March 11, 2013

The PCAOB & Auditor Failures to Remediate

Last week, the PCAOB issued a rare rebuke to a Big Four auditor as PricewaterhouseCoopers was faulted for failing to promptly address quality control problems in audits occurring in 2007 and 2008. The rebuke came after the PCAOB had reviewed the remediation efforts of PwC in response to the nonpublic portions of the Board’s March 2009 and August 2010 inspection reports. Learn more in this GoingConcern blog, WSJ article and Reuters article.

And as recently blogged, this comes on the heels of another PCAOB report on US auditors’ performance, in which the the Board found a reduced rate of “significant audit performance deficiencies” compared to its last review in 2007. However, the PCAOB did note that problems persist with almost half of the audit firms inspected having at least one “significant audit performance deficiency.” The PCAOB called out small firms and big firms alike in its report. Here’s a list of auditors that failed to address quality control criticisms satisfactorily.

Here are some thoughts from Lynn Turner on the PwC inspection report:

The PCAOB Inspection reports are critical of PwC audit partners for not supervising those staff doing the vast majority of the work. In one instance cited below, it notes the partner only spent 2% of the hours put in on the audit. That is a significant issue that would affect audit quality and the credibility of the audit report.

A few years ago, the PCAOB proposed that investors be told the name of the audit partner, as is done in Europe and other parts of the world. This could be done either through the partner signing the report, as is the typical custom, or having the auditors name be disclosed as some have proposed.

Investors are asked to vote on and ratify the auditor as part of the proxy voting process for many companies. Yet today, the PCAOB continues to withhold from investors, the name of the companies whose audits the PCAOB inspection reports call into question, those audits of questionable quality and credibility, and which have not been done in accordance with professional standards. The PCAOB has also failed to act on the proposal to provide investors with transparency as to who the audit partner is. As a result, despite all the criticism leveled by the PCAOB against PwC in today’s report, investors are left totally unable to discern which of these audits they should be concerned about, when voting on the auditor ratification. The PCAOB is simply forcing investors to “fly blind” on that vote.

While SOX does prohibit the PCAOB from disclosing certain information on an auditor that arises as a result of an inspection, it does not prohibit in any fashion the PCAOB from disclosing the name of the Company. And it would not prohibit the disclosure of the names of these partners who perform poorly if the PCAOB were the Board ever to act on its own proposal. Rather, a majority of the PCAOB board members have decided to act in a manner that reduces transparency with respect to audit quality for investors.

Francine McKenna on Audit Industry Developments

In this podcast, Francine McKenna of re:theauditors delves into some of the latest audit industry developments, including:

– Why should audit committees care about PCAOB inspection reports?
– How can the audit committee learn more about a PCAOB inspection report? Should they ask the auditor? The PCAOB?
– In what instances can a PCAOB inspection report be used in litigation against the auditor by the client or shareholder plaintiffs?
– Is it the audit committee’s responsibility or the auditor’s to make sure the firm is independent? What if the auditor uses its member firms all over the world to complete the audit? What can happen if the audit firm is not independent?
– What role does an external auditor play when there’s a corporate investigation? Can the auditor be hired to perform an investigation of fraud or illegal acts? Should the auditor be hired to perform a corporate investigation? Advantages and disadvantages?

As an aside, here’s a Bloomberg article critical of the nonprosecution agreement over illegal tax shelters that the DOJ just reached with Ernst & Young.

And Janice Brunner & Ning Chiu note in this Davis Polk blog: “The New York City Bar Association Financial Reporting Committee has asked the NYSE to consider revising its rules regarding the extent to which audit committees shoulder the burden for risk management oversight. NYSE requires audit committees to discuss policies with respect to risk assessment and risk management. Commentary to these rules indicates that the audit committee is not required to be the sole body responsible for risk assessment and management, but it must discuss guidelines and policies to govern the process by which this activity is undertaken.

The Financial Reporting Committee letter expressed concern that the NYSE rules not only call upon audit committees to assume oversight responsibility for risks beyond those associated with financial reporting, but also that the level of responsibility the committees must undertake is unfortunately ambiguous. The letter argues that audit committees are already burdened with their existing duties and also do not possess particular expertise in broader subjects of risk management that may expand to operational and environmental risk, for example. The letter suggests perhaps a more useful approach would be to vest in the entire board the responsibilities for the allocation of risk management oversight instead. “

Webcast: “What the Top Compensation Consultants Are NOW Telling Compensation Committees”

Tune in tomorrow for the webcast – “What the Top Compensation Consultants Are NOW Telling Compensation Committees” – to hear Mike Kesner of Deloitte Consulting, Jan Koors of Pearl Meyer & Partners, Blair Jones of Semler Brossy and Eric Marquardt of Pay Governance “tell it like it is. . . and like it should be.” The topics include:

– What is ISS QuickScore & How Relates to SOP
– Weaknesses in ISS’ Pay-for-Performance Assessments
– How ISS Overvalues Options
– The Use of Peer Groups
– How to Demonstrate Pay-for-Performance Alignment
– Severance and Pay-for-Performance
– Fighting ISS Recommendations
– Moving Away From a Relative TSR Program
– Clawbacks

– Broc Romanek