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At Least PwC Doesn’t Have to Worry About Improving the Supervision of Its Auditors Anymore

Last week the PCAOB dropped Part II of PwC's 2008 and 2009 inspection reports. This was only the second time a Big 4 firm's Part II had been released since the audit profession was blessed with government regulation. It was like a fire rainbow or an unassisted triple play. Rare! Exciting-ish!

We pored over the details of both inspection reports which had several tasty bits, but the most interesting stuff was in the 2008 report, most notably the supervision or lack thereof that the Board's inspectors called attention to:

Many of the quality control issues described below relate in whole or in part to apparent deficiencies in the Firm's supervision and review activities. This observation provides cause for concern about the effectiveness of this critical aspect of the audit process, including the timing and quality of the supervision and review activities and the attention devoted by senior members of the engagement team to such activities. 
The deficiencies identified in areas with a high degree of judgment and potential for management bias, and in areas involving the application of complex accounting literature (such as * * * * and fair value), similarly suggest that the audit personnel were not adequately supervised. In addition, the deficiencies suggest the possibility that senior members of the engagement team were not devoting sufficient attention to developing an appropriate audit strategy for these areas and that quality review partners were not devoting sufficient attention to reviewing the audit strategy for these areas.
Now, when you think of lax supervision you are probably picturing hapless engagement teams run by overwhelmed managers that are constantly on the phone with an absent, indifferent partner who come in to initial a few workpapers, do a little client glad-handing only to never be seen again. And in some cases that might not be far off!
What's interesting is that in 2009 this was no longer an issue. There's no mention of "apparent deficiencies in the Firm's supervision and review activities" in that report at all. So what happened? I have one theory/imaginary scenario that the Board's distaste of PwC's beloved "cumulative audit knowledge and experience" (aka CAKE) resulted in some serious auditor soul searching and, as a result, that may resulted in more supervision. Like I said, a theory, but a comment on last week's post suggests that the timing is about right:
CAKE has been banned on any engagements I have worked on since 2007 or 2008
So partners start keeping a closer eye on things after hearing whispers about auditors gone wild and maybe there was even some policy tweaks to keep the Monday Morning Auditors at bay, but eventually the firm decided to really keep the Board of out their har, they needed major changes and that resulted in the new supervision policy we reported on last December. Those changes were very specific and directed right at engagements that fall under the PCAOB's eye:
For public company audits […], a manager or partner is also required to perform a detailed review of work where the first level of review was performed by a senior associate. […]

On public company audits […], the engagement leader should review documentation supporting our understanding of the "end-to-end" flow of transactions in business processes and our identification of likely sources of potential misstatement (LSPM), which is expected to be included in Gather Evidence view in multiple instances of the EGA entitled "Identify risks and understand controls in the business process – [business process or FSLI name]".  The engagement leader should review, at a minimum, the flow of transactions documentation and completed LSPM templates for business processes related to revenue, inventory, business combinations, and impairments, and for those business processes that impact financial statement accounts that present elevated or significant risks of material misstatement.

This seemed to be at least part of the details behind Bob Moritz and Tim Ryan's response to the PCAOB's most recent inspection report where they outlined "significant investments and […] actions taken to improve audit quality." Does partners signing off on nearly every section of the audit really result in increased audit quality?  Some people might not think so, but the PCAOB seemed to appreciate the effort; just not so much to keep 2009's Part II a secret.