The Public Company Accounting Oversight Board has censured PwC and fined the firm $1 million over an audit of Merrill Lynch and its compliance with customer protection rules.
The action follows closely a separate disciplinary measure against the Hong Kong affiliate of Crowe Horwath for refusing to cooperate with an investigation of a China-based issuer audit.
At PwC, the PCAOB says PwC failed to obtain sufficient audit evidence about Merrill Lynch’s assertions regarding its protection of customer securities from liens by creditors. The Securities and Exchange Commission found in 2016 that for several years, Merrill Lynch had tens of billions of dollars of its customers’ fully paid, excess-margin securities in accounts that were exposed to liens by third parties. That’s a violation of the Customer Protection Rule under which broker-dealers are required to operate.
The PCAOB’s order says PwC failed in its audit of fiscal year 2014 financial statements to obtain adequate evidence that the firm complied with the rule, or that the firm had adequate internal controls to assure compliance. The firm ultimately restated its 2014 compliance report to disclose a material weakness in its internal control over maintenance of custodial accounts in proper locations.
The PCAOB says PwC consented to the action and penalty without admitting or denying the allegations. “We are pleased to have resolved the matter,” a PwC spokesman said. “Delivering quality is our top priority.”
On the public company audit side, the PCAOB says Crowe Horwath HK has been censured and its registration with the PCAOB has been revoked after the firm refused to provide information requested by the board in connection with an investigation of audit work for a China-based company. The firm will be allowed to reapply for registration after three years, the PCAOB says.
According to the PCAOB’s enforcement order Crowe Horwath HK became registered with the PCAOB in 2010 and issued audit reports for 22 different U.S. listed entities, all but two of which operate in mainland China, through 2016. The PCAOB does not have access to inspect the firm due to legal conflicts over carrying out inspections in certain non-U.S. jurisdictions, including Hong Kong and China.
The PCAOB says the firm filed a request to withdraw its registration, but the board determined permitting withdrawal while an investigation was pending would be “inconsistent” with the board’s responsibilities under the Sarbanes-Oxley Act, so the decision was delayed pending the outcome of the investigation.
Crowe Horwath HK apparently found itself stuck between U.S. and China law. The enforcement order says the firm consulted with counsel in China and learned it was forbidden under the law in China from providing audit work papers to any non-China authority. The PCAOB says non-U.S. legal obstacles “do not create an exception” to a registered firm’s obligation to cooperate with a PCAOB investigation.