Fresh from the Public Company Accounting Oversight Board (PCAOB), just now they’ve announced a settled disciplinary order sanctioning PwC for violations of PCAOB quality control standards relating to the maintenance of auditor independence that will cost the firm $2.75 million in penalties. PDF of the order here.
The PCAOB found that PwC’s quality control policies and procedures were deficient because they did not provide reasonable assurance that the firm’s personnel would timely consult with qualified individuals or refer to authoritative literature or other sources when dealing with certain complex, unusual, or unfamiliar independence issues.
OK so this probably isn’t so bad…
These deficiencies came to light in 2018, when numerous PwC leaders and partners failed to consult with PwC’s Independence Office or conduct other appropriate independence analysis as PwC explored the possibility of terminating its audit relationship with an issuer client to allow for a joint business relationship (JBR) with the client. PwC did not raise the JBR‑related discussions to its Independence Office – or perform an appropriate analysis of PwC’s independence in light of those discussions – until PCAOB investigators raised questions about PwC’s independence from the issuer.
Do you need a TLDR for this?
The PCAOB further found that, in 2018, members of PwC’s Tax group prepared and shared with members of PwC’s Assurance group a “business case” document showing that PwC could generate substantially more revenue from a JBR with the issuer than it was earning as the issuer’s auditor. In response to that business case document and at the instruction of one of PwC’s national leaders for Assurance, two PwC partners – including the engagement partner for the issuer’s then‐ongoing 2018 integrated audit – met with the issuer’s CEO and the issuer’s President in November 2018 and discussed, among other things, business opportunities that PwC and the issuer could pursue in a JBR. Both during and after the meeting, the issuer’s CEO expressed enthusiasm for a JBR with PwC, which the CEO understood might be worth tens of millions of dollars to the issuer.
Shortly after the November meeting, PwC and the issuer began exploring the possibility of transitioning the audit to another auditor. At the same time, however, PwC planned to continue performing the audit of the issuer’s December 31, 2018, financial statements and to also perform the next quarterly review. PwC’s then‐existing independence policies and procedures did not require an Independence Office consultation in these circumstances.
The issue was brought to PwC’s Independence Office only the PCAOB’s Division of Enforcement and Investigations sent PwC a document and information request concerning PwC’s independence from the issuer. At that point, the Independence Office then considered the above circumstances, alongside PwC’s other non‐audit interactions with and involving the issuer and determined that there was a risk that a reasonable investor could conclude that PwC was not independent of the issuer in 2018. Before completing the 2018 audit, PwC was terminated as the issuer’s auditor.
Without or admitting or denying the PCAOB’s findings, PwC consented to the order. They’ve earned themselves a $2.75 million civil money penalty and will have to do the usual performative “remedial undertakings” which are:
We’ll dig deeper into the order later.
PCAOB Fines PwC $2.75 Million for Quality Control Violations Relating to Independence [PCAOB]
A few days ago the paper-pushers at the PCAOB released 15 new inspection reports and […]
Almost three years after being indicted for his involvement in one of the biggest ethics […]
Prior to Dodd-Frank, auditors who inspected the books of nonpublic brokers and dealers were required to register with the PCAOB but managed to avoid being subjected to the Board Insepctors’ Monday Morning QBing. Now that we’ve entered a new, exciting era of mind-numbingly complex financial regulation, auditors of all broker-dealers will soon know the pleasure of the PCAOB inspection process.
But before any of you get your knickers in a twist, it’s technically an “Interim Program,” because, in all honesty, the Board isn’t exactly sure who should be getting extra-special attention and who they can ignore.
About 520 brokerage firms provide clearing or custodial services. Many of the others are introducing firms that, at least in theory, do not have access to client funds or securities. Some are floor brokers without public clients; some are insurance agents that sell products that are technically securities; some are finders active in the M&A market; some are captives that serve the trading needs of a single, affiliated client. Other categories undoubtedly exist. This diversity raises questions about whether we should devote resources to inspecting the auditors of all of these types of brokers and dealers or whether some of their auditors can safely be exempted from PCAOB oversight without compromising investor protection.
While the Board does not yet have the answers to those questions, the temporary rule will allow the Board to begin inspections of broker-dealer audits so that we can develop an empirical basis on which to eventually address them.
So, in other words, the Board has NFI where to start since the broker-dealer biz encapsulates a lot of different services. The unfortunate thing for auditors is that the inspectors have to start somewhere and that’s what this interim program will do. Mr Goelzer gives you a taste of the fun to come:
The interim inspections will focus both on reviewing the work performed on specific audits and on gathering facts to inform the Board’s consideration of a permanent program. The information-gathering aspect of the interim inspections will provide the Board with insight about the potential benefits of broker-dealer inspections to the investing public and about the potential costs and regulatory burdens that would be imposed on different categories of accounting firms and classes of brokers. Armed with this type of information, the Board will be in a better position to decide on possible exemptions from oversight and to determine the objectives, nature, and frequency of inspections for firms that remain subject to PCAOB jurisdiction.
So if you’re lucky, you might – just might! – get out of the whole process altogether, although, we suggest you don’t get your hopes up. When will this all get sorted out, you ask?
Decisions about the permanent inspection program are probably at least a year away. In the mean-time, there will be ample opportunity for the public to learn what the Board is finding in the interim program and to participate in the decision process.
The proposed temporary rule provides for transparency, in that the Board will issue public reports at least annually on the progress of the interim program and on any significant observations. The permanent broker-dealer auditor inspection program will be predicated on rules that will only be adopted by the Board after public notice-and-comment and will only take effect after Securities and Exchange Commission approval.
So if this whole thing sounds like a dry run, it is. However if inspectors stumble across some über-shoddy audits (bound to happen), the Board is reserving the right to lay the smackdown. From Board Member Steven Harris’s statement (full text on last slide), “While the temporary inspection rules anticipate that firm-specific inspection reports would not begin until after a permanent program takes effect, it is important to note that the Board will still take disciplinary action, as appropriate, against an auditor where inspections under the interim program have identified significant issues in the firm’s audit work.” Likewise, if the inspectors happen across out of the ordinary at the B-D (again, a distinct possibility), they will be ringing up the SEC.
So while on the one hand they’re testing the waters, if you happen to be a downright horrible auditing firm, they’re going to make an example out of you. Investor protection is still at stake, you know.
