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Inspections reveal that the Big Four auditor often failed to be thorough.
Alan Rappeport, CFO.com | US
July 1, 2008
In its latest evaluation of PricewaterhouseCoopers, the Public Company Accounting Oversight Board scolded the firm for various "deficiencies" that typically included failing to get enough information to support its opinions about the financial statements of its clients, who in the PCAOB's lexicon are issuers.
PwC acknowledged one instance noted in the PCAOB review that required further audit procedures, but characterized the other problems as "not significant."
PCAOB inspectors scoured work at PwC's headquarters and at 21 of its 61 U.S. offices between April 2007 and January 2008. The agency found that the firm sometimes failed to address errors in its clients' application of U.S. generally accepted accounting principles, and that it also sometimes failed to perform standard audit procedures, or to perform them to a high enough standard. The PCAOB also found that PwC sometimes failed to properly document its work, a violation of Auditing Standard No. 3.
The PCAOB highlighted some specific cases where PwC's work went awry. In one case, PwC failed to test the underlying data behind an added "award amount" during a goodwill impairment analysis when determining fair value of a reporting unit. This resulted in an inflated valuation.
In another case, a PwC client made a modification to the terms of an acquisition. The client incorrectly asserted that the client upped its purchase price, rather than changing its compensation structure for employees. PwC failed to "test the underlying assumptions" to support this and to identify that the disclosure of the agreement was not accurate. Also, the client had multiple contracts with different phases. PwC did not sufficiently test whether the revenue that was allocated to each phase represented fair value, the PCAOB said.
The PCAOB also criticized PwC for its handling of an issuer that sells software licenses, hardware and post-contract support. According to the report PwC failed to test whether the issuer had established vendor-specific objective evidence to support the fair value for each of its products and services.
PwC's documentation problems crept up when it presented no evidence that an issuer's use of the straight-line method of amortization for acquired customer-related intangible assets reflected the pattern in which the economic benefits of the intangible asset were being consumed. Also, the PCAOB said, the firm did not evaluate if the asset's life should have been adjusted due to customer attrition.
Finally, the PCAOB charged that PwC did not "substantively test the existence and valuation" of the significant and long-outstanding accounts receivable of an issuer. They were at two foreign locations and represented a higher risk because of their age, the PCAOB said.
PwC, while thanking the PCAOB for the feedback, contested parts of the critique. "In only one instance were additional audit procedures required and therefore performed," PwC wrote in a letter to George Diacott, director of the PCAOB's division of registration and inspections. It also noted that additional information was later added to its audit files. "We believe the matters raised on other issuers were not significant. In no instances did the additional procedures or documentation impact our conclusions, the issuers' financial statements, or our reports."