And the Oscar for Creative Accounting Goes To …

Can PricewaterhouseCoopers be trusted to count the Academy Awards ballots?

One of the highlights of the Oscars, at least for the certified public accountants in the audience, is the moment when the nerdy partners at PricewaterhouseCoopers are brought on stage to describe their role in tallying the votes. The presence of these professional nit-pickers, these meticulous number-crunchers, reassures the audience and the nominees that the process of counting the Oscar ballots is fair, accurate, and beyond corruption.

After all, as Edward Jay Epstein has documented, accounting in Hollywood is a bizarre and highly suspect enterprise. And given the potential economic rewards that can accrue to Oscar winners, it’s easy to see how certain parties might be tempted to rig the vote. So, it’s a good thing the accounting firm PricewaterhouseCoopers is on the case this year, as it has been for the previous 72 years. “Just the way Rolls-Royce continues to build cars by hand, we continue to count by hand,” said Brad Oltmanns, managing partner of PricewaterhouseCoopers-Los Angeles, last year. “In the 72 years of counting and validating the Academy Awards ballots, there has never been a security breach.”

But if there were a problem with the votes, or if there were a security breach, could we rely on PwC to detect it?

PwC is no Arthur Andersen, the huge accounting firm that was indicted and destroyed for its complicity in the Enron scandal. But, like every other big accounting firm, PwC has audited or advised scandal-ridden companies. After he failed to heed obvious warning signs, the PwC partner responsible for the Tyco account was banned for life by the SEC from working on publicly held companies. In 2001, PwC paid $55 million to settle class-action lawsuits over its role in auditing the books of dot-com disaster MicroStrategy. The PwC partner in charge of that account was similarly barred by the SEC. PwC was the auditor for the drug giant Bristol-Myers Squibb, which was accused by the SEC of fudging numbers. And it was the auditor for Lucent, which also had its share of accounting issues.

Meanwhile, as clients engaged in option-backdating, PwC (and its fellow accounting firms) didn’t see much of a problem. “All of the Big Four accounting firms—PricewaterhouseCoopers LLP, Deloitte & Touche LLP, KPMG LLP and Ernst & Young LLP—have had clients implicated,” noted David Reilly of the Wall Street Journal. “None of these top accounting firms apparently spotted anything wrong at the companies involved.”

Now, if your clients happen to be cheaters and crooks, or if they provide you with false information, or if they block you from getting accurate information, there’s not much an auditor can do.

The Public Company Accounting Oversight Board, a creation of the Sarbanes-Oxley legislation, has been conducting annual reviews of the major accounting firms, and the 2005 PCAOB report on PwC identified several deficiencies, including “failures by the Firm to perform, or to perform sufficiently, certain necessary audit procedures.” In some cases the deficiencies “were of such significance that it appeared to the inspection team that the Firm, at the time it issued its audit report, had not obtained sufficient competent evidential matter to support its opinion on the issuer’s financial statements.”

In 2006, PwC’s Japanese network partner, ChuoAoyama Audit Corporation, was suspended by that country’s Financial Services Agency because of its dodgy work on the audit of Kanebo, a cosmetics company that had a huge accounting fraud. In response, PwC apologized and created a “new and independent audit firm” in order to keep doing business in Japan.

Lawsuits filed by disgruntled investors and government agencies are an occupational hazard for accounting firms. PwC is certainly grappling with its share. In December, Russian tax authorities accused the firm of creating two sets of audits for the oil company Yukos—one for shareholders and one for corporate use. In January, a class-action lawsuit filed against computer giant Dell over accounting issues named PwC as defendant. One government agency has even expressed concern about how PwC keeps its own books. Last August, the Wall Street Journal reported that the IRS was auditing the firm, looking at transactions in which “PwC sold off several side businesses that resulted in billions of dollars in income to the partnership.”

Should all this disqualify PwC from being involved in an event so central to popular culture and the entertainment industry? No. One could assemble a similar catalog of doubts for any of the major accounting firms. (Although the firm’s enormously cheesy corporate anthem should disqualify it from being involved in popular culture.) And everybody in Hollywood—agents, producers, studios, distributors—plays games with numbers. In the kingdom of the blind, the one-eyed auditor is king.