The PCAOB publicly criticized PricewaterhouseCoopers LLP for failing to address a quality control problem found during 2019 audit inspection.
The board faulted PwC for its internal policies on financial holdings disclosures.
“The inspection results indicate that the firm’s system of quality control does not provide reasonable assurance that the firm and its personnel will comply with the firm’s policies and procedures with respect to independence-related regulatory requirements,” according to an updated inspection report, which now includes quality control criticisms. The expanded report was published on July 13, 2023.
PwC periodically audits a sample of its personnel to monitor compliance with its independence policies. In the audits conducted during the 12-month period ended June 30, 2019, the firm identified that 24 percent of the managers who were audited had not reported financial relationships that were required for disclosure under the firm’s policies.
“This high rate of non-compliance with the firm’s policies, which are designed to provide compliance with applicable independence regulatory requirements, provides cause for concern, especially considering that these individuals are required to certify on an annual basis that they have complied with the firm’s independence policies and procedures,” the PCAOB stated in the expanded report.
When the PCAOB publishes an inspection report, it keeps confidential the portion that covers weaknesses with an audit firm’s quality management and supervision. If the firm has not addressed the problems within 12 months, the PCAOB makes quality control findings public. The entire process can be drawn out while a firm negotiates with the supervisory board about the fixes or remedial efforts made.
“We take all feedback to improve our system of quality controls seriously—whether it’s from the PCAOB, our own identification, or from our Global Network,” PwC U.S. said in an emailed statement. “As part of our commitment to continuous improvement, PwC has proactively made significant investments in our training, technology, internal controls and expanded resources to address any issues and to further improve quality and compliance. We remain committed to continuous improvement and to delivering profession-leading audit quality.”
(Editor’s Note. Disclosure: PwC is Thomson Reuters’s external auditor.)
During the 2019 inspection, the PCAOB reviewed 60 audits and found deficiencies in 18. In 2018, inspectors reviewed 55 audits and found problems in 14. In 2017, the PCAOB found problems in 13 of 55 reviewed.
The identified deficiencies in the 2019 inspection cycle “primarily related to the firm’s testing of controls over and/ or substantive testing of revenue and related accounts, income taxes, the allowance for loan losses, investment securities, and inventory,” according to the report.
This is not the first time that PwC was criticized for quality control problems.
The PCAOB publicly criticized the Big Four firm in March 2013, which was the second time for the board to issue an expanded report on PwC. Board inspectors found problems in some of PwC’s 2008 and 2009 audits that were not addressed within the year required by PCAOB guidelines.
However, PwC inspection reports over the performance of audits for more recent years show steady progress.
For 2021 inspections, the PCAOB reviewed 56 audits and found deficiencies in only two. In 2020, the board inspected 52 audits and found problems in only one.
In the meantime, the board issued an expanded report for Deloitte & Touche LLP in January this year for similar issues—policies for financial holdings disclosures.
This in part comes as the PCAOB has been much more aggressive in its enforcement activities.
Separately, the PCAOB has a standard-setting project on quality control partly because of persistent problems observed across audit firms, large and small. The board is expected to finalize its proposed standards by the end of the year.
This article originally appeared in the July 14, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.
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