Major accounting firms admit breaking rules safeguarding audit independence

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The Big Four accounting firms have admitted hundreds of breaches of rules aimed at protecting the independence of their audit work, following the introduction of new disclosure rules in the US.

The admissions come as the Public Company Accounting Oversight Board urges companies and investors to pay more attention to the results of annual inspections of audit firms, the latest round of which is expected to be published in the coming weeks.

U.S. regulators require audit firm staff and their immediate family members to provide in-depth financial information, such as about their investments, and prohibit employment and financial relationships with audit clients that could compromise the firm’s independence.

PwC said Monday it had identified 129 violations of independence rules affecting 74 clients, and PCAOB inspectors found another when inspecting audit work in 2022. The figures were included in an update to the audit report PwC’s quality audit, published on its website.

Deloitte said in its audit quality report last month that it reported to PCAOB inspectors 129 violations on 78 clients in 2022 – affecting about 3% of its U.S. audits – and 107 on 53 clients in the inspection cycle of 2023. EY also said it found independence violations affecting 3% of its audits in 2022.

KPMG is the only Big Four firm that has not disclosed its data, which will become public in the PCAOB’s upcoming 2022 inspection reports. The PCAOB decided last year to begin regularly including data on violations of the independence.

PwC, Deloitte and EY said they examined each breach and concluded there were no cases where an audit’s independence was actually compromised. A person familiar with the situation at PwC said one example was a staff member’s spouse holding a cash balance on payments app Venmo while PwC was auditing Venmo’s parent company, PayPal.

Deloitte said the most common cases of non-compliance were “linked to the financial and employment relationships of approximately 145,000 monitored professionals”.

“I would call them technical violations,” said Dennis McGowan, vice president of the Center for Audit Quality, which represents large U.S. accounting firms. “These companies are large, they have a lot of people in them and they have put in place controls and systems to monitor people’s compliance, which is why it’s almost always self-reported.”

A PCAOB spokesperson said: “Auditor independence underpins the integrity of our capital markets and is essential to ensuring that investors can trust the financial statements they rely on to make decisions.”

PwC vice president Wes Bricker said its compliance programs “often go beyond regulatory requirements.”

The company’s audit quality report update on Monday also revealed that PCAOB inspectors had found faulty work in 9% of PwC audits examined in 2022, where its staff had not performed all procedures necessary to justify its audit opinion. That’s double the 2021 rate, but remains the lowest among the Big Four.

EY admitted in November that its PCAOB inspection report for 2022 would show a deficiency rate of 46%, a figure deemed “unacceptable.”

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