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Pwc our-focus-on-audit-quality Pwc our-focus-on-audit-quality Document Transcript

  • Our focus on audit quality October 2012
  • Contents A message from senior leadership 1 Executive summary 3 Audit quality principles and practices 7 Promoting audit quality 11 Tone at the top 11 Accountability 12 Independence, integrity, and objectivity 12 Methodology, tools, and processes 14 Chief Auditor Network 16 Human capital strategies 17 Learning and development 18 Growth and profitability strategies 20 Global network 22 Assessing audit quality 25 Internal inspections of our audit practice 25 External inspections of our audit practice 29 Additional audit quality indicators 31 Contributing to audit quality in the marketplace 33 Professional and regulatory 33 Audit committees 34 Investing community 35 Academia 35 Our commitments 37 Transparency report 39
  • To capital market stakeholders Accurate and reliable financial information is essential to investor confidence and the effective functioning of the capital markets. The US firm of PwC plays an important role in promoting the reliability of financial information through the performance of high-quality audits. Our reputation as a leader in the auditing profession is built on our rich history of providing quality audits for the benefit of the capital markets. This year marks the tenth anniversary of the Sarbanes-Oxley Act, which ushered in a new era of increased accountability of those in the financial reporting system. Over that ten-year period, audit quality and the quality of financial reporting have significantly improved. We are proud to have contributed to these improvements. But, while much has been accomplished, there is still more to do. We are one of the world’s largest audit firms and a leader in the auditing profession. Being a leader comes with responsibility. In particular, we must be at the forefront of the profession in performing high-quality audits. This means we must continually raise our audit quality and expect that regulators and investors will challenge us to do the same. During our fiscal year ended June 30, 2011, we made a number of strategic decisions and took actions to enhance our ability to consistently perform high-quality audits. We described those in our 2011 report, Our focus on audit quality. During our fiscal year ended June 30, 2012, we continued to take actions toward achieving our audit quality objectives. We are pleased to provide you with our 2012 report, in which we describe those actions. Our actions included increasing by more than 40% the number of partners and other professionals in our Assurance Quality and Transformation Organization to provide more support for our audit teams. We also delivered learning and development programs that reinforce the importance of exercising objectivity and professional skepticism. And, we further enhanced our audit processes to improve the effectiveness and efficiency of our audits. Our focus on audit quality extends beyond US borders. We’ve increased our commitment to regularly work with other members of the PwC global network of firms to share our expertise on US accounting, auditing, and regulatory requirements. Together we achieve effective and timely resolution of US financial reporting issues and meet the needs of the US capital markets. our culture, and vigilance to monitor our performance and seek improvements. Through clear leadership messages and our individual actions, we continually reinforce for our people that quality is our highest priority. We are committed to maintaining our leading role in promoting further improvements in auditing and financial reporting and delivering the highestquality audits in the profession. We are proud of our partners and other professionals, who deliver on our commitment to audit quality and continuously strive to improve quality in every audit we perform. Bob Moritz US Senior Partner Tim Ryan US Assurance Leader Today’s audits benefit greatly from the use of technology, but an audit is still an inherently human process that requires many judgments. Thus, although our report describes a number of technology-based quality improvements, we cannot lose sight of the importance of the human element, of its strengths and its weaknesses. It means that we need rigor in our processes, discipline in Our focus on audit quality 1
  • We embrace our role in the global capital markets and we are committed to performing high-quality audits on a sustained basis. 2
  • Executive summary PwC has long provided audit and assurance services, which enhance the reliability of financial information. For generations, audit quality has been a priority of PwC audit professionals from their first day of employment because, quite simply, our reputation for quality defines our brand and our culture. Our stakeholders expect us to meet everevolving challenges by continually improving what we do to consistently perform high-quality audits. During our fiscal year ended June 30, 2012, we continued to make improvements designed to support our commitment to audit quality. We identified the improvements based on feedback obtained from our professionals, our stakeholder outreach activities, and post-completion inspections of selected audit engagements. The improvements also help us respond to the changing expectations of investors and regulators regarding the audit. We’ve continued to reinforce our tone at the top. We believe our tone at the top has consistently conveyed high expectations about our top priority—audit quality. Firm leaders devoted even more attention to audit quality in fiscal year 2012, allocating more time to understand, evaluate, and implement actions to support achievement of our audit quality objectives. And, we’ve appointed a partner whose primary responsibility is to promote our audit quality message with our people and enhance their understanding of the importance of our audits to the capital markets. We’ve continued to stress accountability for quality. We hold firm leadership and our audit partners accountable in their roles for promoting audit quality throughout the firm. We re-emphasized this with our audit partners as they set their performance goals for fiscal year 2013, and highlighted that audit quality is the top priority relative to other objectives, including revenue growth. To further enhance accountability, in fiscal year 2012 we provided all of our assurance leaders with updated comprehensive guidelines re-emphasizing who within leadership is responsible in their roles for various activities that drive audit quality. We’ve grown our Quality Organization. In fiscal year 2011, we initiated a substantial investment to expand our audit support and inspections network through the establishment of a broader Assurance Quality and Transformation Organization (“Quality Organization”). During fiscal year 2012, we increased by more than 40% the number of partners and other professionals in this organization. One of the groups within the Quality Organization is our Chief Auditor Network. We have now nearly tripled the total amount of time partners in our Chief Auditor Network have committed to spend on activities to support audit teams. These activities include helping our teams design effective and efficient audit procedures. They also include reviewing specific elements of audit plans for selected engagements and recommending additional or different procedures to be performed prior to completion of our audits. We also significantly expanded our inspections group. This group inspects selected audit engagements after they are completed to assess whether our audit quality objectives have been achieved and identify areas where we should focus our improvement efforts. We’ve further enhanced our audit processes. In addition to adding more resources to our Quality Organization, we’ve enhanced our audit processes, starting with the partner assignment process. We’re placing greater focus on assigning roles to partners that best align with their capacity, tenure, capability, and industry experience. We believe this will facilitate partners’ performance of high-quality audits. Our focus on audit quality 3
  • We’ve also leveraged technology to enhance our audit methodology and improve the effectiveness and efficiency of our audits. We provided additional guidance in certain areas, such as the highly judgmental area of how much audit evidence we should obtain when testing on a sample basis. And, we developed additional tools to help audit teams document audit evidence and demonstrate compliance with auditing standards. We’re continually enhancing our learning and development programs. We’ve increased our focus on communicating, throughout the firm, the importance of our role in the capital markets and the individual behaviors and practices that we believe are necessary to perform a high-quality audit. By doing so, we consistently reinforce for our audit professionals that they are personally responsible for achieving our audit quality objectives. We’ve also invested in enhanced learning and development programs, increasing our assurance training expenditures for fiscal year 2012 by over 50% as compared to the prior year. And, we expanded the use of post-course tests, which must be completed by attendees of our required technical courses. This helps to reinforce the concepts covered in the course, helps our professionals to focus on areas requiring improvement, and assists us in identifying where course modifications or other training may be needed. 4 We’re expanding how we monitor audit quality and learn from our shortcomings. Inspections of completed audits are an important part of our audit quality monitoring efforts. We use the results, along with other information, to assess where additional guidance, training, modifications to our audit methodology, or targeted messaging from leadership are needed. We believe, however, that there are other measures of audit quality. Accordingly, we encouraged the Center for Audit Quality, an autonomous, nonprofit group dedicated to enhancing investor confidence by fostering high-quality performance by public company auditors, to develop additional audit quality indicators. We are working with members of the Center for Audit Quality to develop those indicators. We evaluate the potential causes of instances where we may not have consistently achieved our audit quality objectives. Learning from such instances is an important part of our audit quality improvement efforts. We’re exploring ways to deepen our understanding of the potential causes of such instances and the actions that we might take. This will help us to further improve the design and implementation of our audit quality enhancements. We’re engaged in the broader dialogue on audit quality. As a leader in the profession, we’re focused not only on our own audit quality objectives, but on how we can help enhance the broader financial reporting system. We continue to engage in ongoing discussions about how best to achieve that result. This includes ongoing outreach and communications with audit committees and the investing community, as well as publicly issuing materials that set out our point of view and contribute to these important discussions. We’re responding to the desire for more transparency. In the past few years, capital market participants have been seeking more transparency from audit firms, looking for insight into a firm’s management and operations. In response, we have included our 2012 Transparency Report at the end of this report. Our Transparency Report, which provides information that meets the requirements of Article 45(5)(e) of the European Union’s (“EU”) Directive on Statutory Audit 2006/43/EC, describes our internal quality control systems, our legal and governance structures, certain financial information about the firm, and other topics prescribed by the EU. The information it contains also is generally consistent with the information that the Center for Audit Quality recommends be included in an audit firm’s transparency report. In this report, we hope you will see that we’ve embraced our important role in the global capital markets and that we are committed to performing highquality audits now and in the future.
