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PCAOB fines PwC US and Australia for violations

March 28, 2024

The Public Company Accounting Oversight Board sanctioned PricewaterhouseCoopers' member firms in the U.S. and Australia over auditing quality control violations Thursday, imposing a $2.75 million penalty against the U.S. firm and a $600,000 penalty against the Australian firm.

In a settled disciplinary order against PwC US, the PCAOB imposed penalties for violations of its quality control standards relating to the maintenance of auditor independence. The PCAOB found PwC's quality control policies and procedures were deficient because they didn't provide reasonable assurance that the firm's personnel would consult with qualified individuals in a timely way or refer to authoritative literature or other sources when dealing with certain complex, unusual or unfamiliar independence issues.

The problems came to light back in 2018, when a number of PwC leaders and partners failed to consult with PwC's Independence Office or do any other appropriate independence analysis as PwC explored the possibility of terminating its audit relationship with an unidentified issuer client to allow for a joint business relationship with the client. PwC didn't raise discussions with its Independence Office about the proposed business relationship or do an appropriate analysis of PwC's independence in light of those discussions, at least not until PCAOB investigators raised questions about PwC's independence from the issuer.

PwC claimed its independence wasn't impaired. "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," PwC US 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."

Nevertheless, the PCAOB also found that, in 2018, members of PwC's tax group prepared and shared with members of the firm's assurance group a "business case" document showing the PwC could generate substantially more revenue from a joint business relationship with the same issuer than it was earning as that issuer's auditor. In response to that business case document and at the instruction of one of PwC's national assurance leaders, two PwC partners — including the engagement partner for the client's then‐ongoing 2018 integrated audit — met with the issuer's CEO and its president in November 2018 and discussed, among other things, business opportunities that PwC and the issuer could pursue in a joint business relationship. Both during and after the meeting, the issuer's CEO expressed enthusiasm for such a relationship with PwC, which the CEO believed could be worth tens of millions of dollars to the company.

Shortly after the November meeting, PwC and the issuer began exploring the possibility of transitioning the audit to another auditor. At the same time, though, PwC planned to continue performing the audit of the issuer's December 31, 2018, financial statements and to also do the next quarterly review. PwC's independence policies and procedures at that time did not require an Independence Office consultation in these circumstances.

PwC's Independence Office was informed of the November meeting and related discussions only after the PCAOB's Division of Enforcement and Investigations sent PwC a document and information request concerning PwC's independence from the issuer. That PCAOB request caused PwC to initiate a consultation with its Independence Office. The Independence Office then considered the circumstances, along with PwC's other nonaudit interactions with and involving the issuer and decided there was a risk that a reasonable investor could conclude that PwC was not independent of the issuer in 2018. After that happened, PwC was terminated as the company's auditor, before completing the 2018 audit.

"Auditor independence is essential to maintaining trust in our capital market system," said PCAOB chair Erica Williams in a statement. "Firms must have effective guardrails in place to enforce independence and uphold the integrity of their audits."

Without admitting or denying the PCAOB's findings, PwC agreed to the PCAOB's order censuring the firm, imposing a $2.75 million civil money penalty on the firm, and requiring the firm to complete several remedial undertakings. The firm is required under the order to review and revise or supplement, as necessary, its independence‐related quality control policies and procedures. It also needs to take certain communications to the firm's professionals regarding certain independence rules and standards, along with the related firm quality control policies and procedures. PwC US is also required to ensure all the current firm professionals, and all professionals hired in the next five years, complete four additional hours of professional training related to certain independence rules and standards, and related firm quality control policies and procedures.

"A critical component of a well-functioning system of quality control are policies and procedures that provide reasonable assurance that personnel will refer to authoritative literature or other sources and consult, on a timely basis, when appropriate," said Robert Rice, director of the PCAOB's Division of Enforcement and Investigations, in a statement. "If a firm does not appropriately design and maintain such policies and procedures, or does not adequately communicate them, we will not hesitate to hold the firm accountable for that failure."

PwC Australia sanctions

In the case of PwC Australia, the PCAOB fined the firm for violations of PCAOB rules and quality control standards due to the firm's failure to timely report the initiation and conclusion of proceedings against it by the Australian Tax Practitioners Board.

PwC Australia came under fire in its home country over a tax scandal that led to the departures of several partners involved in using confidential tax documents from the Australian government to help global clients respond to upcoming changes to the Australian tax laws.

The TPB proceedings related to failures on the part of the PwC Australia to properly manage conflicts of interest that arose from the participation of some of its partners in confidential consultations with the Australian government, and concerns that confidential information was impermissibly shared by certain partners with others, including existing and prospective clients. PCAOB Rule 2203, Special Reports, requires registered public accounting firms to file a Form 3 to disclose reportable events, including the initiation and conclusion of disciplinary proceedings against the firm, no later than 30 days after the occurrence of the event.

