partners - failed to disclose.

The random tests indicated that 77.5% of the partners failed to disclose at least one violation. Combining the random test results with the voluntary response results, it would appear that a total of 86.5% of partners -- but only 10.5% of other staff members -- committed violations, according to the report.

Jess Fardella, the report's lead author, said the extrapolations are telling despite a margin of error.

PricewaterhouseCoopers' chairman, Nicholas Moore, and its chief executive, James Schiro, sent a letter to the firm's partners on Wednesday to prepare them for discussions surrounding the SEC report. The letter said the violations were embarrassing and came as the result of lax enforcement of disclosing their own investments.

"The vast majority of infractions resulted from an honest failure to appreciate the importance of compliance, failure to check the independence lists and a lack of understanding of the intricacies of the rules," the letter said.

But according to the SEC review, almost 32% -- 2,565 instances -- of the firm's violations stemmed from employees holding stock or stock options in a client of the firm. A company spokesman had no comment about how these transpired.

Schiro and Moore jointly said in the letter that the infractions were "unacceptable" but did not impair the objectivity and integrity of any audits.

"It is now painfully clear that the controls at

PricewaterhouseCoopers had not kept pace with the complexities of the independence rules and the changes in the business world," Moore and Schiro said in the letter.

Other intricacies included owning mutual funds of clients of the firm, holding securities brokerage accounts at affiliates of clients and rules as obscure as holding balances on credit cards issued by clients.

The accounting firm said it has since taken steps to improve its independence reporting.

"The training in place then was not as formulated as it is now," a company spokesman said. "It was less formal. When everyone was hired, the importance of the rules was explained to them, including the partners."

The firm has tried to achieve compliance through computers, the spokesman said. "We've invested in an automated independence compliance system where our employees enter their equity holdings and it matches them against a client list and notifies them if they are in violation."

In addition they have also required all relevant employees, including partners, to take a computer-based independence training course. "People will be audited more routinely," the spokesman added.

The investigation stems from an SEC order made Jan. 14, 1999, requiring the firm to perform a sweeping self-evaluation and submit to a review from an independent consultant.

But the process dates back to late 1997, when the SEC investigated a Tampa, Fla. office of the consulting firm Coopers & Lybrand. That investigation found that three staff members owned shares of four publicly traded companies they had audited.

By the time the SEC issued its January 1999 order in that case, Coopers & Lybrand had united with Price Waterhouse in a worldwide merger that altered the accounting industry.

The merger itself created many of the conflicts, when staff members from the Coopers & Lybrand side held securities in companies audited by Price Waterhouse, and vice versa. The review found 3,697 such violations, compared with 4,367 not related to the merger.