  • Our focus on audit quality 5
  • Performing a high-quality audit means being objective and skeptical, and taking personal responsibility for quality. 6
  • Audit quality principles and practices PwC’s brand has been built on a reputation for performing high-quality audits. At PwC, quality is—and always will be—our top priority. It’s how we bring value to the capital markets—by providing assurance that enhances user confidence in the financial statements that are accompanied by our audit reports. There are many different views on what constitutes audit quality. Although audit quality is difficult to define, in our view the principles of audit quality require us to (i) comply with accounting, auditing, and regulatory requirements, (ii) have a deep and broad understanding of the companies we audit and the business environments in which they operate, (iii) use our expertise to identify and resolve issues early, and (iv) exercise objectivity and professional skepticism when performing our audits. To reinforce these principles for our audit professionals in their daily activities, we issued guidance that more directly links the principles to the individual practices we believe are necessary to perform a high-quality audit. The practices include asking tough questions, staying current on professional standards, applying an objective and skeptical mindset, and taking personal responsibility for quality. Core behaviors Our individual practices are supplemented by our firm’s four core behaviors—investing in relationships, sharing and collaborating, putting ourselves in others’ shoes, and enhancing value— which form the basis of our culture and guide our people in delivering high-quality audits. For example, by investing in relationships we develop mutual respect with members of audit committees and key members of management. This helps us to gather relevant facts, consider different perspectives, understand the companies we audit, apply critical thinking, make balanced independent judgments, and “call it like we see it.” Thus, by investing in relationships, we are better able to challenge management’s judgments and accounting conclusions. Given the increasing number of instances where financial reporting requires management to make significant judgments, it has become more important than ever for us to challenge those judgments. For example, we objectively assess the assumptions management makes in estimating the fair values of financial instruments and tangible and intangible assets. And, we make candid observations about matters affecting financial reporting, such as a company’s internal control processes. These difficult conversations have always been a critical part of our role as auditors and are facilitated by having strong professional relationships. A culture of sharing and collaborating means that our people understand the importance of bringing the proper expertise to bear on complex issues. Our focus on audit quality 7
  • Leveraging that expertise allows us to better understand complex transactions, assess the appropriate accounting treatment, and identify areas where we need to be particularly skeptical. This includes, for example, leveraging the skills and knowledge of our tax and valuation specialists when auditing complex management estimates. Our specialists help our audit teams determine when to challenge management’s judgments. Thus, their advice helps to inform our conversations with management and audit committees on highly judgmental matters. We also listen to and understand others’ perspectives by putting ourselves in others’ shoes. When we understand a company’s business and the perspectives of management, we can design and conduct effective and efficient audits that better serve the capital markets. Putting ourselves in others’ shoes also allows us to more effectively communicate with audit committees and management. These communications involve, in many cases, raising questions about management’s accounting conclusions and presenting our objective point of view. Robust conversations with audit committees and management about accounting and financial reporting matters contribute to the quality of a company’s financial information. We believe quality is foundational to enhancing value. Our audits have value to the capital markets because we perform them with an independent mindset. We also have the courage to 8 ask difficult questions, raise sensitive audit issues, challenge questionable accounting or disclosures, and voice concerns. Investors and other stakeholders do not see these “behind the scenes” actions. It is through those actions that we defend and stand firm in our conclusions and improve financial reporting, thus enhancing the value of financial information for the capital markets. The understanding we gain of a company’s business through our audits also enables us to identify issues that are important to audit committees and management. This facilitates our ability to bring value by providing recommendations that can improve operations, controls, and other aspects of the business. Decision-making philosophy Our core behaviors also facilitate our decision-making philosophy for resolving accounting, auditing, and financial reporting issues. For example, when assessing a proposed accounting treatment, we first seek to understand the transaction and the different perspectives on the accounting. The exercise of integrity, objectivity, and professional skepticism enhances our ability to perform this assessment effectively. We focus on whether the company’s accounting is appropriately supported and the economics of the transaction are transparently reflected after considering the associated disclosures. We will accept an accounting
  • treatment only if those conditions are met. If management decides to use a treatment that we find acceptable but not preferable, we discuss our point of view with management and the audit committee. As part of our collaborative culture, the audit partner is expected to leverage the full quality support network of the firm when difficult accounting, auditing, and financial reporting matters arise. This includes our National office, Chief Auditor Network, risk management partners, the engagement quality review partner, and partners who lead the audit practices in our market and industry groups. Thus, in reaching conclusions, especially on some of the most difficult aspects of an audit, the audit partner and the firm will have an opportunity to align their views. Whether the matter involves an accounting, auditing, or financial reporting issue, this alignment occurs before decisions are conveyed to the audit committee and management. Our focus on audit quality 9
  • Clear messages from firm leadership motivate individual behavior and drive audit quality. 10
  • Promoting audit quality Performing high-quality audits requires a strong foundation that promotes audit quality. We continue to make significant investments in one of the key elements of our foundation—our quality control system. We continuously seek to identify and anticipate where improvements are needed to achieve sustained audit quality. The elements of our audit quality foundation, and the actions we have taken and continue to take to promote audit quality, are described below. Over the next year, we will continue to build on our audit quality foundation and make additional investments where needed. individual behavior and drive audit quality. Leadership’s philosophy and messages about quality, their decisions to invest in enhancements that drive quality, and their personal accountability in their roles for quality foster a culture of quality throughout the firm. Tone at the top Audit quality begins with our firm’s tone at the top. Clear messages and actions from firm leadership combine with policies and programs to motivate Firm leadership regularly conveys its high expectations about audit quality to our partners and other professionals. During fiscal year 2012, firm leaders devoted even more of their time to promoting audit quality in a variety of ways. For example, they continually emphasized the importance of quality in periodic emails, webcasts, town-hall meetings, and various learning and development programs. They engaged in rich dialogues with our people about audit quality—sharing stories of their personal audit experiences and those of other audit teams, recognizing what we do well, and emphasizing where we need to improve. These activities help keep audit quality top of mind for our partners and other professionals. Leadership also regularly discusses with a standing committee of the firm’s governing board1 matters of strategic importance to audit quality. The standing committee is charged with overseeing certain aspects of the firm’s audit practice, including monitoring the development and evaluation of appropriate policies and procedures that promote consistent performance of high-quality audits. Quality Organization staff levels FY2010 FY2011 FY2012 283 In fiscal year 2012, we added significant resources to our 331 476 Quality Organization, which is a key component of our foundation that promotes audit quality. The Quality Organization includes our National office (audit, accounting, and financial reporting experts, and our audit methodology and risk management groups), Chief Auditor Network, 1 The firm’s governing board is the Board of Partners and Principals and the standing committee is the Accounting & Audit Practice committee. Refer to the accompanying Transparency Report for more information. assurance learning and development team, regulatory relations group, and internal inspections group. Our focus on audit quality 11
  • To be effective, the tone at the top and messages from leadership about quality must be consistently communicated to and understood by our people. We have appointed a partner to assist in driving our culture of quality, identifying additional ways to promote greater audit quality throughout the practice, and promoting a greater understanding by our professionals of the importance of our audits to the capital markets. We annually survey our people to obtain feedback on how they view PwC as a place to work. In fiscal year 2012, the people in our assurance practice rated the “quality service” category the We continue to emphasize to our audit partners the primary importance that should be placed on audit quality relative to other objectives, including revenue growth. In fiscal year 2012, we moderated the growth goals for our audit practice to increase the focus on audit quality as our top priority. highest. Specifically, 94% of respondents strongly agreed or agreed with the statement “PwC leadership is committed to providing high-quality 12 services to external clients.” This result helps validate that messages from leadership about quality are understood by our people. Accountability Personal accountability for quality is an important component of how we promote audit quality throughout the firm. All levels of firm leadership, along with all of our partners involved in the audit process, have important roles in achieving audit quality and are held accountable for the performance of their roles. We also assess contributions to audit quality by other audit professionals when evaluating their performance annually. In fiscal year 2012, we provided all levels of assurance leadership with updated, comprehensive guidance re-emphasizing who within leadership is responsible for various activities that affect audit quality. The guidance reinforces that our leaders are accountable in their roles for the achievement of consistent audit quality throughout the segment of the assurance practice that they lead. The guidance also provides recommendations to help assurance leaders in performing their roles. For example, our market and industry group assurance leaders’ roles include implementing and monitoring our audit quality initiatives and overseeing our system of quality control. They also include recognizing and rewarding our people for audit quality. In fiscal year 2012, we enhanced the process for reviewing and monitoring partner assignments within our market and industry groups. The enhanced review process facilitates a greater focus on assigning roles to partners that best align with their capacity to perform a quality audit, including having sufficient time to effectively review the audit work and supervise the engagement. It also places greater focus on a partner’s tenure, capability, and industry experience. The enhanced monitoring process focuses on determining that partners whose responsibilities change continue to have the capacity to perform high-quality audits. The achievement of our quality goals, and lapses in quality, are carefully considered in determining partner compensation. Our partners understand this. But to emphasize that audit quality is our top priority, we took two actions before our partners developed their performance goals for fiscal year 2013. We highlighted the primary importance that should be placed on audit quality relative to other objectives, including revenue growth. And, all audit partners were required to participate in a planning session that reinforced our quality expectations. Independence, integrity, and objectivity A critical underpinning of our audit quality foundation is our commitment to independence. Being independent enables us to arrive at and express accounting and audit conclusions without being affected by influences that could compromise our professional judgment. It facilitates our acting with integrity and objectivity, and exercising professional skepticism, all of which are critical to making the sound judgments required in an audit.
