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PwC Bolsters Audit Independence Amid SEC Investigation

Oct. 9, 2019, 8:45 AM

PwC LLP, stung by a recent $7.9 million SEC settlement, has taken multiple steps to showcase and strengthen the independence of its auditing team from its audit clients.

Among them: new compliance checks, more auditor training, policy changes, and disciplinary action for supervisors responsible for those involved with the prohibited services. Some new checks are designed to detect “scope creep”—add-on work that stretches the bounds of a typical financial statement audit.

The moves aim to strengthen the Big Four firm’s independence and compliance with federal conflict of interest rules intended to prevent the behavior PwC is accused of: auditors cashing in on lucrative consulting gigs with their audit clients.

“We take independence and our role in the capital markets seriously,” the firm, also known as PricewaterhouseCoopers, said in a written statement Oct. 7.

PwC settled charges that the firm provided prohibited services to audit clients, failed to discuss the scope of the firm’s work with audit committees charged with overseeing their work, and misrepresented the nature of that work, which brought in $3.8 million in fees. A PwC partner, Brandon Sprankle, was also fined and sanctioned for pursuing the prohibited work.

Firm Chairman Tim Ryan has previously defended the mix of tax, consulting, and accounting practices, arguing that pool of expertise is necessary to provide high-quality audits.

But accounting firms are increasingly facing pressure both here and abroad to demonstrate that they can provide consulting work and still serve as independent and effective checks on the largest companies in the world.

Cracks in the System

Sprankle, an IT specialist and audit team member, altered the description of computer system design work he pursued with 15 audit clients to avoid detection by the firm’s independence and compliance checks. He also misrepresented the work in engagement letters sent to clients, robbing audit committees of the opportunity to discuss whether the additional work impaired the independence of PwC, according to the order.

The $3.5 million penalty combined with the fee disgorgement, though a drop in the bucket for a firm that counts revenue in the billions, is a signal that this is a priority for the SEC, said Lisa Bragança, a securities lawyer and former investigator for the SEC.

PwC had a review process intended to ensure any additional work wouldn’t violate the firm’s policies or federal regulations. But that process relied significantly on the honesty of the partner, she said.

“It tells us one important thing: that this partner knew that he had to misrepresent what the engagement was in order to get it approved,” Bragança said.

After uncovering the behavior, PwC took steps to close such internal check loopholes prior to the SEC settlement.

A Bright Line

Daniel Taylor, a Wharton School associate professor of accounting, called Sprankle’s side projects a clear violation of the SEC’s independence rules that bar firms from providing certain nonaudit services to audit clients—designing financial reporting systems or controls over those systems among them.

Taylor argued that the penalty should have been higher given the number of engagements involved and the clear line that was crossed: Firms shouldn’t be auditing their own work, he said.

But the case also raises questions about the culture at the firm, whether Sprankle was a rogue employee or whether he was responding to a corporate culture that drives partners to bring in revenue for the firm, and the role that the partners running the audit teams had in supervising Sprankle’s work, he said.

Tailor said that the case also hints at a larger, systemic problem in the profession of pairing audit with nonaudit services and labeling such services as part of the financial statement audit, or “scope creep.”

As the firms grow their menu of consulting services, such conflicts could increase, he said.

A Positive Spin

The size of the fine reflects the integral role auditors play in sharing trusted financial information with shareholders, potential investors and others—details needed to keep the economy humming. The auditor independence rules are intended to ensure the integrity of the financial statements, said Nancy Reimer, an accountants liability partner with Freeman Mathis & Gary LLP.

“Whoever is investing in the company, how can they rely on the integrity of the management statements, because for all they know, the auditor could be putting a positive spin on the numbers. They are supposed to be independent,“ Reimer said.

She urged other accounting firms to review their own compliance programs to make sure that they too are following the conflict of interest rules.

Wes Bricker, the former SEC chief accountant who now leads the firm’s audit practice, could be PwC’s best tool to allay concerns from both regulators and clients.

“Who knows the rules better than someone that worked for the SEC? Who better to right your ship?” Reimer said.

To contact the reporter on this story: Amanda Iacone in Washington at aiacone@bloombergtax.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Kathy Larsen at klarsen@bloombergtax.com