PwC and partner violated auditor independence rules

The SEC charged PricewaterhouseCoopers LLP and one of its partners Monday with violating auditor independence rules for running a project to upgrade the client’s enterprise software while doing its audit work.

PwC was also charged with engaging in “improper professional conduct” on engagements for 15 public companies.

PwC and partner Brandon Sprankle settled the charges without admitting or denying the SEC’s findings.

The Big Four firm agreed to pay over $7.9 million in total penalties. It disgorged $3.83 million plus prejudgment interest of about $614,000, and paid a civil penalty of $3.5 million. The SEC also censured the firm.

Sprankle, 42, agreed to pay a civil penalty of $25,000. He was suspended from appearing or practicing before the SEC, with a right to reapply for reinstatement after four years. He lives in San Jose, California.

While he was a member of the audit-engagement team for a client, Sprankle negotiated and subsequently supervised a project to upgrade the client’s enterprise software and related programs. The project involved working directly with the client’s internal audit group.

Companies use enterprise software to manage their overall businesses, including day-to-day activities such as accounting, procurement, and manufacturing.

PwC exercised “decision-making authority in the design and implementation of software relating to an audit client’s financial reporting, and engaging in management functions,” the SEC said.

The SEC also charged PwC with failing to give the audit committees of 15 audit clients written information about the non-audit work PwC was doing for them. “PwC’s actions deprived numerous issuers’ audit committees of information necessary to assess PwC’s independence,” the SEC said.

PwC’s independence-related quality controls “broke down,” the SEC said. The firm wasn’t able “to properly review and monitor whether non-audit services for audit clients were permissible and approved by clients’ audit committees.”

As part of Monday’s settlement, PwC agreed to review its quality controls for complying with auditor independence requirements for non-audit services and for evaluating its provision of non-audit services.

The SEC’s enforcement order against PwC is here (pdf) and Sprankle here (pdf).

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Last month the SEC charged the U.S. unit of global accounting firm RSM International with violating the SEC’s auditor independence rules on at least 100 audit reports for 15 or more audit clients. The firm settled the charges without admitting or denying the SEC’s findings. It agreed to pay a penalty of $950,000.

In February this year, the SEC fined Deloitte’s Japan unit, Deloitte Touche Tohmatsu LLC, $2 million for violating auditor independence rules and suspended its former CEO and director of independence for causing the violations.

In 2015, the SEC fined Deloitte’s parent, Deloitte & Touche LLP, more than $1 million for violating auditor independence rules. Deloitte’s consulting affiliate kept a business relationship with a trustee serving on the boards and audit committees of three funds Deloitte audited.

In 2014, a former chief risk officer for Deloitte & Touche settled SEC charges alleging he accepted tens of thousands of dollars in “casino markers” while serving as an adviser on the audit of the casinos’ owner. James T. Adams was suspended for two years from practicing as an accountant for public companies for concealing the casino markers from Deloitte & Touche and lying to another partner when asked if he had casino markers.

Also in 2014, KPMG paid the SEC a penalty of $8.2 million for violating auditor independence rules by providing non-audit assistance including bookkeeping and corporate finance services to the affiliates of companies it was auditing.

In 2015, the SEC charged Grant Thornton India LLP and Australia-based Grant Thornton Audit Pty Limited with auditor independence violations. Two Grant Thornton Mauritius partners served on the boards of Mauritius-based subsidiaries of companies that were Grant Thornton audit clients. The firms paid combined penalties of around $350,000 to settle the charges.

In 2014, fifteen smaller audit firms were charged by the SEC or the PCAOB with violating auditor independence rules. The SEC said eight of the firms relied on data from financial statements and notes that the audit firms themselves had prepared for the clients. That meant the audit firms were auditing their own work.

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Richard L. Cassin is editor at large of the FCPA Blog.