  • We take great care to evaluate all professional services to be provided to companies we audit for compliance with applicable independence requirements. Once we determine that the services are permissible under those requirements, we seek preapproval of those services from audit committees as required by law. We also focus our compliance efforts on other matters that have independence implications, such as joint business relationships and procurement of goods and services by the firm. During fiscal year 2012, there were over 22,000 independence inquiries and consultations, an increase of 9% over the prior year. Applying professional skepticism requires a combination of technical skill, to recognize when additional evidence is needed to reach a conclusion, and strength of character, to ask the difficult questions that are necessary during an audit. All team members, from a new associate to an experienced partner, must maintain their professional skepticism in each audit test they perform. At PwC, our culture promotes a questioning mindset. Importantly, it encourages all of our professionals to take the time during the audit to exercise professional skepticism as they evaluate various audit issues. We support our professionals in asking the right questions, independently thinking through issues and arriving at conclusions, and standing firm in the name of audit quality. Through our communications, training programs, and messaging from leadership, we reinforce our commitment to integrity, objectivity, and professional skepticism, and enable our people to deepen their understanding of what it means to be an auditor. Our independence training programs reinforce the importance of being independent in fact and in appearance, and combine instruction on the relevant literature with practical examples. We provide our people with written independence policies and procedures, along with various technology-based tools to support them in maintaining their independence. Our professionals also have access to dedicated independence subject matter experts to help navigate personal and engagementrelated independence matters. When they join the firm, and at least annually thereafter, all partners and employees are required to confirm their compliance with all aspects of the firm’s independence policy. In addition, all partners confirm that the business relationships they are responsible for are in compliance with the firm’s independence policy and that the firm’s processes have been followed in accepting these relationships. These confirmations serve two primary purposes: to identify, and then address, any threats to independence that may have arisen, and to provide a periodic reminder of the firm’s independence policies and procedures. Each partner’s compliance with the personal independence requirements is generally audited every four years, while partners who comprise firm leadership are audited every two years. Other employees are subject to audit periodically. We performed over 1,000 personal independence audits during fiscal year 2012, a 10% increase over the prior year. In compliance with SEC and PCAOB requirements, lead audit partners and quality review partners on each public Our focus on audit quality 13
  • company we audit rotate every five years. Certain other partners rotate every seven years. We also have our own internal rotation requirements for partners and managers on nonpublic company audits. Partner rotations provide an appropriate balance between maintaining our knowledge of the companies we audit and periodically bringing a “fresh look” and different perspective to the audit. Methodology, tools, and processes The identification and evaluation of audit risks is a central feature of our audit methodology. Under our approach, we seek insights into the business, the risks inherent in that business, and the related financial reporting and audit risks. The audit team then plans an effective audit approach by identifying the procedures that are necessary for us to gain sufficient audit evidence to reach appropriate conclusions. To audit effectively in a changing environment, we enhance our audit methodology, tools, and processes on an ongoing basis. This includes taking advantage of new technologies that can improve both the effectiveness and efficiency of our audits. During fiscal year 2012, we made such enhancements based on input from our audit teams, inspection results, and the results of other quality-related activities. We also added experienced auditors to our audit methodology group to further contribute to these ongoing improvements. As part of our improvement efforts, we provided additional, specific guidance through a series of communications, 14 including “how to” guides designed to assist audit teams in addressing certain highly judgmental aspects of an audit. This guidance addresses topics such as the amount of audit evidence we should obtain when testing on a sample basis and the evaluation of key assumptions used in developing accounting estimates (including fair value measurements for investments, business combinations, and impairment of indefinite-lived intangible assets). The guidance also covers enhanced supervision and review techniques, such as how to guide others in approaching, addressing, and resolving matters with appropriate professional skepticism when contrary audit evidence is identified. Other areas where we have enhanced our guidance include substantive analytics, multi-location scoping, testing of investments, application of risk assessment standards, evaluation of likely sources of misstatements, and using the work of others. In coordination with industry group assurance leaders, we have also developed more industry-specific examples and guidelines to help our teams translate our audit methodology into effective and efficient audit steps that incorporate common audit risks and business issues found in certain industries. We issued our enhanced guidance by June 2012 so that teams can leverage it when planning their 2012 audit engagements. We also set clear timing goals for early completion of audit planning activities and we’ve added additional training on techniques to better manage the steps in an audit engagement. By completing audit planning early in the audit cycle, our teams can identify issues earlier. This provides more time to execute our audits and perform effective review and supervision. In addition to enhancing our guidance, we’ve been refining the audit tools we use. Some of these are related to
  • the audit of management’s significant estimates and judgments, such as those involving investment fair values. Recently implemented automated tools help audit teams to more efficiently audit investment securities. We also developed standardized processes to help our audit teams perform certain audit procedures earlier in the audit cycle, which translates into more time to resolve audit issues. Some of our standardized processes help our teams to more effectively coordinate with valuation specialists, execute audit procedures, and document the audit evidence they obtain in a more consistent manner. Our efforts in fiscal year 2012 also focused on standardizing the processes, tools, and templates we use to understand a company’s business and identify potential sources of financial statement misstatement. Our processes, tools, and templates assist audit teams in evaluating the design and effectiveness of associated internal controls and linking that evaluation to our planned audit procedures. Two elements of our audit processes are Aura, our audit software, and our Global Assurance Delivery Model. Both elements are designed to facilitate improved consistency in executing our audits. Aura is used by over 70,000 professionals in the PwC network2 of firms and represents a significant investment by the PwC network. Aura facilitates the analysis and evaluation of audit risks specific to each company we audit, which we build into our audit strategy to develop an effective riskbased audit approach. Our Global Assurance Delivery Model allows certain routine audit activities to be performed by audit team members who are located in one of three centralized service centers, two of which are outside of the United States. This enables us to improve the quality and consistency of our performance of these procedures because they are conducted by individuals who focus on those specific aspects of our audits. It also provides our locally based audit teams with additional time to focus on the non-routine aspects of our audits. We believe this provides a better developmental experience for our people. To standardize the execution of our audits and achieve greater audit quality in specialized areas, the firm has subject matter experts who assist audit teams in considering key matters that may arise in an audit, such as Service center hours FY2011 FY2012 520,000 720,000 By transferring certain audit activities to FY2013 Projected 1,000,000 our service centers, our locally based audit teams have additional time to focus on the non-routine aspects of our audits. 2 The “PwC network” refers collectively to those firms that are members in PricewaterhouseCoopers International Limited (“PwCIL”). Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. Our focus on audit quality 15
  • when auditing the valuation of financial instruments. We also have subject matter experts who are dedicated to auditing employee benefit plans. Chief Auditor Network Our Chief Auditor Network provides valuable locally based support for our audit professionals in each of our US markets. The primary purpose of the Chief Auditor Network is to provide auditing advice, leveraging the deep expertise of the professionals in the network on auditing standards, policy, and methodology. This support helps our audit teams to identify where audit attention is warranted and design effective and efficient audit procedures. The Chief Auditor Network also coordinates and shares knowledge with other groups in our Quality Organization. This includes the audit methodology group, the inspections group, and our assurance learning and development team. Because they are based throughout the country, the partners in the Chief Auditor Network and the roughly 65 highly experienced audit professionals who support them are easily accessible to audit teams. They provide on-the-ground support to audit teams and participate in market and industry group meetings. In this way, they share knowledge about frequently asked questions and areas that require increased attention. And, because of their role, they also have a strong connection to our National office audit experts. Though the Chief Auditor Network has been in place for several years, we continue to enhance and invest in this group. For example, as of June 30, 2012, our Chief Auditor Network included approximately 35 partners, each of whom is committed to devote, on average, about 1,000 hours annually to chief auditor activities. This contrasts with the previous model in which 40 partners committed to devote approximately 300 hours each year to chief auditor activities. Expanding the time commitment of partners in the Chief Auditor Network enabled them and the professionals assisting them to provide significantly greater support to our audit teams in fiscal year 2012. Based on the results of our inspections, we identified certain audit procedures that require significant judgment and therefore pose greater challenges to design effectively. Members of the Chief Auditor Network devoted additional attention to those procedures when consulting with audit teams, in order to help drive quality and consistent execution. Other Chief Auditor Network activities during fiscal year 2012 included performing targeted pre-issuance reviews of specific elements of the Chief Auditor Network Total partner hours committed FY2011 FY2012 12,000 35,000 Over the past year, there were over 2,000 consultations with partners and other professionals in our Chief Auditor Network initiated by audit teams seeking to leverage their technical expertise and experience. 16
