PricewaterhouseCoopers, one of the world's largest accounting firms, has agreed to pay $55 million to settle a class-action lawsuit alleging it defrauded investors in MicroStrategy Inc. by approving financial reports that inflated the earnings and revenue of the Vienna software maker.

Investors sued MicroStrategy and PwC early last year after the software maker retracted two years of audited financial results and its stock price plunged by 62 percent in a single day, wiping out billions of dollars in shareholder wealth. The company, headed by Michael J. Saylor, later disclosed that, contrary to its reported profits, it had been losing money since 1997, even before its initial public stock offering.

PwC denies it did anything wrong in its MicroStrategy audits.

A report filed in court by the plaintiffs said the audit firm "consistently violated its responsibility" to maintain an appearance of independence. It cites e-mail evidence of a PwC auditor seeking a job at MicroStrategy while he was the senior manager on the team that reviewed the company's accounting. PwC also received money for reselling MicroStrategy software and recommending it to other clients. The accounting firm was working on setting up a business venture with its audit client, according to the plaintiff's report.

Steven G. Silber, a PwC spokesman, said the company denies "all of their allegations about our independence and the work we performed." He added: "While we believe our defense against the class-action claim was strong and compelling, we ultimately made a business decision to settle in order to avoid the further costs and uncertainties of litigation."

MicroStrategy's chief of staff, Paul N. Zolfaghari, said in a statement that PwC auditors "have consistently assured us that they have been in full compliance with all applicable auditor independence requirements."

An audit firm's responsibility for errors in a client's financial statements, and its liability for investor losses, are subjects of legal debate. Regulators say stockholders are being put at risk by potential conflicts of interest involving audit firms that do other business with audit clients at the same time they are supposed to serve as financial watchdogs for the public.

The settlement is one of the largest by an accounting firm in recent years. Ernst & Young paid $335 million in 1999 to settle charges brought by Cendant Corp. shareholders. Andersen, formerly Arthur Andersen, agreed last week to pay $110 million to end a suit over its work for Sunbeam Corp. And Arthur Andersen paid $75 million in a settlement of a suit by Waste Management Inc. shareholders in 1998.

PricewaterhouseCoopers' auditing of MicroStrategy remains under investigation by the Securities and Exchange Commission, a legal source said yesterday.

Once a star of the local technology industry and a symbol of the superheated Internet economy, MicroStrategy has seen its stock plunge from $226.75 just before the accounting correction to $5.22 yesterday. It has laid off hundreds of workers and sharply curtailed its once-soaring ambitions.

MicroStrategy settled with the class-action plaintiffs last fall for a package that included an IOU for $80.5 million. Saylor and two other top executives settled SEC civil fraud charges, without admitting or denying guilt, for about $11 million.

The SEC charged that the company counted revenue before deals were signed and booked up front revenue that should have been spread over the term of software and service contracts.

Much of the court record in the lawsuit remains under seal. But a report by Andy Mintzer, an accountant hired to review the case for the plaintiffs, described a close relationship between PwC and MicroStrategy. Mintzer wrote that he based his report on depositions and documents gathered in the case.

During the 1999 audit, John Konawalik, PwC's senior manager on the engagement, solicited a job as chief financial officer of MicroStrategy subsidiary in violation of accounting ethics, Mintzer wrote.

Mintzer cited an Aug. 6, 1999, e-mail from Konawalik to MicroStrategy Chief Financial Officer Mark Lynch, saying: "Please keep me posted on As we discussed I would really appreciate the opportunity to have a shot at the CFO spot in the new company."

Neither Lynch nor Konawalik returned calls yesterday.

Shortly after that e-mail was sent, in September 1999, Konawalik was involved in scrutinizing a major deal between MicroStrategy and NCR Corp., Mintzer wrote. Though Konawalik "left PwC for a period of time," the evidence reviewed "suggests that no one at PwC gave the NCR transaction a meaningful reconsideration" in later months, until the accounting for that deal and others was restated, Mintzer wrote.

The report said MicroStrategy presented to PwC a marketing plan dated Feb. 26, 1999, "which contemplates a 'virtual company made up of PwC and MicroStrategy employees.' "

An internal PwC e-mail in January 2000 said PwC was "actively engaged in discussions with MicroStrategy and Exchange Apps about becoming a partner" in a business initiative, Mintzer said. The booking of a major deal between MicroStrategy and Exchange Applications was later corrected as part of last year's accounting restatement.

PwC said in a court filing that a transaction involving the three companies was discussed, but nothing came of it.

To "get around" an SEC prohibition against business relationships with audit clients another company was sometimes "brought in as a go-between" between PwC and MicroStrategy, Mintzer wrote.

In his statement, MicroStrategy's Zolfaghari said: "From time to time, the management advisory services group of PricewaterhouseCoopers has resold MicroStrategy products to its consulting clients, but PricewaterhouseCoopers has never entered into a joint venture with MicroStrategy or been a dealer or distributor of MicroStrategy products."

The Mintzer report said that PwC partner Warren Martin twice sent letters to the MicroStrategy audit committee "admitting that PwC personnel had investments in MSTR [MicroStrategy] which were 'exceptions to the independence rules.' " Those employees were not involved in the audit, a lawyer familiar with the case said.

Ralph Terkowitz, The Washington Post Co.'s vice president for technology, is one of two members of the audit committee. He declined comment.

The accounting firm has consistently declined to say how or why MicroStrategy's flawed accounting got past it. It pushed MicroStrategy to issue last year's correction after one of the firm's top experts intervened, sources familiar with the case said.

In a deposition excerpt, a PwC accounting expert read from a paper he wrote summarizing what PwC was going to say in a phone call to MicroStrategy management. The paper said that, "based on the recently received final NCR contract," PwC had "determined that the 1999 accounting was in error and as a result the financial statements are materially misstated."

The settlement remains subject to approval by the U.S. District Court in Alexandria.