The PCAOB found, according to the settled disciplinary order, that PwC Australia did not disclose on PCAOB Form 3 in a timely way the TPB proceedings and it failed to properly monitor compliance with its quality control policies and procedures that were meant to provide reasonable assurance that the firm met its Form 3 reporting requirements.

"Failure to disclose required information is not acceptable, and the PCAOB will hold firms accountable," said PCAOB chair Williams in a statement.

PwC Australia's then-CEO, as well as members of the firm's Office of General Counsel, members of its strategy, risk and reputation group, and members of its financial advisory services practice were all aware of the TPB investigation as early as March 2021 and related proceedings as early as February 2022. They also participated in preparing PwC Australia's responses to the TPB, but none of them shared information about the proceedings with those at the firm responsible for Form 3 reporting compliance. The people who were responsible for Form 3 reporting found out about the proceedings only after reading about them in the press in early May 2023. Even then, PwC failed to file mandatory Form 3s until June 20, 2023.

The PCAOB also found that PwC Australia's quality control monitoring processes failed to identify the siloed nature of its main practice areas and the impact it might have on the firm's compliance with its PCAOB reporting requirements. The firm's monitoring process further failed to identify the necessary corrective actions and improvements in a timely way to be made in the firm's system of quality control. They also didn't communicate to the appropriate people at the firm any weaknesses in the quality control system or in the level of understanding or compliance therewith. Plus, they didn't follow up with appropriate firm personnel to ensure that any necessary modifications were made to the quality control policies and procedures in a timely manner.

PwC Australia said it regretted the failings. "We deeply regret the sharing of confidential Treasury information and the associated governance and cultural shortfalls under past leadership," PwC Australia said in a statement. "This disciplinary order stems from the same issue and we acknowledge this late filing and apologize for our initial failure to report this incident. The firm has cooperated with the PCAOB during this process and has taken a number of steps to improve our policies and procedures related to the reporting requirements. 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."

Without admitting or denying the PCAOB's findings, PwC Australia consented to the PCAOB's order, which censured the firm and imposed a $600,000 civil money penalty. PwC Australia is also being required to undertake certain remedial measures to establish, revise or supplement, as necessary, its policies and procedures, including monitoring procedures, to provide the firm with reasonable assurance that (a) personnel comply with the firm's policies and procedures related to compliance with Form 3 reporting requirements and (b) those policies and procedures related to compliance with Form 3 reporting requirements are suitably designed and are being effectively applied.

Fines against five other firms

Separately on Thursday, the PCAOB sanctioned five smaller auditing firms for violations related to audit documentation and disclosure of who worked on audits on the Form AP. The PCAOB imposed a total of $130,000 in fines on the five firms as well as censured them, and required various remedial undertakings including training and improvement of policies and procedures to foster compliance with the PCAOB's rules and standards. The Form AP discloses who led specific audits for the firm and whether any other firms were involved in those audits.

The firms were sanctioned as part of sweeps conducted by the PCAOB, which has been cracking down more on auditing firms in recent years. Starting in 2022, the PCAOB expanded its use of sweeps as part of its strategic goal of strengthening enforcement.

"These requirements are designed to protect investors, and when firms fail to meet them, the PCAOB won't hesitate to take action," said PCAOB chair Williams. 

Specifically, two firms failed to assemble a complete and final set of audit documentation within 45 days of the audit report release date, in violation of AS 1215, Audit Documentation. Berkower LLC received a $25,000 penalty and censure. Sassetti LLC was hit with a $25,000 penalty and censure.

Another firm, Freedman & Goldberg CPAs P.C., got a $25,000 penalty and censure for failing to design and implement appropriate policies and procedures to provide it with reasonable assurance that it would comply with AS 1215's requirements:

Two other firms failed to timely file Form APs in violation of PCAOB Rule 3211, Auditor Reporting of Certain Audit Participants: R. Bolko CPA P.A, which got a $30,000 penalty and censure, and Fontanella Associates LLC CPA & Consulting Firm, which received a $25,000 penalty and censure.

Without admitting or denying the findings, each firm consented to the various PCAOB orders and disciplinary actions. Each firm also consented to undertake remedial measures. Berkower, Sassetti, and Freedman & Goldberg agreed to undertake professional education and training concerning compliance with AS 1215. For their part, Freedman & Goldberg, Bolko, and Fontanella consented to improve their policies and procedures concerning compliance with PCAOB rules and standards related to these violations.

"These orders demonstrate the importance of compliance with PCAOB rules and standards related to audit documentation and the timely filing of Form APs," said Rice in a statement. "The PCAOB will take action to hold firms accountable when they violate them."

[Accounting Today]

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