  • audit plans for approximately 180 audit engagements. Through these real-time reviews, professionals in the Chief Auditor Network recommended additional or different procedures to be performed prior to completion of our audits. As mentioned in the discussion of methodology, tools, and processes, another area of focus for our audit teams is accelerating their audit planning procedures. During fiscal year 2013, the Chief Auditor Network will be providing assistance to audit teams to help them achieve this objective. The Chief Auditor Network has also enabled us to enrich our audit training courses. Members of our Chief Auditor Network contributed extensively to our required annual audit training held in the spring and summer of 2012. This included serving as lead instructors in many of the audit training sessions. Human capital strategies The quality of our work depends on the people we hire and our programs designed to support their development. Accordingly, effective human capital strategies are critical to achieving sustained audit quality. Our strategies start with a rigorous recruiting program to bring in a mix of highly qualified candidates, at all levels, who have diverse backgrounds and skills. Our recruiting of experienced professionals is an important part of our human capital strategies. We actively target individuals who possess the specific skills, knowledge, and personal attributes we believe are necessary to perform high-quality audits. During fiscal year 2012, we hired into our assurance practice approximately 1,200 experienced professionals. Our overall headcount increased as of June 30, 2012 to approximately 13,500 assurance professionals, which is up from approximately 12,000 a year ago. Increasing our headcount provides each of our professionals more time to focus on how they can best deliver on our commitment to perform highquality audits. This includes exercising professional skepticism when evaluating various audit issues. To promote their development, our professionals are provided with increasingly challenging experiences and professional growth opportunities. They receive on-the-job coaching and mentoring, as well as feedback on their performance, including their contributions to quality. Our non-partner professionals are recognized for career milestone successes and participate in Our focus on audit quality 17
  • a performance bonus plan that is based on achievement of quality and financial performance goals. The retention of highly qualified people is an important contributor to our achievement of sustained audit quality. Our people told us that one way to increase retention is by increasing their flexibility to allow them to better balance their professional commitments to the firm with their other commitments. Importantly, they said that flexibility is not necessarily about working less, but about working differently. So, during fiscal year 2012 we emphasized our flexible work arrangement opportunities and launched an initiative to enhance flexibility for all of our professionals—in the way we work, in our career paths, and in the career opportunities we offer our people. By helping our people to meet their professional commitments in flexible ways, we are making it easier for them to meet their personal commitments. This energizes their passion for and commitment to delivering quality, creates a more rewarding experience for them, and increases their desire to remain with the firm longer. As a result of our human capital strategies, our people are highly motivated and disciplined about achieving their professional growth goals. And, the strategies have been successful in boosting employee retention. In fiscal year 2012, our assurance staff turnover decreased to 14.2% from 18.8% in the prior year. This is notable, particularly in an environment where the demand for accounting professionals is increasing. Learning and development Our audit professionals hone their skills through a combination of on-the-job training and firm-developed learning and development programs. At PwC, a significant amount of learning takes place in an environment where our professionals are coached and mentored by more experienced team members. This includes discussing the resolution of complex audit and accounting matters and providing each other with real-time feedback. Assurance partner internal admissions FY2010 FY2011 33 53 Increasing the number of assurance partners FY2012 66 in our firm helps facilitate a more balanced workload for our assurance partners, which increases our ability to consistently perform high-quality audits. 18
  • Understanding complex accounting, disclosure, and industry matters also contributes to audit quality. We provide regular updates on accounting and reporting matters through various national and industry communications, including quarterly National office webcasts and communications, to help our teams learn about these important matters and how they affect the design and execution of our audits. Team members also learn to exercise professional judgment by watching more senior professionals interact with management and audit committees and resolve issues. They learn the importance of objectivity, professional skepticism, and asking the right questions to understand business transactions. Thus, they develop these qualities and put them into action under the watchful eye of senior team members. We are proud of the career-enhancing on-the-job training our people receive. Our learning and development programs prepare our professionals to tackle the rigors of an audit. They include business and industry developments as well as a significant focus on audit and accounting skills. In developing the content for our training courses, we draw upon what we’ve learned from our internal and external inspections, along with observations from our Chief Auditor Network. The training we provide our professionals has consistently been recognized by outside organizations as best in class. Even so, we continue to enhance our programs, recognizing that effective training is critical to achieving consistent quality in our audits. In fiscal year 2012, we increased our actual assurance training expenditures by more than 50% over the previous fiscal year. This provided the resources to increase in-person training for our people from entry-level professionals through partners. We also redesigned the curriculum for our entry-level professionals to include a new simulated audit engagement experience that emphasizes the importance of integrity, objectivity, and professional skepticism. An important component of an individual’s performance assessment is whether the individual has attended all required training sessions. We continue to require our audit professionals, from first-year staff to partners, to attend various audit training courses, including our annual audit training course, which is delivered over a period of up to three and a half days. Our focus on audit quality 19
  • We also hold industry-specific meetings for our managers and partners to highlight hot topics and business trends that impact our clients and may potentially need to be incorporated into our risk assessment and audit approach. And, to help our people understand and appreciate the importance of our role in the capital markets, we also share with them broader issues being addressed by the PCAOB and regulators outside the United States regarding audit quality. Much of our training in fiscal year 2012 focused on refining our auditing skills, including strengthening our auditors’ objectivity and skepticism, emphasizing the importance of a questioning mindset, and evaluating the sufficiency of audit evidence. Real-life examples were used to discuss how to apply these concepts in practice. Passing the CPA exam, a significant step toward obtaining the CPA credential, is a prerequisite for advancement to the senior associate level. 20 Our training programs are only successful, of course, if our professionals understand and retain the information. We have expanded the use of post-course tests, which must be completed by attendees of our required technical courses to reinforce the concepts covered in each course. These tests also help our professionals identify areas in which they need to focus. And from a continuous improvement perspective, we use the results of these tests to identify whether additional targeted training or course modifications are needed. Growth and profitability strategies Our strategy is to invest in the fundamentals of our business that will continue to promote greater quality in our audit and other services, and develop our people. This allows us to grow the firm profitably by expanding both our assurance practice and our non-assurance practice in a careful and controlled manner. Further, the continued growth and profitability of our assurance practice is essential to helping our people grow professionally, which positively impacts employee retention. This, in turn, contributes to our ability to improve audit quality. While it is important that we continue to expand our assurance practice, we remain selective in accepting new audit engagements and renewing existing ones. As part of our evaluation of each engagement, we identify potential areas of high risk. This helps us assess whether we have the resources with the right skills, experience, industry knowledge, and capacity to perform a high-quality audit in light of the identified risks. It also helps identify whether the engagement aligns with our strategies for growing our practice. If we decide to perform the audit, this assessment becomes part of our analysis and evaluation of audit risks for purposes of planning our audit procedures. To grow our assurance practice, we must increase our resources and service capabilities. As part of this growth, we continue to hire individuals, primarily partners and other highly experienced professionals, who have distinctive skill sets and who we believe can make an immediate and significant contribution to our quality, growth, and people objectives. We also continue to increase the number of non-audit specialists in our firm through both direct hiring and strategic acquisitions. We added more than 500 partners and other professionals to the firm through strategic acquisitions during fiscal year 2012. Continued growth in professional services other than audits contributes to our diversified and financially sound business and our ability to continue to invest in our people, our audit quality programs, and the other fundamentals of our business. Some of the specialists we’ve hired assist our audit teams by providing support in certain highly technical audit and accounting areas. Our audit teams
  • It’s important that audit fees be sufficient to promote a highquality audit. But regardless of any individual fee amount, audit teams are expected to perform all audit work that is necessary for us to meet our audit quality objectives. We will not compromise audit quality for any reason. leverage the knowledge and expertise of these specialists to identify audit risks, design their audits, and more fully understand the financial reporting implications of certain transactions. We believe we perform higher-quality audits when we can draw upon these specialized skills from within our firm. For example, our valuation experts are important contributors to our audits, helping audit teams make sound judgments on difficult issues such as fair value estimates. Our tax experts are a critical resource in helping audit teams to understand and effectively audit the accounting for complex tax regulations existing in jurisdictions around the world. And, our actuarial experts help audit teams understand employee benefit issues that have audit implications. Our growth and profitability strategies include providing high-quality audits at a reasonable cost. In determining our audit fees, our audit partners assess the scope of audit procedures necessary to perform a high-quality audit. They also consult with others, including our market and industry group assurance leaders, who we hold accountable in their roles for audit quality. We communicate the importance of setting fees at an appropriate level to audit committees and management and help them understand the value we deliver through the audit process. We believe that when we are able to demonstrate the value we bring to companies—through efficient and effective high-quality audits, as well as timely and relevant insights about their businesses—we can have productive discussions about audit fees. At times, discussions about audit fees are challenging. In the past we’ve made some difficult decisions to give up audit engagements where we’ve concluded that the fees are not sufficient to support a sustainable high-quality audit, and we will continue to do so. Our focus on audit quality 21
  • Global network The member firms of PricewaterhouseCoopers International Limited are from more than 150 countries and together form the PwC network. Because we are a member of the PwC network, we are able to serve clients across borders and regions and in emerging markets. 22 Achieving high-quality audits is our top priority, regardless of whether the audit procedures are performed inside or outside the United States. Thus, the firm’s assurance leader is a member of the network’s global assurance leadership team. This team focuses heavily on quality-related needs throughout the network and makes suggestions on how best to satisfy those needs.
