Understanding the Responsibilities and Code of Conduct for the Auditor

CAROL MASSAR Back in May, PricewaterhouseCoopers was hired to provide advice on managing the housing financier Freddie Mac, but the accountant's work includes consulting services, which means this consulting contract between PwC and Freddie Mac is barred under the SEC's auditor independence rules. Scratching your head? Well, you should be, according to Jonathan Weil, our accounting and finance  columnist for Bloomberg View. This kind of feels a little incestuous, I gotta tell you.

00:20JONATHAN WEIL BLOOMBERG VIEW COLUMNIST

FREDDIE MAC'S AUDITOR-INDEPENDENCE PROBLEM

JONATHAN WEIL Well, let me clarify a couple things. Freddie Mac, in this instance, is actually being run by the government, the Federal Housing Finance Agency, the FHFA, they're a-, they actually are Freddie Mac, for all intents and purposes, and the contract is between them and PricewaterhouseCoopers to oversee not just, I mean, to come up with all sorts of plans, not just for Freddie Mac, but every company that FHFA regulates, including Fannie May and the fede-, federal home loan banks. The problem is, because Freddie Mac is, is in the (ph)conserver's ship, run by this federal agency, and it's also audited by PricewaterhouseCoopers. That's where suddenly PricewaterhouseCoopers, if you look at the, what the contract entails, no longer is independent, as far as I  can tell, from Freddie Mac, which presents a big problem when it comes to light, potentially. If somebody would've actually called them on this, besides just some ink-stained, rich columnist, if somebody in the government would call them on this, say, "You (crosstalk)can't, you can't provide public relations advice to an audit client; you can't provide investment banking advice to an audit client or risk management or asset management or uh . . ." All these consulting banks, they're actually . . . There's a, there's a provision in this contract - it's pretty long - that says that there's some circumstances where PwC can actually be called to help operate the company. You can't audit a company that you're operat- . . . You can't operate a company that you're auditing

01:40CAROL MASSAR (crosstalk)Right.

CAROL MASSAR It just makes no sense.

JONATHAN WEIL It makes no sense, and the people at PricewaterhouseCoopers and the government, this, this federal agency that screwed 'em in the first place, before Freddie and Fanny cracked four years ago, it obviously shows it's not up to the task as a company. Like, $2,000,000,000,000 balance sheet, nobody knows what to do with it, and it's just . . .

01:55CAROL MASSAR A lot of tax payer money.

JONATHAN WEIL A lot of tax payer money getting pumped in there and it's still on life support from treasury, and it's just another indication that the government, particularly this, you know, FHFA, has really no idea what they're doing when it comes to managing these  things. Anybody who reads this contract who knows anything about auditing your accounting or financial reporting should've been able to spot that these were, this is a huge problem, and what the SEC should be doing is calling up the federal agency and saying "You need to fire PricewaterhouseCoopers as the auditor, because they jsut, just completely spoiled (crosstalk)the wealth."

02:25CAROL MASSAR (crosstalk)Well, what does the FHFA say?

WHAT IS THE CONFLICT OF INTEREST BETWEEN PWC & FREDDIE MAC?

JONATHAN WEIL They say that this is not a contract between PricewaterhouseCoopers to do, this is not a contract for PricewaterhouseCoopers to do work for Freddie Mac,  which is a distinction without a difference. It's a PricewaterhouseCoopers contract to tell FHFA how to run Freddie Mac, and these are contingency plans, basically. If  anyone was ever to go on the receiver's ship, these are all the things that they would have to . . .

02:45CAROL MASSAR But at the same time you've got, um, Freddie Mac; they've gotta file with the SEC, right? They still have to (crosstalk)file these regulations.

02:50JONATHAN WEIL (crosstalk)That's why the rules apply! You never can . . . You know, this is a public private company; no one can tell exactly what it is, but as long as it's a public private company, file with the SEC, they gotta file, follow the SEC (crosstalk)rules.

03:00CAROL MASSAR (crosstalk)Jonathan, what's the worst-case scenario that could play out because of this kind of incestuous relationship a little bit?

03:05JONATHAN WEIL The worst-case (crosstalk)scenario is that PwC still audits the company while it's actually doing consulting work, telling the government how to run it. That's actually the worst thing that could happen, is you get . . . But the, what the most uh, chaotic thing that could happen is that PricewaterhouseCoopers is actually disqualified from the audit and then somebody else has to come in and start from scratch how to figure out, you know, the auditing of a $2,000,000,000 company. That's the most chaotic situation, and that, on paper, in my opinion,  that's exactly what should happen right now, but I don't think anybody in the government, probably, is gonna have the guts to do, to do the right thing.

03:40CAROL MASSAR (crosstalk)Or conflicted relationship.

CAROL MASSAR Call PricewaterhouseCoopers?

CAN FREDDIE MAC HIRE PWC TO CONSULT?

JONATHAN WEIL PricewaterhouseCoopers . . . You ask them, you know, they say "We're complying with the rules," and you ask, "Well, could you explain how this is consistent with the rules?" "No comment."

03:50CAROL MASSAR It makes no sense at all.

JONATHAN WEIL It makes no sense at all.

CAROL MASSAR It's kind of just uh, symbolic of  kind of these strange relationships that have happened between the government and these (crosstalk)organizations.

03:55JONATHAN WEIL BLOOMBERG VIEW COLUMNIST

JONATHAN WEIL (crosstalk)Any time you get below the surface, you get a peek behind the scenes of what's actually going on, (crosstalk)and the regulation of a big financial institution and the government . . . Yeah, things always . . . You, you find out things that just  amaze.

04:10CAROL MASSAR (crosstalk)It's pretty scary.