PwC is taking more condemnation from the Public Company Accounting Oversight Board in its newest inspection report, but not without a little pushback. The PCAOB's 2011 inspection of PwC shows problems with 41 percent of the audits inspected, prompting PwC to summarize its efforts internally to address regulators' concerns and ask the board to accelerate its own efforts on auditing standards that might clarify expectations in some of the toughest areas of auditing.
The 2011 inspection of PwC took a close look at 60 audits, plus three additional audits where the firm played a critical role but didn't issue the final audit report. Inspectors found fault with 26 audits, or 41 percent, including three cases where issuers restated their financial results or announced their intention to do so after the inspection, according to the report. Last year, PwC saw 37 percent of its audits called out for problems by PCAOB inspectors.
Inspectors took exception with auditors' work in some of the most commonly criticized areas, including at least eight audits where the firm failed to properly test fair value measurement or disclosures for difficult-to-value assets, such as municipal bonds, asset-backed securities, collateralized mortgage obligations, credit default swaps, and others, the report says. Inspectors frequently criticize the firm for failing to press back on management estimates and assumptions, and in some cases for relying too heavily on outside valuation specialists or internal audit staff.
PwC is the second major firm to get an unfavorable 2011 report, continuing the theme that began last year with the publishing of 2010 reports that showed a considerable jump in unfavorable findings across all of the largest firms. KPMG's 2011 inspection report published in August showed a failure rate of 23 percent, lower than PwC's in the most recent year but consistent with KPMG's 22-percent rate from 2010.
In its response to the 2011 inspection, which is included with the inspection report, PwC outlines a number of steps it has taken to improve audit quality to address the board's concerns and calls on the PCAOB to take some measures of its own to upgrade its auditing standards. PwC asks the board to accelerate its work on proposed standards regarding fair value measurements, auditing managements estimates, and strengthening firms' systems of quality control.
“In our view, the consistency of audit execution, not only within a single firm but across the profession, can be greatly enhanced with standards that reflect the increasingly complex accounting and auditing environment in which we operate,” the letter says. The letter is signed by Bob Moritz, U.S. chairman and senior partner for the firm, and Tim Ryan, U.S. assurance leader for the firm.
Moritz and Ryan say the firm has invested significant time and money in efforts to support quality, including hiring 1,200 experienced auditor professionals over the past year and adjusting partner compensation based on quality measures. The firm even has established a new bonus plan with compensation tied to the achievement of firm-wide audit quality benchmarks.
The senior partners also relate that while they respect the PCAOB's mission and the effort to improve audit quality, they don't necessarily agree with all of the inspection findings. “We believe that as with any audit process, judgments are necessarily involved in the inspection process and professionals can reach different conclusions about the adequacy of audit evidence in a particular circumstance.” Moritz and Ryan wrote. “In those instances where such differences exist related to the inspection observations detailed in this report, they generally related to the significance of the observation in relation to the audit evidence taken as a whole rather than the specific nature of the observation. So, while we may disagree with the significance of inspection observations in certain cases, we have taken all of the Board's observations into account in formulating our plan to continuously improve audit quality.”
In a prepared statement, Ryan says that the firm has made significant investments to improve audit quality. "We remain committed to working with the PCAOB as it seeks to set standards reflecting the increasingly complex auditing environment faced across the profession," he says.