The PCAOB blessed us this morning with its first batch of 2020 inspection reports, which included BDO USA, Deloitte, EY, Grant Thornton, KPMG, and the highly anticipated one for PwC.
Back in August PwC released its 2021 audit quality report, which included a lot of bragging about how much more competent P. Dubs’ auditors have been in the past year. In a video accompanying the report, Wes Bricker, PwC Trust Solutions co-leader and former SEC chief accountant, mentioned that when the PCAOB releases the firm’s 2020 inspection report, the lack of screw-ups from PwC auditors would be noticeable:
“[In the audit quality report] you’ll read about the results of our inspections. We presently anticipate only one out of 58 audits inspected to be included in Part 1a of our PCAOB 2020 inspection report. That reflects a significant decrease in the number of audits with identified deficiencies, which is a positive impact from the investments that we’ve made in audit quality because audit quality is at the core of our purpose to build trust in society to solve important problems.”
That statement from Bricker left our skeptic spidey-senses tingling. But as I mentioned in our post last August, Bricker has too good of a reputation in accounting circles to have been lying about PwC’s low deficiency rate in its 2020 report.
Could PwC’s newfound auditing prowess be attributed to having an ex-SEC chief accountant leading the firm’s assurance practice? Bricker, who rejoined PwC in July 2019 to head the firm’s assurance practice (now part of the Trust Solutions group), didn’t have time to wave his magic wand to make the bad auditing go away when PwC was found to have had significant mistakes in 18 of its 60 audits of public companies reviewed by the PCAOB as documented in the firm’s 2019 inspection report. But now that he’s been on the job for more than two years now, can we give Bricker credit for PwC’s miraculous audit quality turnaround? Maybe?
Our friend and fellow skeptic Francine McKenna, who wrote an excellent post on her blog The Dig about PwC’s promise of only one audit deficiency in its 2020 inspection report, had a better reason why the firm supposedly got better at auditing all of a sudden:
[Former SEC chief accountant] Lynn Turner is doubtful about the reasons for a drop but, as always, tries to be optimistic.
“Given the PCAOB’s total lack of transparency with its inspections and reports in the past, a dramatic drop in deficiencies found likely is either the result of a firm’s audit quality improving or the inspection process going ‘soft.’ Given the recent removal of PCAOB board members and chair, one might lean to the latter conclusion while hoping otherwise.”
A significant improvement by PwC may be an unexpected result for one firm but a significant improvement for all firms, if that is what the official reports say, would signal a very unusual result for the PCAOB inspection process overall. Either way, a root cause analysis of the phenomenon is required.
One possibility is that the PCAOB, and SEC, may give all the firms a break on their 2020 and 2021 inspections because of the challenges of financial reporting and auditing during the pandemic. The SEC and PCAOB have not been clear on what adjustments were being made by issuers and audit firms to accommodate fully remote audits and subsequent remote PCAOB inspections.
During a period where public companies have been highly vulnerable to material misstatement and fraud, could the SEC, and a broken PCAOB, have decided to give public companies and the auditors a pass for two years? I hope not.
Whatever the reason, PwC’s 2020 PCAOB inspection report does show only one audit deficiency out of 52 audits inspected, which equates to an all-time low error rate among the Big 4 firms of 1.9%:
Of course, Bricker took a victory lap on LinkedIn today. He’s probably had this post saved in his Drafts for months now:
The PCAOB states in the report that it “selected for review 45 audits of issuers with fiscal years generally ending in 2019. In addition, to gain an understanding of how COVID-19 affected the firm’s performance of audits, we selected for review seven audits of issuers with fiscal years ending between March 28 and June 30, 2020.”
We can figure out from the report that the one wayward audit was for a public company in the industrials sector that has revenues in the range of greater than $10 billion to $50 billion. In that one audit, PwC auditors had some difficulties in both the issuer’s financial statement and internal controls over financial reporting:
We’ll take a look at the 2020 inspection reports for the other five firms in the coming days, including an almost equally impressive report card for Deloitte. In the meantime, you can review PwC’s 2020 PCAOB inspection report below: