In separate enforcement actions, the US Public Company Accounting Oversight Board (PCAOB) on March 28, 2024, fined PricewaterhouseCoopers LLP in the US $2.75 million for quality control violations related to auditor independence and fined the Big Four affiliate in Australia $600,000 for a matter related to a tax scandal that came to light in late 2022 and early 2023 which led to a parliamentary inquiry in Sydney.
A former partner of PwC Australia leaked confidential information about government tax plans intended to crack down on tax avoidance. The firm used the information try to drum up business.
While the two disciplinary actions are unrelated and separate, they are both about quality control failures.
PwC US
The PCAOB said that PwC in the US failed to implement a robust quality control system to help make sure that its personnel are independent both “in fact and in appearance” as required by the securities laws and PCAOB rules in all required circumstances.
This is something that SEC Chief Accountant Paul Munter has been emphasizing in the past few years as many accounting firms are engaged in other services such as consulting, which are more lucrative but may impair their objectivity and professional judgment.
The order noted that PwC maintains an Independence Office because of its large size and significant businesses outside of audit, which could present complex and unusual issues that might affect the firm’s independence.
But quality control problems came to light in 2018 when numerous PwC leaders and partners failed to consult with the office or carry out other independence analysis as the firm was exploring the possibility of terminating its audit relationship with an unnamed software company—which the firm used as a consumer for both internal and client-facing business activities—to be able to pursue a potential joint business relationship (JBR) with that audit client.
In particular, PwC leaders and partners, including the audit engagement partner for the software company, met the chief executive and the president to discuss independence restrictions. PwC planned and conducted the meeting after a June 2018 “business case” prepared by PwC’s Tax group showed that the firm could make a lot more money from a JBR than auditing.
The Big Four firm and the software company then explored the possibility of transitioning auditing to another accounting firm, which PwC called it as “channel change.” This way, they could enter into a JBR.
But the PCAOB said that PwC planned to continue performing the audit of the software company for the year ended December 31, 2018, and perform a review of the company’s first quarter 2019 interim financial statements while at the same time arranging meetings with the CEO of the company.
The board faulted PwC for not having a policy that would have required consultation with the Independence Office.
PwC looked into its independence issues only after PCAOB investigators asked questions about the firm’s independence from the audit client. Then PwC’s Independence Office looked into it and determined that there was “a risk that a reasonable investor could conclude that PwC was not independent of the issuer in 2018,” the PCAOB said.
PwC was terminated as the software company’s auditor before completing the 2018 audit.
“Auditor independence is essential to maintaining trust in our capital market system,” PCAOB Chair Erica Williams said in a statement.“Firms must have effective guardrails in place to enforce independence and uphold the integrity of their audits.”
In addition to the fine, the PCAOB is requiring PwC to remedy its deficiencies. Among other requirements, the firm must make sure that all current professionals as well as those who will be hired in the next five years complete four additional hours of professional training on independence.
“While there is no allegation that our independence was impaired, PwC recognizes that maintaining our independence is key to our important role in the capital markets,” the US firm said in a statement. “We cooperated with the PCAOB’s investigation concerning events from 2018 and are pleased to have resolved this matter. We remain committed to a process of continuous improvement, as reflected in our profession-leading audit quality results.”
PwC Australia
The PCAOB sanctioned PwC Australia because it did not report in a timely manner that the Australian Tax Practitioners Board (TPB) brought and concluded proceedings against the firm related to the tax scandal, according to the order.
The Australian authority’s proceedings were related to the firm’s failure to manage conflicts of interest after PwC partners participated in confidential consultations with the Australian government and shared it with existing and potential clients.
A PCAOB rule requires firms to file Form 3 to disclose reportable events, including disciplinary proceedings against the firm no later than 30 days after the event.
The TPB initiated the proceedings in February 2022 and issued an order in November 2022 against PwC Australia, finding ing that the firm violated the TPB’s Code of Professional Conduct. But PwC did not report either the initial or conclusion of the proceedings to the PCAOB on Form 3 until June 2023.
Moreover, the US board said that PwC Australia failed to properly monitor compliance with its quality control system that would provide reasonable assurance that it would file Form 3 when reportable events occur within the deadline.
“Failure to disclose required information is not acceptable, and the PCAOB will hold firms accountable,” Chair Williams said.
In addition to the fine, the PCAOB is requiring the firm to undertake remedial measures to fix its quality control deficiencies.
In a statement, PwC Australia confirmed that the disciplinary action stems from the tax scandal and said it deeply regrets the sharing of secret Treasury information and “the associated governance and cultural shortfalls under past leadership.”
The firm said that it has cooperated with the PCAOB and took a number of steps to improve its policies on the reporting requirements.
“We acknowledge this late filing and apologise for our initial failure to report this incident,” PwC Australia said.
“Additionally, we have taken considerable steps to overhaul our firm and rebuild trust, including installing new leadership and making good progress on our comprehensive transformation program to implement our commitments to change,” the firm said.
This article originally appeared in the March 29, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.
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