  • The network provides processes, tools, and resources to member firms to assist them in meeting PwC quality standards. These include maintaining a global audit methodology, developing and providing training and audit tools (such as Aura), coordinating resources to help member firms perform quality reviews, and assisting member firms in enhancing their supporting infrastructure to promote quality audits. In addition, the network’s overall monitoring of member firms’ audit quality can help identify areas for increased attention. A network quality review team, consisting of full-time, dedicated partners from firms throughout the network, monitors a member firm’s review of the quality of its management level controls and the quality of the audit work it performed. This team leverages additional partner and other resources from various member firms, including the US firm. When issues are identified in the audit quality systems or controls of a member firm, the member firm prepares a remediation plan and the network monitors the member firm’s implementation of the plan. The network also may facilitate inbound and outbound secondments of experienced audit partners and professionals who can contribute to improving the auditing and accounting skills of the partners and other professionals in a member firm. If a member firm has severe or repeated audit quality issues, the member firm may have to replace its leadership. The partners in each member firm understand their local economic, business, risk and regulatory environments, and can help other member firms understand how those environments may impact a company’s business and financial reporting. Performing audits in emerging and rapidly growing markets can present challenges from an audit quality standpoint. Various factors, such as less-developed company governance practices, culture, substantial economic growth, and limited resources, may create those challenges. Those factors, in turn, reinforce the importance of member firms in those markets building and maintaining a quality organization to facilitate the performance of highquality audits. The network often provides assistance to member firms in those situations. Further, audit partners understand their responsibility for quality and address these challenges through various means, including through effective oversight of the audit work, visits with audit teams of other member firms, and secondments of experienced professionals. Our focus on audit quality 23
  • We monitor our own performance, learn from our experiences, and continuously make improvements to enhance the quality of our work. 24
  • Assessing audit quality To achieve sustained audit quality, we monitor our environment to understand and anticipate changes in business practices and in the companies we audit, and the changing expectations of investors, regulators, and others. We also monitor our own performance, learn from our experiences, and continuously make improvements to enhance the quality of our work. In considering what improvements we should make, we evaluate the results of our internal and external inspections, and consider feedback from our professionals and from our stakeholder outreach activity. We also identify and evaluate potential underlying causes of instances in which our quality objectives have not been consistently achieved. For example, we assess whether a partner’s workload had an effect on the partner’s ability to effectively review and supervise the audit, whether the skills of the professionals assigned to the audit should be enhanced, and whether our audit guidance, methodologies, tools, and processes should be refined, to name a few. We believe evaluating potential underlying causes of inconsistencies in achieving our quality objectives is an important component of our quality control system. Learning from such instances helps us to assess whether the actions we are taking to promote more consistent audit execution will be effective. We are now exploring ways to deepen our understanding of the causes of such instances and the actions that we might take in response. We’re doing this so that we can further improve the design and implementation of our audit quality enhancements. Recently the PCAOB released Information for Audit Committees About the PCAOB Inspection Process. The release notes that information about inspection results of a company’s audit, and general inspection results of a firm, can help audit committees in carrying out their auditor oversight role. We believe that audit committee oversight is one of the keys to promoting greater audit quality. Thus, we agree that an audit firm’s candid and robust discussions with an audit committee about its inspection results and what they might mean to the audit can be helpful to the audit committee. We are committed to engaging in those discussions. The primary responsibility for such discussions rests with our audit teams. While this section presents an overview of those results, this report is not intended to be the primary source of information for audit committees. Internal inspections of our audit practice One of the important ways we monitor our performance is through our internal inspection program. Under this program, certain audits are selected for inspection. These inspections are conducted by individuals who were not involved with the audit. Our focus on audit quality 25
  • The inspections group considers the appropriateness of the judgments made by the audit teams and looks for instances where our audit quality objectives were not fully achieved. When such instances are identified, the inspections group considers the potential underlying causes and whether remediation is required. They also work with our Chief Auditor Network, audit methodology group, learning and development group, and firm leadership to determine whether additional guidance or training, modifications to our audit methodology, or additional targeted messaging from leadership are needed to enhance the consistency of our audit quality. The inspections group today reflects changes that we began making in 2011 to create a larger core team of mostly dedicated professionals in order to drive greater consistency and quality in internal inspections and enhance the rigor of those inspections. As we perform individual inspections we supplement the group with experienced audit partners and other senior audit professionals as needed, particularly those with special industry or technical expertise. Their current audit, industry, and technical experience brings added value to our inspections process. Learnings from our inspections team Messaging and guidance from leadership and the National office Chief Auditor Network pre-issuance reviews and required consultations Learnings from our inspections team Improvements to our audit methodology and tools 26 Enhanced learning and development programs During the past year, the inspections group inspected over 300 public and private company audits. We estimate that the partners and other professionals in the inspections group will spend approximately 70,000 hours conducting our 2012 inspections of 2011 year-end audits. When combined with assistance from experienced audit partners and other senior audit professionals, we estimate we will spend approximately 100,000 hours conducting our 2012 inspections. Our 2011 internal inspections (our most recently completed internal inspections process), which cover 2010 audits, found a number of items that were similarly identified in external inspections of our audit practice conducted by the PCAOB. Our findings suggested that in the following overall areas one or more inspected audit engagements indicated an instance where we can focus our improvement efforts on certain specific matters: (i) Auditing fair value measurements of financial instruments This refers generally to understanding how management valued its financial instruments, especially hard-to-value instruments; evaluating the specific methods and assumptions underlying the measurements; and assessing the implications of significant differences in measurements of an instrument from various sources (for example, pricing services). (ii) Management’s estimates This refers generally to evaluating management’s assumptions underlying certain estimates, such
  • We consider causes underlying the trends identified through our inspections to inform our continuous audit quality improvement efforts. We time our internal inspections so that we can incorporate what we learn from them into our training programs before the next audit cycle is completed. as inventory reserves, and specifically considering information that may contradict assumptions in the estimate. obtaining sufficient audit comfort with the portion of a population that remains after performing targeted testing that represents a significant amount of the account being tested. (iii) Fair value measurements of items other than financial instruments This refers generally to understanding how management measured the fair value of items other than financial instruments, such as when performing goodwill impairment testing, including evaluating the specific methods and assumptions underlying the measurements. (v) Using the work of others (for example, internal audit) This refers generally to evaluating the quality, effectiveness, and conclusions of the work, as well as the competency and objectivity of those who performed the work, and sufficiently documenting the nature, timing, and extent of work performed. (iv) Substantive analytic procedures and targeted testing This refers generally to tests of revenue accounts, and involves setting reasonable expectations with appropriate precision when performing substantive analytic tests to provide audit evidence; addressing differences between expected and recorded amounts that exceed an established threshold for investigation; and (vi) Auditing internal control over financial reporting and testing the controls in a financial statement audit This refers generally to understanding and documenting the likely sources of material misstatement; sufficiently testing management’s controls, including entity-level controls; and identification and sufficient evaluation of control deficiencies. Our improvement efforts in fiscal year 2012 included enhanced audit training, for example, focusing on matters such as the exercise of professional skepticism, and issuance of 15 audit policy updates. We also issued guidance on 25 separate occasions to help our professionals apply the auditing standards and our audit methodology. The audit policy updates and other guidance include a number of new audit tools and templates that are intended to enhance the consistency of our audit execution. To enable our audit teams to identify audit issues earlier, we’ve set timing goals for completing audit planning activities and provided additional training on techniques to better manage the steps in an audit engagement. This will also facilitate our senior team members’ review and supervision of the audit work performed. Our 2012 internal inspections, which are ongoing and cover 2011 audits, show that we have improved. Nevertheless, we know that changes in Our focus on audit quality 27
  • (iii) Tests designed to detect fraud This refers generally to documenting our process of selecting items for testing, especially journal entries, and linking them to our assessment of risk, including risks arising from deficiencies in a company’s internal controls. (iv) Auditing income tax provisions and related accounts This refers generally to enhancing our audit procedures, documentation, and coordination with tax professionals supporting the audit team. the companies we audit and evolving business and regulatory environments require us to continuously evaluate the effectiveness of our audit procedures. Because the purpose of our inspections group is to identify areas where we can improve our audits, and because auditing is a complex and judgmental process, we expect the group will always identify new areas for improvement. In this way, the inspections group helps us to maintain a mindset of continuous improvement. our performance involving certain specific matters: A preview of the preliminary results of our (still in process) 2012 internal inspections, which cover 2011 audits, follows. The results show that one or more inspected audit engagements indicate an instance where we need to improve the consistency of (ii) Financial statement disclosures This refers generally to identifying disclosure errors and omissions, and auditing a company’s internal controls over financial statement disclosures. 28 (i) Understanding likely sources of potential misstatements This refers generally to focusing particularly on non-routine transactions, including business combinations and complex evaluations, such as impairments and deferred tax asset valuation allowances, and understanding the controls, processes, and management judgments that apply. (v) Assessing and responding to risks of material financial statement misstatements This refers generally to focusing on more formal upfront risk assessment and documentation of those risks, pursuant to the PCAOB’s new risk assessment standards that became effective in 2011. Our inspections group also annually evaluates the firm’s system of quality control for the assurance practice. This includes leadership responsibilities for quality (including the tone at the top), oversight by all levels of assurance leadership, relevant ethical requirements, acceptance and continuance of clients, hiring and development of our people, compliance with independence requirements, continuing professional education, and execution of our audits. The inspections group also supports audit teams whose audits have been selected for inspection by the PCAOB. This process, which was put in place in 2011, helps facilitate objective, timely,
