The PCAOB Just Hit PwC With a Massive Independence Violation

Whoops!

Fresh from the Public Company Accounting Oversight Board (PCAOB), just now they’ve announced a settled disciplinary order sanctioning PwC for violations of PCAOB quality control standards relating to the maintenance of auditor independence that will cost the firm $2.75 million in penalties. PDF of the order here.

Says the PCAOB:

The PCAOB found that PwC’s quality control policies and procedures were deficient because they did not provide reasonable assurance that the firm’s personnel would timely consult with qualified individuals or refer to authoritative literature or other sources when dealing with certain complex, unusual, or unfamiliar independence issues.

OK so this probably isn’t so bad…

These deficiencies came to light in 2018, when numerous PwC leaders and partners failed to consult with PwC’s Independence Office or conduct other appropriate independence analysis as PwC explored the possibility of terminating its audit relationship with an issuer client to allow for a joint business relationship (JBR) with the client. PwC did not raise the JBR‑related discussions to its Independence Office – or perform an appropriate analysis of PwC’s independence in light of those discussions – until PCAOB investigators raised questions about PwC’s independence from the issuer.

Do you need a TLDR for this?

The PCAOB further found that, in 2018, members of PwC’s Tax group prepared and shared with members of PwC’s Assurance group a “business case” document showing that PwC could generate substantially more revenue from a JBR with the issuer than it was earning as the issuer’s auditor. In response to that business case document and at the instruction of one of PwC’s national leaders for Assurance, two PwC partners – including the engagement partner for the issuer’s then‐ongoing 2018 integrated audit – met with the issuer’s CEO and the issuer’s President in November 2018 and discussed, among other things, business opportunities that PwC and the issuer could pursue in a JBR. Both during and after the meeting, the issuer’s CEO expressed enthusiasm for a JBR with PwC, which the CEO understood might be worth tens of millions of dollars to the issuer.

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

The issue was brought to PwC’s Independence Office only the PCAOB’s Division of Enforcement and Investigations sent PwC a document and information request concerning PwC’s independence from the issuer. At that point, the Independence Office then considered the above circumstances, alongside PwC’s other non‐audit interactions with and involving the issuer and determined that there was a risk that a reasonable investor could conclude that PwC was not independent of the issuer in 2018. Before completing the 2018 audit, PwC was terminated as the issuer’s auditor.

Without or admitting or denying the PCAOB’s findings, PwC consented to the order. They’ve earned themselves a $2.75 million civil money penalty and will have to do the usual performative “remedial undertakings” which are:

• Review and revise or supplement, as necessary, its independence‐related quality control policies and procedures;
• Make certain communications to the firm’s professionals regarding certain independence rules and standards, and related firm quality control policies and procedures; and
• Ensure that all 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.

We’ll dig deeper into the order later.

PCAOB Fines PwC $2.75 Million for Quality Control Violations Relating to Independence [PCAOB]

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