July 1, 2014 was a big day for Sarah Martin, as she was one of 180 chosen ones who were admitted to the partnership by PwC. On that day the Richmond, VA-based Martin became a partner in assurance, which along with tax now falls under the Trust Solutions umbrella at P. Dubs. Now fast-forward seven years and Martin, who reportedly no longer works at PwC, got busted last week by the US audit cops for shoddy auditing:
A former PwC LLP audit partner has agreed to a $10,000 penalty to settle disciplinary charges that she missed a series of internal control lapses and failed to cooperate with audit inspectors.
Sarah Martin didn’t ensure her audit team tested the internal controls for a Virginia-based audit client. And following a routine Public Company Accounting Oversight Board inspection, PwC would later identify 15 areas where the client’s controls didn’t meet muster, resulting in a pair of material weaknesses for revenue and cash flow forecasts that was reported to investors, according to the board’s order released [Sept. 17].
The audit client filed an 8-K disclosing that PwC’s unqualified ICFR opinion pertaining to the audit for the year ended Dec. 31, 2017 should no longer be relied upon, according to the PCAOB.
But that’s not all. The order states:
In addition, during the PCAOB’s inspection of the 2017 Issuer audit, Martin participated in meetings during which PwC personnel provided the PCAOB inspectors with a sensitivity analysis performed during the inspection that PwC personnel claimed had informed the engagement team’s work during the audit. Martin knew or should have known that the sensitivity analysis had been created during the inspection and had not informed the team’s work during the audit. However, Martin failed to disclose this information to the PCAOB inspectors, in violation of PCAOB rules.
The PCAOB order against Martin is pretty lengthy so you can read through it at your leisure. But one part seems particularly noteworthy regarding controls over cash flow forecasts:
The Issuer reported a significant investment in a private company representing 7% of the Issuer’s total assets as of December 31, 2017 (“Investment”). The Issuer accounted for the Investment using the fair value method, which relied on cash flow forecasts, and recorded a net gain on the Investment of 63% of the Issuer’s net income during 2017.
In addition, the Issuer recorded a significant acquisition (“Acquisition”) during 2017 for which it recorded customer relationship and trade name intangible assets totaling 4% of total assets. The Issuer used revenue projections in valuing these intangible assets.
During the 2017 audit, Martin and the engagement team identified the significant judgment used in management’s cash flow projections and inaccurate revenue growth rate assumptions as LSPMs [likely sources of potential misstatement] with respect to the valuation of the Investment and the acquired intangible assets, respectively.
Martin and the engagement team determined that these LSPMs were addressed by two controls involving the corporate controller’s review of cash flow projections, including revenue projections, for reasonableness. However, in testing these two controls, Martin and the engagement team failed to evaluate the specific review procedures the corporate controller performed to assess the reasonableness of projected cash flows and revenue growth assumptions. Martin and the engagement team failed to evaluate whether and how the controller would follow up on items relating to management’s use of significant judgment or the accuracy of revenue growth rate assumptions. Accordingly, Martin failed to ensure that the engagement team adequately tested whether the controls were designed and operating in a manner that appropriately addressed the LSPMs.
Like in youth baseball, when it’s almost automatic that a batter will hit the ball to the weakest-skilled kid on the field who is standing there picking his/her nose, the PCAOB, of course, selected the 2017 audit of this issuer with the weak internal controls for inspection and began field work for the inspection during the week of May 21, 2018.
PCAOB rules stipulate that registered public accounting firms and their associated persons “shall cooperate with the board in the performance of any board inspection.” This includes an obligation not to provide misleading documents or information in connection with, or otherwise to interfere with, the board’s inspection processes. An auditor provides misleading information if he or she fails to disclose that documentation presented to inspectors as having existed at the time of the audit was, in fact, subsequently altered or created [bold emphasis added].
PwC probably trusted that Martin and her team had conducted the sensitivity analysis at the time of the 2017 audit. Silly PwC. Here’s an excerpt from the PCAOB order:
The engagement team’s testing of the Issuer’s accounting for the Acquisition, and in particular the team’s testing of the customer relationship intangible asset, was an area of interest of the PCAOB inspection.
On May 21, 2018, a PwC audit staff member requested that PwC’s Transaction Services Group perform a sensitivity analysis —“a valuation of customer relationships assuming a static growth rate of 4% in revenue”— in response to questions during the inspection. Martin was then copied on emails concerning the preparation of the analysis.
The next day, a member of PwC’s Transaction Services Group sent the newlycreated sensitivity analysis to Martin and other PwC personnel. Martin forwarded the sensitivity analysis to a PwC audit staff member, along with a note stating that it was “[o]ne more piece of support for the [Acquisition] file for tomorrow.”
Also on May 22, 2018, Martin and other PwC personnel participated in a meeting with the PCAOB inspectors. PwC’s notes of this meeting record that PwC personnel told the inspectors that a sensitivity analysis had “informed our work” with respect to the customer relationship intangible asset.
During the May 22 meeting, neither Martin nor any other PwC personnel disclosed that the specific sensitivity analysis shown to the inspectors had not existed during the 2017 audit, and so could not have informed their work at the time of the audit.
On May 24, 2018, Martin and other PwC personnel participated in another meeting with the inspectors to discuss the engagement team’s testing of the Acquisition. PwC personnel provided the inspectors with a hard copy of the sensitivity analysis. Martin and her team did not provide the inspectors with an electronic copy of the sensitivity analysis; nor did they disclose that the sensitivity analysis had been created during the inspection week, and not during the 2017 audit.
At the end of the day on May 24, Martin and one other PwC representative attended an additional meeting with a PCAOB inspector. PwC’s notes from this meeting, which were located in a spreadsheet tab labeled “High priority,” indicate that the inspector requested “anyting [sic] that can show the sensitivy [sic] was done at the time of the audit.” The notes do not reflect a response.
Martin knew or should have known that the inspector’s comment reflected her understanding that PwC purported to have performed the sensitivity analysis at the time of the 2017 audit. Nonetheless, Martin did not disclose that the sensitivity analysis had, in fact, been created during the inspection, and not during the time of the 2017 audit of the Issuer.
In addition to the $10,000 fine, Martin was barred from being an associated person of a registered public accounting firm for one year.
Former PwC Auditor Censured for Missing Internal Control Lapses [Bloomberg Tax]