Disclosure of PwC’s Quality Control Deficiencies Concerning to Investors
On 7 March 2013, the Public Company Accounting Oversight Board (PCAOB) updated its 2009 and 2010 inspection reports for PricewaterhouseCoopers (PwC) covering audit years 2008 and 2009. Originally, the PCAOB identified quality control deficiencies associated with those audit years and gave PwC 12 months from the date of each report to implement corrective action. PwC did not make sufficient changes to the satisfaction of the PCAOB, so the findings were made public some three or so years after the original reports.
Naturally, it is puzzling to investors why it would take so long.
Who Are the Watchdogs for Investors?
PwC is one of the leading professional services firms in the U.S. Its website prominently describes the “PwC audit experience,” noting that one element of this “experience” is the firm’s commitment to performing a high-quality audit that provides businesses with “an audit that helps give stakeholders confidence in the integrity of your financial statements.”
The PCAOB oversees the audits of public companies. In essence, the PCAOB audits the auditors. And, as its website states, its purpose is to “protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports.”
Investors Caught in the Middle
In the middle are investors who pay the auditors to be the watchdogs to provide assurance that the financial reports of companies they invest in are reliable. They expect the audits performed by PwC to be of high quality to protect against an audit failure. Investors expect that the regulators, such as the PCAOB, are performing inspections of the auditors and taking appropriate and effective action against those firms that do not meet the standards for high-quality audits.
In a recent CFA Institute member survey, respondents called weak enforcement a concern in regard to audit practice. Only 30% of survey respondents said that the current state of regulatory oversight and enforcement of the independent audit is effective. What’s more, a vast majority (80%) indicated that inspection reports issued by regulators of audit firms need more transparency. These responses clearly indicate that more can be done by the PCAOB to strengthen its enforcement responsibilities.
CFA Institute sent a letter to the PCAOB suggesting that it have a more focused discussion on how the inspection and subsequent reporting process could be made more rigorous and transparent. The main emphasis should be to strengthen enforcement outcomes, ensure a proper deterrence value, and add more timely and greater transparency of PCAOB findings.
Now PwC has been publically called out by the PCAOB for quality control deficiencies in conducting audits because it failed to correct them within the proper timeframe. Why was PwC so slow to correct its internal-quality processes? And why would they fall short of implementing changes to sufficiently satisfy the PCAOB considering its fiduciary duty to investors?
Of equal curiosity is why it took the PCAOB so long to issue its report exposing the PwC deficiencies? Shouldn’t the public know something? And shouldn’t it come faster than more than three years after the initial findings? Whatever the reason, it gave PwC time to publish Our Focus on Audit Quality and release its survey, Assurance Today and Tomorrow. These publications by PwC offer deeper insight into their audit methods and provide survey results about user perceptions of the audit today. Maybe publishing these reports helped soften the blow.
Investors will be interested to see how subsequent PCAOB inspections of PwC turn out because, as of now, the 2010 and 2011 reports indicate there may be non-public matters related to quality control. When will the general public know the extent of any problems and whether they have been corrected? For now, the PCAOB reports that “A substantial portion of the [PCAOB’s] criticisms of a firm (specifically criticisms of the firm’s quality control system) is nonpublic, unless the firm fails to make sufficient progress in addressing those criticisms.”
Will the string continue? And if so, what enforcement actions will the PCAOB take?
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