By Anne Rosivach and Frank Byrt
The Public Company Accounting Oversight Board (PCAOB) last week released its quality-control criticisms of audits conducted by PricewaterhouseCoopers (PwC) contained in the board's March 25, 2009, and August 12, 2010, inspection reports. Under the Sarbanes-Oxley Act (SOX) of 2002, firms are given twelve months to remediate their quality-control issues before comments are made public.
The PCAOB states it made public the additional portions of the previously issued inspection reports because PwC "had not addressed certain criticisms in the reports to the board's satisfaction", and PwC had not made "sufficient effort and progress" during the twelve-month period.
As part of its efforts to improve the quality of audits and thereby better protect investors, the PCAOB, with powers vested by SOX, reviews the work of public accounting firms that do audits of more than 100 public companies annually.
This was only the second time the PCAOB has taken this action against a Big Four accounting firm. The board released Deloitte & Touche's 2008 inspection report back in 2011. The remediation process is designed to link the inspections to improvements in a firm's performance.
The decision to release the inspection report "is not a broad judgment about the effectiveness of a firm's system of quality control compared to those of other firms, and it does not signify anything about the merits of any additional efforts a firm may have made to address the criticisms after the twelve-month period", the PCAOB stated.
In a response to the release, PwC stated that the "Part II comments relate to some of the most complex, judgmental, and evolving areas of auditing. Our actions relating to those areas, during the twelve months following issuance of the comments and thereafter, have included providing our audit professionals with enhanced audit tools, training, and additional technical guidance to promote more consistent audit execution. We believe that these efforts have been important positive contributors to audit quality at our firm."
PwC also said that it will not seek Securities and Exchange Commission (SEC) review of the determination, which it has a right to do under the Sarbanes-Oxley and SEC rules.
Following are a few examples of specific audit shortcomings cited by the PCAOB:
- In four audits, deficiencies were found in PwC's testing of the fair values of investment securities and/or derivatives, which means PwC failed to obtain sufficient competent evidential matter to support its audit opinion.
- In another audit, PwC failed to sufficiently test certain assumptions and key inputs used to develop a significant portion of a client's loan loss allowance.
- One client had numerous foreign locations, which accounted for over 20 percent of the client's revenue. PwC did not visit any of the foreign locations in connection with the audit, nor did it use the work of its international affiliates or other auditors in reporting on the client's financial statements in the year under audit.
- In another audit, PwC obtained a schedule from the client that indicated that the carrying amount of one of its reporting units significantly exceeded its fair value. There was no evidence in the audit documentation, and no persuasive other evidence, that PwC had performed procedures, beyond inquiries of management, to address the client's assertions that the fair value indicated in the schedule was not relevant and that no impairment had occurred
- One issuer prepared cash flow projections to use in a fair value determination for purposes of its annual goodwill impairment test. The gross profit margin in the third year of the client's projections was significantly higher than the actual gross profit margin achieved by the client in any of the most recent five years, and this higher margin had the effect of substantially increasing the fair value used in the impairment test. PwC accepted the higher gross profit margin without evaluating whether it was reasonable in light of the issuer's past experience.
PwC further commented",We are one of the world's largest audit practices and a leader in the profession, and we are committed to maintaining our leading role in promoting further improvements in auditing and financial reporting and delivering the highest quality audits in the profession. We look forward to continuing our dialogue with the board in support of our commitment to audit quality."
- Access the Report on 2008 Inspection of PricewaterhouseCoopers LLP (March 25, 2009).
- Access the Report on 2009 Inspection of PricewaterhouseCoopers LLP (August 12, 2010).