To date, the largest fine levied by the PCAOB against a registered audit firm was 2024’s $25 million extracted from the pockets of KPMG Netherlands for widespread answer-sharing. In recent years the PCAOB has made it their mission to crack down on this thing that happens at literally every firm because something something capital markets (nevermind that many of the firms fined for this so far boasted flawless PCAOB inspections with zero deficiencies at the time the answer-sharing was taking place within their firm) and the latest batch of fines announced yesterday proves just how serious they are about it.
The Public Company Accounting Oversight Board (PCAOB) today announced three settled disciplinary orders sanctioning Deloitte Accountants B.V.(PDF) (“Deloitte Netherlands”), PricewaterhouseCoopers Accountants N.V.(PDF) (“PwC Netherlands”), and EY Accountants B.V.(PDF) (“EY Netherlands”) for violations of PCAOB rules and quality control standards relating to the firms’ internal training programs and monitoring of their systems of quality control.
The PCAOB found that, over a five-year period, all three firms failed to adequately prevent or detect extensive improper answer sharing on mandatory tests for training intended to develop the competencies and professional integrity of their personnel.
The PCAOB and the Dutch Authority for the Financial Markets (AFM) conducted parallel investigations, and the AFM has separately imposed intensive supervision measures aimed at preventing recurrences.
The fines against Deloitte Netherlands, EY Netherlands, and PwC Netherlands total $8.5 million in freedom bucks; Deloitte and PwC will be paying $3 million each while EY’s fine was $2.5 million.
“As we have stated previously, investors must be able to trust that all audit professionals are acting with integrity, and few things damage trust like impaired ethics,” said Robert E. Rice, Director of the PCAOB’s Division of Enforcement and Investigations, in the press release. “Our investigations of these three firms revealed that their quality control systems failed to evaluate appropriately and monitor the risk of improper answer sharing among their personnel, including after the firms learned of extensive answer sharing in at least one other major audit firm. We remain committed to our statutory mission of protecting investors and improving audit quality, and we will hold firms accountable when they fail to comply with PCAOB quality control standards.”
Looking at the individual orders there’s nothing new or remarkable here that hasn’t already been explained in the dozen other cheating fines the PCAOB has slapped firms with in recent years so we’ll just breeze through them. Deloitte’s:
From at least 2018 to 2022, Deloitte Netherlands violated PCAOB rules and quality control standards related to integrity and personnel management by failing to establish appropriate policies and procedures for administering and overseeing internal training tests. Those quality control failures prevented the Firm from identifying that, during the relevant period, hundreds of Firm personnel were involved in improper answer sharing—either by providing access to test questions or answers, or by receiving such access without reporting it—in connection with online tests for mandatory internal training courses. These courses related to a variety of topics, including U.S. auditing standards, U.S. generally accepted accounting principles (“GAAP”), and professional ethics. Firm personnel engaged in the answer sharing through a variety of unauthorized methods, including sending or receiving answers through electronic communications and taking tests jointly. The majority of the professionals who engaged in improper answer sharing performed work for the Firm’s Audit & Assurance practice.
PwC’s has the same paragraph and explains in detail how the firm’s quality control procedures weren’t sufficient to stop this behavior:
In June 2019, PwC Netherlands became aware of substantial answer sharing at a U.S. member firm of the KPMG International Limited network of firms, through that firm’s settlement of an enforcement action brought by the U.S. Securities and Exchange
Commission. Even after learning of that misconduct, PwC Netherlands did not appropriately evaluate and address the risk of improper answer sharing among its personnel.Starting in August 2020, the Firm added specific language to some of its training tests warning against answer sharing in connection with the tests, but this warning language had still not been included in all of the Firm’s mandatory audit and compliance trainings as of the end of 2022. Additionally, it was not until mid-2022 that the Firm supplemented the training test warnings with broader messaging to its personnel, such as through firmwide postings, specifying that improper answer sharing was prohibited.
Reminder that the 1,200 people at PwC Canada who got caught cheating in 2022 believed that maintaining shared drives full of internal training test answers was the kind of “collaborative culture” PwC encourages them to have with their colleagues.
According to the PCAOB order, the “improper answer sharing” at PwC Netherlands included a number of partners, directors, and leaders.
For example, a Firm partner stepped down from a PwC Netherlands’ senior leadership role after the Firm discovered that the partner and another colleague had met together while taking a mandatory test. None of these individuals reported their misconduct to appropriate parties at the Firm before the Firm became the subject of a regulatory investigation in 2023.
EY’s order tells us they were a bit more aggressive with the warnings, even sending out firmwide emails in 2022 to remind everyone that sharing answers is a no-no. Maybe that’s why their fine was the smallest.
Although in June 2020 the Firm started adding mandatory attestations to its training tests warning against answer sharing in connection with the tests, the Firm did not include these attestations in all of the Firm’s mandatory audit and compliance training known to have tests until mid-2021.
It was not until December 2022 that the Firm engaged in messaging to all of its personnel through firmwide emails or postings specifying that improper answer sharing was prohibited.
Each firm’s order mentions that the firms were extraordinarily cooperative in the PCAOB’s investigation and had they not been, they would have been slapped with way bigger fines. This is what they said about EY’s cooperation specifically:
The Board also took into account the Firm’s extraordinary cooperation in this matter. Specifically, the Firm provided substantial assistance to the PCAOB’s investigation by conducting, and providing to the PCAOB the results of, an extensive internal investigation into improper answer sharing among its personnel. As part of the internal investigation, the Firm collected and analyzed a voluminous amount of electronic data using an expansive array of search parameters. Additionally, the Firm applied optical character recognition to millions of electronic records of hundreds of individuals to optimize the review process. The Firm also interviewed hundreds of Firm personnel, encouraged self-reporting by individuals, and met frequently, on a regular basis, with the PCAOB to provide comprehensive, detailed reports and to receive feedback on the ongoing internal investigation.
Additionally, since the answer sharing misconduct occurred, the Firm has implemented remedial and corrective measures aimed at ending improper answer sharing at the Firm. Among other actions, the Firm implemented an annual confirmation for personnel to certify that they have complied with the Firm’s policies, which now include an explicit ban on improper answer sharing. The Firm also increased messaging and training among its personnel to communicate that improper answer sharing is prohibited. The Firm also required some personnel to reperform trainings. Additionally, the Firm disciplined Firm personnel who were found to have engaged in improper answer sharing.
Absent this extraordinary cooperation, the civil money penalty imposed would have been significantly larger, and the Board may have imposed additional sanctions.
If our math is right (and it may not be because no one around here can count), this makes 13 big firms fined for “improper answer sharing” since 2021 with the one before this being PwC Israel in February.
Do ya feel safer now, capital markets?
These cases are nonsense. Anyone who believes continuing education improves auditing is an idiot.
What’s likely going on here?
The PCAOB and the B4 are colluding to show the investing public the PCAOB is serious about improving audit quality and is not afraid of the B4.
When I see the PCAOB take a B4 firm “to the mat” over a busted audit and make findings of fact, a plaintiff’s law firm can use, I may begin taking the PCAOB seriously.
That the PCAOB has time for cases like this, shows it is overstaffed.
Will even one B4 client leave for a firm which has not been fined for answer sharing?
If not, this is Kabuki theater.