Issues called out by the PCAOB included failures to identify, or to address appropriately, financial statement misstatements, including failures to comply with disclosure requirements, as well as failures by the engagement team to perform, or to perform sufficiently, certain necessary audit procedures. In some instances, follow-up between the Firm and the issuer led to a change in the issuer's accounting or disclosure practices. The PCAOB also claimed PwC failed to perform some procedures based on absence of documentation or other sufficient evidence in some cases though the firm claimed to have performed the procedure (that's AS 3 for those of you taking Audit).
These assertions by the PCAOB go far beyond accusing PwC of sloppy record-keeping, we're talking full on audit failure. Per the inspection report:
The inspection team considered certain of the deficiencies that it observed to be audit failures. Specifically, certain of the identified deficiencies were of such significance that it appeared that the Firm, at the time it issued its audit report, had failed to obtain sufficient appropriate audit evidence to support its audit opinion on the financial statements and/or on the effectiveness of internal control over financial reporting.
Now, Bob Moritz and Tim Ryan don't come right out and tell the PCAOB to shove it in their response but they do – in the classiest way possible – suggest that maybe the PCAOB could lay off a bit and trust PwC's judgment, using elementary audit logic as their weapon:
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. 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.
They go on to outline numerous steps the firm has taken to
appease those nosy jerks at the PCAOB improve audit quality which include hiring 1,200 new experienced audit professionals in the last year and establishing a new bonus program tied to the firm's audit quality benchmarks.
Here's where it gets a tad catty. PwC doesn't come right out and say it's the PCAOB's fault for not being a tad clearer about what exactly it is they want from the firms but it's implied (our emphasis):
Meeting the challenges that must be addressed to consistently perform high-quality audits is our top priority. We look forward to continuing our dialogue with the PCAOB in support of our priority commitment to audit quality. In this regard, we hope that some of the Board's important standard-setting activities — such as proposed standards with regard to auditing fair value measurements, auditing management's estimates, and strengthening firms' systems of quality control — can be accelerated. 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.
Seeing as how PwC was dinged hard for its treatment of hard-to-value financial instruments such as certain municipal bonds, asset-backed securities, MBSs and credit default swaps, we can only take that above statement to translate as a bit of finger pointing back at the PCAOB for not clarifying how it expects the firms to audit these items before it starts faulting firms for not doing it right.
Which is an interesting strategy because there are a couple messages in here:
1. PwC is capitulating to its regulator. The firms would never say "capitulate" but the accounting profession was self-regulating for a long time and this is the most public instance that we can recall where a firm has said that the PCAOB needs to do more so that firms can do their jobs better. They want some guidance, that's all. The hoops are pretty hard to jump through when you don't know where they are or if you can fit through them.
2. PwC is saying that the status quo is setting audit firms up to fail. Quite literally. The word appears 128 times in their inspection report. The PCAOB is under tremendous pressure to demonstrate that they are pulling their weight as a regulator because the results so far have been pretty lackluster. Enforcement has been unimpressive and audit standards have been in short supply after a rash of them broke out back in 2010. This allows the PCAOB to point fingers and stamp "FAIL" all over their inspection reports and is measurable when members of Congress demand to see some results. PwC isn't going sit by and eat crow with a smile, so they're calling BS on the current state of things.
The simple message is: "You want better audits? Be a better regulator."