By: Joe Milicia, Associated Press Writer

January 12, 2005, The Associated Press

A federal magistrate's report that PricewaterhouseCoopers LLP failed to produce documents in a lawsuit will damage the firm's reputation in a climate in which the Big Four accounting firms are under intense scrutiny, analysts said.

Magistrate Judge Patricia Hemann wrote in a 74-page report that it was hard not to conclude that the firm "engaged in deliberate fraud." She also noted there was evidence that documents may have been destroyed.

She recommended a default judgment against Pricewaterhouse in two lawsuits involving Telxon Corp. If Judge Kathleen O'Malley adopts the magistrate's recommendation, the firm could face millions of dollars in fines and damages.

The accounting firm issued a statement acknowledging "an error in discovering and producing documents in the litigation later than should have occurred." But the firm said it disagrees with Hemann's recommendation and has filed objections.

"This puts them in a clearly awkward position and given that this is an industry whose performance and success is judged on the basis of their reputation, anything that puts them in an awkward position damages them in some way," said Lawrence Revsine, professor of accounting at Northwestern University.

The Big Four accounting firms - PricewaterhouseCoopers, Ernst & Young, KPMG and Deloitte & Touche - have been under scrutiny since the 2002 conviction of Arthur Andersen for destroying Enron Corp.-related documents before the energy giant's collapse, said Stephen Presser, a business and law professor at Northwestern University.

"When you talk about a Big Four accounting firm and document destruction ... from a public relations view there's a perception," said Julie Lindy, editor of the trade publication Inside Public Accounting.

Pricewaterhouse was the accounting firm for Telxon, a maker of bar-code scanners once based in suburban Fairlawn. It was bought by Symbol Technologies Inc. in 2000 for $456 million.

Telxon was sued by its shareholders in 1998 over a restatement of earnings and both parties requested copies of Pricewaterhouse's auditing. Telxon and shareholders later sued Pricewaterhouse alleging securities fraud.

Hemann noted in her recommendations that Pricewaterhouse was reckless in its responsibility to produce documents.

"The arrogance demonstrated by (PricewaterhouseCoopers) in the face of plaintiff's serious allegations and (PricewaterhouseCooper's) obvious failings is beyond anything this court has seen in 11 1/2 years on the bench," Hemann wrote.

The magistrate filed her report in July, but it was kept under seal at Pricewaterhouse's urging until this week when O'Malley made it public.

Attorney Brett Krantz, who represents Telxon shareholders, said he was pleased with Hemann's recommendation.

Revsine said the case is a setback to auditing firms have been working hard to build reputations for their integrity in the face of the Arthur Andersen debacle.

"Everybody nowadays is trying to convince the investment community that they've turned the corner," he said. "This won't help."