The firm has also agreed to undertake remedial measures within the next 90 days – including implementing policies and procedures to provide “reasonable assurance of compliance with auditor independence requirements and with audit committee communications” – and to report back to the Public Company Accounting Oversight Board (PCAOB) within four months that it has complied with the order.
The problem arose over PwC Mexico’s audit of a Mexico City-based bank, one of the largest financial services holding companies in Mexico based on total loans. The bank’s American Depository Shares were listed on the New York Stock Exchange.
During PwC’s audits of the bank’s 2016 and 2017 financial statements, at least six of its partners had personal financial relationships with the bank which breached the independence criteria set out in US Securities & Exchange Commission (SEC) rules and regulations.
The six partners worked at the office where the lead audit engagement partner on the bank engagement was primarily based, so they were “covered persons” for the purposes of the SEC regulations. Three of them were in banned debtor-creditor relationships with the bank because they each had acquired a loan or mortgage for a second residence from it, while the other three held uninsured assets in brokerage accounts with the bank or an affiliate.
PwC Mexico found out about the debtor-creditor relationships shortly after it first signed the initial engagement letter in June 2016, and unwound them within a couple of months. However, it did not identify the uninsured brokerage interests until two years later, during which time it audited the bank twice and stated in both audit reports that it was independent of the bank.
The firm did not have effective quality control policies and procedures in place which would have flagged the independence problems. As a result, the firm failed to inform the bank’s audit committee about the existence of the partners’ financial relationships.
Indeed, when the firm sent a letter to the audit committee in June 2017, it failed to raise the issue of the debtor-creditor relationships or the uninsured brokerage interests. Rather, the letter stated that the firm was “not aware of any relationship between the firm and client bank that had continued or arisen since June, 2016 and that may reasonably be thought to bear on the firm’s independence”.
The regulator said PwC Mexico should have known that the letter was inaccurate, since it had already discovered the debtor-creditor relationships and knew that those personal financial relationships breached the independence criteria.
PwC Mexico did not provide the audit committee with any written description of the uninsured brokerage interest relationships until January 2019.
In deciding to accept the deal, the PCAOB said that it had taken into account PwC Mexico’s willingness to settle the matter at an early stage and to take remedial action before the order was agreed.