Top accounting firms admit breaking rules safeguarding audit independence

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The Big Four accounting firms have admitted hundreds of violations of regulations designed to protect 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 greater attention to the findings of its annual inspections of audit firms, the latest round of which are expected to be released in the coming weeks.

US regulators require audit firm staff and their immediate family to make thorough financial disclosures, for example of their investments, and they ban employment and financial relationships with audit clients that could impair the firm’s independence.

PwC said on Monday that it had identified 129 breaches of independence rules affecting 74 clients and PCAOB inspectors had found a further one themselves while inspecting audit work in 2022. The figures were included in an update to PwC’s audit quality report, published on its website.

Deloitte said in its audit quality report last month that it had told PCAOB inspectors of 129 breaches across 78 clients in 2022 — affecting approximately 3 per cent of its US audits — and 107 across 53 clients in the 2023 inspection cycle. EY also said it had found independence violations affecting 3 per cent of its audits in 2022.

KPMG is the only Big Four firm not to have stated its figures, which will become public in the PCAOB’s forthcoming inspection reports for 2022. The PCAOB decided last year to begin routinely including data on independence violations.

PwC, Deloitte and EY all said that they had looked into each violation and concluded there were no cases in which the independence of an audit was actually compromised. A person familiar with the situation at PwC said one example was the spouse of a staffer holding a cash balance on payments app Venmo while PwC was auditing Venmo’s parent company PayPal.

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

“I would characterise them as technical violations,” said Dennis McGowan, vice-president of the Center for Audit Quality, which represents large US accounting firms. “These firms are big, with a lot of people in them, and they have put in the controls and systems to track people’s compliance, which is why these are almost always self-reported items.”

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

PwC’s vice-chair Wes Bricker said its compliance programmes “often go beyond regulatory requirements”.

The firm’s audit quality report update on Monday also revealed that PCAOB inspectors had found flawed work in 9 per cent of PwC audits it examined in 2022, where its staff failed to carry out all the procedures required to justify their audit opinion. That is twice the rate of 2021, 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 per cent, a figure it deemed “unacceptable”.