  • and high-quality interactions with the PCAOB inspection teams. We believe this helps the PCAOB inspection teams to complete their work sooner and minimizes situations where unresolved regulatory matters could possibly interfere with a company raising funds or entering into transactions involving the public markets. External inspections of our audit practice The results of external inspections of our public company audit practice by our regulator, the PCAOB, and the results of peer review of our private company audit practice also contribute to our assessment of where to make improvements. PCAOB reviews take place annually, whereas peer reviews are performed every three years3. The PCAOB’s inspections are conducted using a risk-based approach. It notes that its inspection results should not be used as a gauge for assessing the overall quality of a firm’s audit practice. A PCAOB inspection report comprises public (Part 1) and non-public (Part 2) portions. Specific audit inspection findings of the PCAOB are generally referred to by the PCAOB as instances of “audit failure” and are included in Part 1 of its report. The PCAOB uses that term when it concludes that not enough evidence was gathered to support the opinion that the financial statements are not materially misstated. Its use of the term does not mean the PCAOB has concluded that there is a material misstatement. When such instances have been identified, they generally have not related to our risk assessment or to our judgments about the application of accounting standards. Instead, they’ve related to our execution of the audit procedures we performed in order to form an opinion about whether the financial statements are free of material misstatement. Audit opinions are typically supported by performing a number of different audit tests, often using sampling techniques. Significant judgment is required to determine which type of test to perform, how much to test, and what our conclusions should be for each of the tests. If the PCAOB concludes that any one of those tests was not performed with sufficient robustness and that more or different tests should have been performed, the PCAOB includes that instance in Part 1 of its report. Whenever such an instance has been identified, we performed additional procedures, as deemed appropriate, to determine whether our previous conclusions should be revised. In nearly all cases, when we performed those additional procedures, they resulted in no changes to the financial statements, and we were able to reaffirm that the financial statements are free of material misstatement and could continue to be relied upon. As with our internal inspections process, we study the instances where the PCAOB’s inspectors concluded that there is not enough evidence to support the audit opinion and we evaluate their potential underlying causes. In 3 Our latest peer review will be completed by Grant Thornton LLP by December 2012. Our focus on audit quality 29
  • many cases we agree with the PCAOB inspectors’ assessment of our work. In certain cases, however, we do not agree with their assessment. There is a high degree of judgment required, both on the part of the PCAOB’s inspectors to reach their conclusions and by us in evaluating their conclusions. In each instance, however, we assess potential underlying causes of the findings and consider what firm actions are appropriate to take to enhance the consistency of our audit quality. Part 1 of our most recent PCAOB report (its 2010 report dated November 8, 2011, covering inspections of selected 2009 audits) noted the need for us to improve the consistency of our execution in (i) designing and performing substantive analytical procedures, (ii) auditing internal control over financial reporting and testing those controls in a financial statement audit, (iii) determining our audit scope for companies with multiple locations, (iv) testing measurements and disclosures of the fair value of financial instruments, (v) testing management’s estimates and fair value measurements of items other than financial instruments, and (vi) determining materiality levels for testing pension plan assets. Part 2 of a PCAOB report contains the PCAOB’s criticisms of a firm’s system of quality control and reflects its review of certain of a firm’s practices, policies, and processes related to audit quality. In reviewing these, the PCAOB considers its engagement-specific findings identified in Part 1. Thus, its Part 2 comments often address a firm’s practices, policies, and processes in the context of its specific Part 1 findings. 30 The PCAOB Part 2 review generally includes the following: (i) Management structure and processes, including the tone at the top (ii) Practices for partner management, including allocation of partner resources and partner evaluation, compensation, admission, and disciplinary actions (iii) Policies and procedures for considering and addressing the risks involved in accepting and retaining clients, including the application of a firm’s risk-rating system (iv) Processes related to a firm’s use of audit work that a firm’s foreign affiliates perform on the foreign operations of a firm’s US issuer audit clients (v) A firm’s processes for monitoring audit performance, including processes for identifying and assessing indicators of deficiencies in audit performance and independence policies and procedures and processes for responding to weaknesses in quality control Under the Sarbanes-Oxley Act of 2002, no portion of Part 2 can be made public by the PCAOB if, in its opinion, a firm has remediated, to the PCAOB’s satisfaction, the quality control matters described in Part 2 within twelve months after Part 2 is issued to the firm. For PwC, the earliest inspection years for which the PCAOB is in the process of making this determination are 2008 and 2009 (covering audits of 2007 and 2008, respectively). Many of the observations noted by the PCAOB in Part 2 of its reports address policies and practices that, in our view, deal with some of the most complex areas of an audit. Our actions relating to those areas have included providing our audit professionals with enhanced audit tools, training, and additional technical guidance to promote more consistent audit execution. These focused on areas such as auditing management’s estimates and fair value measurements, scoping multi-location audits, designing and performing substantive analytical procedures, performing risk assessments, testing internal control over financial reporting, and determining the sufficiency of audit evidence. We have also focused on enhancing the review, supervision, and inspection of our audits. We have continued to emphasize to our people the importance of exercising objectivity and professional skepticism, and maintaining our independence. This occurred through messages from firm leaders, and in various learning environments, such as formal classroom and virtual training, on-the-job coaching, and discussions in industry and market meetings. We believe that the enhancements to our audit training, the additional tools and guidance we’ve provided, and the consistent communications from firm leaders about quality have been important contributors to enhancing audit quality. But we haven’t stopped there. In line with our continuous improvement focus, we are also
  • assessing how we can strengthen our controls over the application of our audit policies and procedures in order to further enhance audit quality on a consistent basis. Actions may include new compliance requirements, additional monitoring of the application of certain audit policies and practices, and further alignment of our rewards system with our quality objectives. Additional audit quality indicators In addition to post-completion inspections, we believe there are other ways to measure audit quality. We encouraged the Center for Audit Quality to consider ways to supplement inspections as a measure of audit quality by using other audit quality indicators. We are working with members of the Center for Audit Quality to develop such indicators. Our focus on audit quality 31
  • We are fully engaged in discussing and developing ideas to improve audit quality within the profession and promote greater investor protection. 32
  • Contributing to audit quality in the marketplace Our focus on audit quality includes being actively involved in developing the profession’s perspectives on the events and trends in the audit, financial reporting, regulatory, and business environments. We are fully engaged in discussing and developing ideas to improve audit quality within the profession and promote the reliability of financial reporting and greater investor protection. Professional and regulatory The regulatory environment remains fluid in the United States and abroad. Regulators and policymakers continue to consider what more can be done to promote greater investor protection. We believe that it is important for us to be involved in these discussions. These broader efforts, combined with our own audit quality initiatives, will promote higher-quality financial reporting for investors. Our role in the capital markets provides us with a unique perspective of companies’ businesses and their financial reporting. We also have significant insight into the thinking of other stakeholders in the capital markets— regulators, investors, standard setters, policymakers, academics, and others— about financial reporting. We use this knowledge to inform our thinking and, within the bounds of appropriate confidentiality restrictions, share that knowledge through participation in debates and discussions aimed at improving audit and financial reporting quality. We will continue to leverage this type of information to help us challenge conventional thinking. Some ways in which we are contributing to the discussions are highlighted below. An important activity aimed at improving audit quality is the operation of the Center for Audit Quality. As evidence of how important its work is in promoting greater audit quality, the Center for Audit Quality’s governing board includes the chief executive officers of the largest auditing firms (the board is currently chaired by our firm’s Senior Partner). Our firm is involved in a number of activities at the Center for Audit Quality. These include participation in multiple workshops and public discussions on emerging auditing issues. Among those issues are the auditor’s role, auditor reporting, and increasing audit quality through enhancing auditor independence, objectivity, and professional skepticism. Through our various publications, we seek to educate stakeholders on issues that could impact audit quality. We also proactively meet with policymakers, regulators, and standardsetters to share our perspectives. And, we respond to various proposals by submitting comment letters and participating in public meetings. To learn more about our perspectives on topics important to the capital markets, please refer to the following resources: • 10Minutes on Effective Audit Committees • Point of view: Mandatory Audit Firm Rotation • Point of view: Emphasis Paragraphs • Point of view: Assurance on Other Information • Point of view: Auditor’s Discussion and Analysis • Written Testimony of Bob Moritz, US Chairman and Senior Partner, before the PCAOB, March 21, 2012 We believe reforms implemented over the last decade as a result of the Sarbanes-Oxley Act of 2002 have been successful in enhancing audit quality and should be built upon. We have provided our perspectives on regulatory proposals that we believe enhance audit quality, such as the increased use of emphasis paragraphs in audit Our focus on audit quality 33
