A friendly reminder to audit firms: an auditor must maintain independence in both fact and appearance. Maybe PwC Mexico forgot this when it took over in fiscal year 2016 as the auditor of one of the largest financial services holding companies in Mexico.
It just so happened that at the time the engagement letter was signed, at least six of PwC Mexico’s partners had personal financial relationships with that bank, which Francine McKenna of MarketWatch reported was Banco Santander Mexico. That’s a no-no under those pesky auditor independence rules, as the PCAOB found the partners’ ties to the bank as “inconsistent with a firm’s obligation to maintain independence from its audit client.”
So, the PCAOB fined PwC Mexico $100,000 on Aug. 1 for violating rules and standards related to P. Dubs’ independence, audit committee communications, and system of quality control.
Basically, PwC Mexico ran afoul of PCAOB Rule 3520, Auditor Independence, which requires a registered public accounting firm to be independent of the firm’s issuer audit clients throughout the audit and professional engagement period, and PCAOB Rule 3526, Communication with Audit Committees Concerning Independence, according to the PCAOB order.
During the audit and professional engagement periods for the Firm’s audits of the 2016 and 2017 financial statements of Client Bank, covered persons in the Firm had personal financial relationships with Client Bank that were inconsistent with the independence criteria set out in Commission regulations. Accordingly, the Firm violated PCAOB Rule 3520.
PCAOB Rule 3526 requires that, before accepting an initial engagement, and at least annually for each audit client, a registered firm describe in writing to the audit committee of the audit client certain relationships that may reasonably be thought to bear on independence. The Firm failed to timely make such required written communications with respect to the above-mentioned financial relationships that Firm covered persons had with Client Bank.
The six partners were located in the same office where the lead audit engagement partner for the bank’s audit primarily practiced, according to the PCAOB. Three of the six partners had obtained a margin loan or mortgage for a second residence from the bank. The other three partners held uninsured assets in brokerage accounts with the bank or its affiliate.
However, according to PwC records, none of the six partners worked on the bank’s audit engagement, the PCAOB order states.
The order also notes that on July 20, 2017 and June 18, 2018, PwC Mexico signed engagement letters extending the engagement through FY 2017 and FY 2018, respectively.
Once it figured out that some of its partners had personal financial relationships with the bank, PwC tried to do damage control and fix those independence issues.
But the problem was it took PwC a couple more years to discover the brokerage relationships the other partners had.
Although the Debtor-Creditor Relationships were discovered by the Firm shortly after the Engagement Letter and then unwound by September 2016, the Uninsured Brokerage Interests were not identified by the Firm and were not unwound until approximately June 2018, two years after the Engagement Letter. During those two years, the Firm issued audit reports on Client Bank’s 2016 and 2017 financial statements included in the Forms 20-F filed with the Commission in April 2017 and March 2018, respectively. In both audit reports, Respondent affirmed that it was independent of Client Bank.
The PCAOB said PwC failed to suitably design, implement, and appropriately monitor quality control policies and procedures, which resulted in the independence and Rule 3526 violations.
The Firm also issued a Rule 3526 letter to Client Bank’s audit committee during that two-year period. But that letter, dated June 16, 2017, failed to identify either the Debtor-Creditor Relationships or the Uninsured Brokerage Interests. Instead, the letter represented that the Firm was not aware of any relationship between the Firm and Client Bank that had continued or arisen since June 13, 2016 and that may reasonably be thought to bear on the Firm’s independence. The Firm should have known that this Rule 3526 letter was inaccurate, though, because the Firm had discovered the Debtor-Creditor Relationships after June 13, 2016, and knew that those personal financial relationships ran afoul of applicable independence criteria, and thus may reasonably be thought to bear on independence. As for the Uninsured Brokerage Interests, the Firm failed to provide Client Bank’s audit committee with any written description of those relationships until January 2019.
In addition to the $100,000 fine, PwC Mexico must undertake certain remedial measures within the next 90 days, including measures to “establish, implement, and monitor policies and procedures to provide reasonable assurance of compliance with auditor independence requirements and with audit committee communication requirements,” the PCAOB said.