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IBM and PwC defend post-sale auditing relationship

IBM is standing by its plan to keep PricewaterhouseCoopers (PwC) as its auditor after announcing last week that it will purchase PwC Consulting, a subsidiary of the auditing firm.

The plan had reportedly drawn criticism from analysts and institutional investors who questioned the ability of PwC to maintain its independent status.

The Wall Street Journal reported on Friday that institutional investors are airing concerns that PwC will no longer be able to audit IBM's books independently.

New York Comptroller H. Carl McCall, who administers the New York State Common Retirement Fund, said the decision to keep PwC as IBM's auditor raises questions as to the future validity of its audits. The New York State Common Retirement Fund owns 5.6 million shares of IBM, according to the newspaper.

The deal to purchase PwC Consulting involves $2.7bn (£1.73bn) in cash payable to PwC, with the remainder in convertible bonds and stock. The stock portion of the deal will go to PwC Consulting employees, said Steven Silber, a spokesman for PwC.

IBM has released a statement addressing the criticism, saying that although it was "sensitive" to concerns about its relationship with PwC, it believes the company "understands our company, our business, and our industry. Going forward, we believe (PwC) will continue to provide the best advice."

PwC went through "a painstaking process" to ensure auditor independence during the purchase negotiations, according to Silber. The audit team left IBM's offices during all negotiations, which did not begin until all audit work for IBM's second-quarter results was completed and the results were announced, he said.

To preserve the independence of PricewaterhouseCoopers in future audits of IBM, PwC Consulting is to become part of a separate IBM business unit within IBM Global Services.

PwC Consulting's financial results will be handled by an auditing firm other than PwC during the first three years of its life as part of IBM Global Services, said Sehra Eusufzai, a spokeswoman for PwC Consulting.

"Once people understand the facts about the negotiations and the process going forward, they'll take comfort in the fact that investor confidence was being protected," Silber said.

"It's a valid question people should be asking, but I don't think there is anything [improper] here," said Fred Amoroso, who recently became president and chief executive officer of research firm Meta Group and who has previously worked for both PwC and IBM Global Services.

PwC has been looking to divest PwC Consulting for some time, he said. The US Securities and Exchange Commission has mandated auditing firms to exit the consulting business after investigations into the relationship between audit firm Arthur Andersen and bankrupt energy trader Enron.

"The consulting practice had already gone through the initial stages of separation [from the auditing side], and there would be no retained ownership of the consulting unit going forward" by PwC, Amoroso said.

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