  • We are supportive of a more robust dialogue between auditors and audit committees. We believe oversight of auditors by audit committees is one of the keys to promoting greater audit quality. We are actively involved with audit committees to help them stay updated on developments and trends, and to share leading practices that enhance audit and financial reporting quality. reports. We have also shared our point of view on potential changes that we do not believe will increase audit quality, such as mandatory audit firm rotation and the auditor’s issuance of an “auditor’s discussion and analysis.” Some other examples of changes we support include increasing audit committee monitoring of the auditor’s objectivity and skepticism, further training for auditors in exercising professional skepticism, and requiring firms to publish more information describing their systems of quality control. We also support promoting consistent communications between an audit firm and an audit committee about regulatory inspection results, increasing disclosures by companies when an audit committee changes audit firms, and involving the audit committee in the selection of the lead audit partner. We have established principles that guide our thinking in determining which proposals and ideas are worth 34 pursuing. Those principles are that any changes should (i) enhance audit quality and the reliability of financial reporting, (ii) enhance the roles of, and effectiveness of interactions between, audit committees, management, and auditors, (iii) promote audit reports that are comparable between companies, and (iv) maintain management as the source of information about the company. Audit committees The Sarbanes-Oxley Act of 2002 made the audit committee responsible for overseeing a public company’s financial reporting process and its auditor. It required audit committees to have independent members, enhance their financial expertise, and expand required communications with auditors. These changes enhanced the dialogue between auditors and audit committees, and empowered audit committees to more effectively carry out their responsibilities. Our Center for Board Governance (the “Center”) is one of the largest corporate governance practices of any audit firm. It comprises partners and other governance specialists who bring unsurpassed experience to boards and audit committees on accounting, auditing, financial reporting, and other governance issues. Through the Center, we assist audit committees to more effectively meet the challenges of their oversight role. Importantly, we encourage audit committees to actively oversee our audit work, evaluate our performance, and challenge our judgments. And, we provide guidance to audit committees to help them in conducting their oversight activities. We also brief audit committees on significant corporate governance and financial reporting developments through a series of recurring publications, including a monthly and quarterly newsletter and annual compilations of leading practices for audit committees, which can be accessed on our Center for Board Governance website. We host seminars, roundtables, and quarterly webcasts to engage audit committees in dialogues about key developments. And, we meet with audit committees one-on-one to share our insights and
  • help them understand the complex regulatory and business environment and best practices. continue, including one-on-one meetings between assurance leadership and key investor advocates. For the most part, the Center does not engage in revenue-generating activities. Our governance practice is illustrative of our commitment to contribute to increased audit and financial reporting quality for the benefit of the capital markets. We are also keeping our finger on the pulse of developments in corporate reporting. For example, some stakeholders are asking for sustainability reports that provide information beyond today’s financial reporting model. Taking this concept even further, “integrated reporting,” which would involve reporting financial and non-financial information in one report, is beginning to be discussed more frequently in some parts of the world. Investing community As the needs and expectations of the capital markets evolve, we believe it is important for us to engage with the investing community. An effective outreach process involving investors will result in improved relationships with the investing community that will benefit the firm, the profession, and the broader capital markets. We believe that through enhanced communications with investors, we can obtain firsthand knowledge of the financial reporting matters that are important to them and better understand their perspectives. We will leverage what we learn as we consider further enhancements to our audit processes. We also believe we can share with investors our perspectives on the profession’s role in the financial reporting system during these interactions and what it takes to perform a high-quality audit. We periodically obtain the investing community’s views of our profession and its value to the capital markets through surveys, participation on advisory committees, and other forums. These interactions will As these concepts continue to evolve, we will participate in the dialogue and provide our perspective. We will continue to support efforts that could present an opportunity for improved corporate reporting and benefit the investing community. To that end, consistent with market demands, we are making investments in our Sustainable Business Solutions practice, and other areas to address needs as they arise. We also continue to educate companies and the wider business community on corporate reporting trends and developments. Academia Recognizing the importance to audit quality of a strong pipeline of qualified and well-prepared individuals entering the profession, we devote significant efforts to engaging with academia. Our approach includes providing grant programs to help support a university’s curriculum, interacting with professors and individuals interested in teaching and/or attaining a PhD, and interacting with students to provide internship opportunities and convey the relevance of the profession and the value we bring to the capital markets. Our assurance practice leaders, partners, and other professionals collectively spend thousands of hours on campuses and in other venues each year speaking to business professors and students and participating in their classroom and other activities. With many predicting a need to increase the supply of accounting professors, we have also taken actions to fund various programs to create more opportunities for professionals to join the ranks of professors in colleges and universities. We have made a significant contribution in the Accounting Doctoral Scholar program, a collaborative effort of the AICPA Foundation, public accounting firms, and state CPA societies, to increase the number of academically qualified faculty. This eight-year commitment (through 2015) funds stipends for individuals with public accounting experience to pursue a PhD in accounting. The goal is to produce approximately 120 new PhDs. We have also created a program designed to transition retiring PwC partners into the academic world. The PwC Bridge program provides various training and reference materials to those preparing to teach. Our partners, who have many years of real world experience, can bring a unique perspective and skill set to the classroom to enhance the learning experience of the next generation of audit professionals and leaders. Our focus on audit quality 35
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  • Our commitments We appreciate the privileged role we have in the capital markets, and understand the importance of performing audits that provide investors with confidence in the financial statements of the companies we audit. Our goals are to foster a sustainable culture of audit quality within our firm and consistently achieve our audit quality objectives. To meet these goals in the dynamic business environment in which we operate, we strive to continuously improve at all levels of our firm. This includes in our processes, our audit methodology, and the individual audits we perform. Meeting these goals will require that we continue to make significant investments in our assurance business. We must also demonstrate a willingness to change as a firm and to facilitate change in our profession in order for the profession to remain relevant. We will make the needed investments to continuously improve our audit quality. We also will listen to investors, engage in debates on matters impacting investor confidence in financial reporting and our profession, and thoughtfully come to our own perspective on the most productive changes the profession can make to improve audit quality and provide more value to investors. These are our continuing commitments. Stakeholders in the capital markets should expect nothing less. Our focus on audit quality 37
  • We recognize the desire for more audit firm transparency. Our 2012 Transparency Report provides an additional view into our structure, systems, and practices that promote audit quality. 38
  • Transparency report In today’s complex and continuously evolving business environment, investors, regulators, audit committees and other capital market participants are seeking more transparency from those involved in the financial reporting system. This desire for increased transparency has heightened during the past several years and extends to audit firms as people seek greater insight into how a firm’s management and operations are structured to support the performance of highquality audits. Our 2012 Transparency Report follows. In it, we describe our legal and governance structures, internal quality control system, independence and continuing education practices, and the global network of PwC firms, of which we are a member. We also share summary financial information. The information contained in the report, together with a list of the public companies we audit4, is generally consistent with the information that the Center for Audit Quality recommends be included in an audit firm’s transparency report. The information also presents the required disclosures of “third country” audit firms stipulated in Article 45(5)(e) of the European Union’s Directive on Statutory Audit 2006/43/EC (the “8th Directive”). We recognize and embrace our responsibility to create and maintain confidence in the quality of the audit. The report that follows provides an additional view into our structure, systems, and other practices that underpin our high-performing culture that promotes audit quality. 4 The list of public companies we audit can be accessed on the PCAOB’s website by searching for the firm’s Form 2, Item 4.1, under “Registration & Reporting,” or using the following link: https://rasr.pcaobus.org/Forms/FormSummary.aspx?ID=C836DF2E6913E81 2EB1AB7003BE30F56. Our focus on audit quality 39
  • PricewaterhouseCoopers LLP 2012 Transparency Report This Transparency Report is published in accordance with the requirement set forth in Article 45 (5)(e) of the European Union’s Directive on Statutory Audit 2006/43/EC for our fiscal year ended June 30, 2012. Its contents are also generally consistent with the information that the Center for Audit Quality recommends be included in an audit firm’s transparency report. Throughout this report, the terms “PwC,” “Firm,” “we,” and “our” refer to PricewaterhouseCoopers LLP, the US member firm of PricewaterhouseCoopers International Limited (PwCIL). Legal structure and ownership of the Firm The Firm is a limited liability partnership established under the laws of the State of Delaware. All interests in the Firm are held by its partners and principals1, all of whom are individuals. The PwC Network PwC is the brand under which the member firms of PricewaterhouseCoopers International Limited operate and provide professional services. Together, these firms form the PwC network. “PwC” is often used to refer either to individual firms within the PwC network or to several or all of them collectively. In many parts of the world, accounting firms are required by law to be locally owned. Although regulatory attitudes on this issue are changing, PwC member firms do not and cannot currently operate as a corporate multinational. The PwC network is not a global partnership, a single firm, or a multinational corporation. For these reasons, the PwC network consists of firms that are separate legal entities. The firms that comprise the PwC network are committed to working together to provide quality audits of the financial statements of companies audited by the member firms and quality service to other entities to which member firms provide services throughout the world. Firms in the PwC network are members in, or have other connections to, PwCIL, which is an English private company limited by guarantee. PwCIL does not practice accounting, provide auditing or other professional services, or conduct business with third parties. Rather its purpose is to act as a coordinating entity for member firms in the PwC network. Focusing on key areas such as strategy, brand, risk, and quality, the Network Leadership Team and Board of PwCIL develop and implement policies and initiatives to achieve a common and coordinated approach among individual firms where appropriate. 1 A partner is a certified public accountant (CPA) whereas a principal is not. This document generally refers to partners and principals collectively as “partners.” Only a CPA may sign an audit opinion for a client. 40 PwC 2012 Transparency report
