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PCAOB Releases 2009 Inspection Report on PricewaterhouseCoopers, 9 Issuers Cited

PCAOB Releases 2009 Inspection Report on PricewaterhouseCoopers, 9 Issuers Cited

John Fowler,
August 16, 2010

PCAOB just released its 2009 annual inspection report on PricewaterhouseCoopers using inspections from October 2008 through October 2009 at the Firm’s National Office and at 34 of its approximately 61 U.S. assurance practice offices.

They found only problems in only 9 issuers (of a total of 76, that is about a 11% error rate, much lower than what we saw in Deloitte but slightly higher than the 9% in Ernst & Young).

We are noticing, at least in this report and perhaps as a general trend that the PCAOB is focusing a lot on fair value determination, with four issuers (A to D) being cited for failing to independently test management’s process and documentation and get its own competent evidence to support the audit opinion. This was also noticed in the recent E&Y inspection report. We wonder if this is anything to do with the increased focus on this topic by the IASB and the FASB.

On another note, it has become rather routine that firms respond with the boilerplate that they have fully examined the PCAOB’s report and find no need to restate either their audit opinion or issue revised financials. That leads us to slowly believe that either the more controversial issues are highlighted and addressed in the Part 2, 3 and Appendix A, which are not revealed to the public, and what we see is just a sanitized look at some issuers and the firm’s standard, cordial but firm response to hold on their initial opinions. We just hope that the PCAOB is really bringing up substantial issues, which may have been overlooked by the firm and thus the Board is really doing its bit to improve audit quality.

With three of the Big Four firms reports out, this leaves only KPMG’s 2009 report to arrive – and it’s much later this time, last year the KPMG report was out on June 16, 2009.

Here is the full text of the findings on each issuer. We look forward to your comments and your insights on this

Issuer A)
One issuer estimated the fair values of certain investment securities that were not actively traded using a weighted average of two fair value estimates. One estimate was determined using a discounted cash flow model and the other was obtained from an external pricing service. For the fair value estimate determined using the discounted cash flow model, the Firm failed to test certain key assumptions underlying the cash flow projections.

(Issuer B)
The engagement team had requested that the Firm’s internal investment securities pricing group obtain third-party pricing information to corroborate the issuer’s fair value estimates for its investment securities. The Firm’s internal investment securities pricing group was unable to obtain pricing information for a portion of the issuer’s investment securities.

Issuer C

One issuer held investments in auction rate securities that had failed at auction. As a result, the issuer used a discounted cash flow model to estimate the fair value of these securities at year end. The Firm failed to evaluate the reasonableness of the discount rate the issuer used in light of the contractual maximum rates and the credit and liquidity risks that suggested the discount rate should have been considerably higher

Issuer D

In one audit, the Firm failed to perform adequate audit procedures to evaluate the fair values of various types of the issuer’s investment securities and derivatives

Issuer E
In this audit, the Firm failed to sufficiently test certain assumptions and key inputs used to develop a significant portion of the issuer’s loan loss allowance. Specifically, the Firm tested one of the inputs through inquiry only on a few loans. In addition, the Firm used the work of the issuer’s internal loan review group to test certain key inputs; however, it did not reperform any of the group’s testing or perform its own independent testing of these inputs.

Issuer F
One issuer had a deficiency in its internal control over financial reporting at year end that the Firm and the issuer classified as a significant deficiency. The deficiency resulted from the aggregation of access control deficiencies regarding information technology systems that maintained the contract pricing of sales transactions, customer account set-up, and the financial reporting system.

Issuer G
One issuer had numerous foreign locations, which accounted for over 20 percent of the issuer’s revenue. The Firm did not visit any of the foreign locations in connection with the audit, nor did it use the work of its international affiliates or other auditors in reporting on the issuer’s financial statements in the year under audit. The issuer’s foreign locations did not have common information technology systems, processes, or controls. With respect to these locations, the Firm’s procedures were limited to testing the issuer’s entity-level controls, the performance of analytical procedures for a few of the locations, and inquiry of management. The Firm failed to properly test revenue from the foreign

Issuer H
One issuer had numerous foreign locations. For certain of the issuer’s foreign locations, which represented 29 percent of its revenues, the Firm’s planned approach placed significant reliance on certain entity-level controls and the performance of substantive analytical procedures for a few of the foreign locations. The Firm failed to properly test revenue from these foreign locations

Issuer I
In this audit, the Firm identified a significant error at year end in the issuer’s calculation of impairment for one of its asset groups. In the prior year, a material weakness had existed in the internal control over the calculation of impairment for assets in a similar asset group. A control implemented by the issuer to remediate the prior year’s material weakness failed to detect the error discovered in the current year.

PwC simply responded, “In no instance did our evaluation result in a change to our audit opinion, or the restatement of the issuer’s financial statements.”

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