  • Member firms of PwCIL can use the PwC name and the resources and methodologies of the PwC network. Although many of the member firms have legally registered names that contain “PricewaterhouseCoopers,” there is no ownership of the firms by PwCIL. In addition, member firms may seek to use the resources of other member firms and/or secure the provision of professional services by other member firms. Member firms have agreed to abide by certain common policies and maintain the standards of the PwC network. A member firm cannot act as agent of PwCIL or any other member firm, cannot obligate PwCIL or any other member firm, and is liable only for its own acts or omissions and not those of PwCIL or any other member firm. Similarly, PwCIL cannot act as an agent of any member firm, cannot obligate any member firm, and is liable only for its own acts or omissions. Governance structure of the Firm The firm’s Senior Partner serves as Chairman and Chief Executive Officer and manages the firm. The Senior Partner may appoint persons and committees to assist with firm management and provides the Board of Partners and Principals, which is PwC’s governing body, with initiatives for the firm’s philosophy, policies, and direction. To assist him in discharging his responsibilities, the Senior Partner has appointed a Leadership Team, which works with him in managing the firm. The responsibilities of the Senior Partner and the Leadership Team include establishing and determining the effectiveness of the firm’s system of internal control, including those relating to the quality of the firm’s audit services. All of the members of the Leadership Team are partners or principals. Changes to the Leadership Team are determined by the Senior Partner. Members of the Leadership Team Chairman and Senior Partner Robert Moritz, CPA Operations Leader & Chief Financial Officer Michael Burwell, CPA Chief Administrative Officer and Partner Affairs Leader John Carter, CPA Sectors and Markets Leader William Cobourn Jr., CPA Strategy Leader Mitchell Cohen, CPA Regulatory Affairs and Public Policy Leader Laura Cox-Kaplan Clients and Markets Leader Greg Garrison, CPA Marketing and Sales Leader Robert Gittings, CPA Human Capital Leader Terri McClements, CPA Advisory Leader Dana McIlwain, CPA Tax Leader Mark Mendola, CPA Chief Diversity Officer Maria Castañón Moats, CPA Assurance Leader Tim Ryan, CPA General Counsel Diana Weiss Our focus on audit quality 41
  • Senior Partner election process The Senior Partner is elected by a partner vote for a four-year term that can be renewed once. To determine the candidates to stand for election, the Board of Partners and Principals (the Board) appoints a Senior Partner nominating committee comprising partners who are not candidates for election as Senior Partner and who are not “designated members of management.”2 No more than two members of the Senior Partner nominating committee may be existing Board members. Absent special circumstances, appointments to the Senior Partner nominating committee are ratified by a partner vote. The committee solicits and vets potential candidates, and submits up to three proposed candidates to the Board for approval, after which the partners vote on the candidates. When there is only one candidate, the individual must receive the support of two-thirds of the partners voting on a headcount basis. When there is more than one candidate, the winner is decided by a vote of a majority of the partners voting on a headcount basis. The election is typically supervised by an independent election teller. Board of Partners and Principals Authority The Board is responsible for approving the overall strategic direction of the Firm. It approves long-range strategies, business plans, and major transactions that could significantly affect the firm’s business. Its authority also includes the approval of the firm’s capital policies, the manner in which partners participate in firm profits, and the admission of partners. It approves the compensation of the Senior Partner and members of the Leadership Team as a group, after a review and recommendation by a committee of the Board. All candidates proposed by the Senior Partner Nominating Committee to stand for election as Senior Partner must also be approved by the Board. 2 Designated members of management are (i) the Senior Partner, (ii) a partner reporting directly to the Senior Partner, (iii) the members of PwCIL’s Network Leadership Team, and (iv) any other person holding a management position in the Firm or with PwCIL determined on occasion by the Board to be ineligible to serve on the Board. 42 PwC 2012 Transparency report
  • Composition Members of the Board are partners of the Firm and are elected for staggered terms of four years that can be renewed once. The Board is chaired by a Lead Director, who is elected by members of the Board. The Board has at least 12 and not more than 18 members in addition to the firm’s Senior Partner. Its current members are: Members of the Board of Partners and Principals Robert Moritz, CPA, Chairman and Senior Partner Paul Kepple, CPA John Maxwell, CPA, Lead Director John Livingstone Mark Boyer Riccardo Mancuso, CPA Brian Cullinan, CPA John McCaffrey, CPA John Farina, CPA Bradley Oltmanns, CPA Saverio Fato, CPA Alan Page, CPA Julie Harmon, CPA Lawrence Petzing, CPA Linda Ianieri, CPA Chris Simmons James Kaiser, CPA Board member selection process The Board appoints a Board nominating committee comprising partners who are not candidates for election to the Board and who are not “designated members of management,” as defined above. No more than two members of the Board nominating committee may be existing Board members. Absent special circumstances, appointments to the Board nominating committee are ratified by a partner vote. The committee solicits and vets potential candidates, and submits a list of proposed candidates to the Board for approval. After Board approval, that list, which typically has more candidates than available seats, is submitted to the partners for a vote. The partner vote is on a head count basis (one partner, one vote) and typically is supervised by an independent election teller. Our focus on audit quality 43
  • Board committees Committee Role Accounting & Audit Practice Scope of responsibility includes (i) regulatory matters that affect the assurance practice of the firm and, as appropriate, the PwC network, and (ii) accountancy licensing and professional standards issues. Provides oversight on behalf of the Board with respect to the Assurance practice of the firm that it (i) develops appropriate policies and procedures to deliver consistent quality in the assurance practice and minimize risks; (ii) maintains ongoing programs that monitor and evaluate the effectiveness of those policies and procedures; and (iii) develops and maintains appropriate relationships with federal and state regulatory authorities that have jurisdiction over the assurance practice. Admissions Validates the assessment of candidates nominated for admission to the partnership. Using guidelines that are in place throughout the network, it reviews admissions documentation, discusses and deliberates on candidates’ backgrounds and suitability for partnership, and performs additional due diligence when warranted to arrive at a consensus on candidates’ worthiness for admission to the partnership. Finance Reviews annual business plans, budgets, and investment programs proposed by management. Reviews the firm’s annual financial statements with management, addresses capital, financing, and key financial matters, assists in overseeing the firm’s internal audit function, and monitors network matters that may impact the financial affairs of the firm or its partners. Governance Develops processes for and oversees key firm governance events, such as Senior Partner and Board elections and other firm votes. Develops and recommends modifications to the Partners and Principals Agreement. Develops processes for evaluating the Board’s performance. People Monitors the appropriateness and effectiveness of the firm’s human resources strategies, policies, and operations. Oversees, consults with, and supports management, as appropriate, and advises the Board on the overall strategy and underlying intent of our HR initiatives; the effectiveness of, and challenges confronting, leadership in managing those initiatives; the process of formulating and refreshing the firm’s HR strategy, including the coordination of the strategy with that of the network; and other matters that bear on the experience of our people and their contributions to the continued success of the firm. Management Evaluation & Compensation Evaluates the performance of the Senior Partner, reviews his or her assessment of the members of the Leadership Team, and recommends to the Board the compensation of the Senior Partner and members of the Leadership Team as a group. Partner Affairs Oversees partner matters, particularly those involving partner interests and rights. Looks to management to demonstrate that the partnership utilizes suitable policies, procedures, and practices to ensure partners are properly evaluated and compensated. Reviews partner benefit programs for fairness and consistent application. Risk Management, Ethics & Compliance Considers whether appropriate risk management structure, resources, policies, procedures, and controls are in place in all practice areas of the firm and whether they reinforce the firm’s ethical standards, promote compliance, are effective, and produce an acceptable risk profile for the firm. Clients Reviews and monitors management’s development and coordination of strategies, plans, and policies for the assurance, tax, and advisory practices, including market, service, and business development, thought leadership, innovation, client service and client management, brand enhancement, and internal and external communications. Reports on the systems, processes, and performance measures in place for monitoring and reporting on the execution of strategies and plans, the performance of the firm, and developments that might affect the firm’s performance. 44 PwC 2012 Transparency report
  • Internal Quality Control System Quality control standards Quality control standards established by the Public Company Accounting Oversight Board (PCAOB), the American Institute of Certified Public Accountants, and the International Auditing and Assurance Standards Board require public accounting firms to have a system of quality control over their accounting and auditing practices. PwC’s quality control system complies with those standards, is functioning effectively, and addresses the following elements: • Leadership responsibilities for quality within the Firm (the “tone at the top”) • Ethical requirements (including independence, integrity, and objectivity) • Acceptance and continuance of client relationships and specific engagements • Human resources (including personnel management and learning and education) • Engagement performance • Monitoring Quality control procedures Our quality control procedures are summarized below in a manner consistent with the COSO (Committee of Sponsoring Organizations of the Treadway Commission) framework: Control environment Through an appropriate tone at the top, firm leadership emphasizes its commitment to quality as its top priority. It issues effective and consistent communication of the importance of quality throughout the firm, and takes the requisite actions so that the firm continues to stand for quality, independence, and objectivity. While no client individually constitutes a material element of the firm’s revenue, which gives our professionals the necessary freedom to act with independence, integrity, and objectivity, PwC has extensive systems and processes to monitor and promote the independence of the firm and its professionals. Our independence policies are readily available to all of our professionals and reinforced through periodic training and mandatory testing. Our various technology based independence tools and processes include: systems that list entities for which independence is required, encourage professionals to seek preapproval for investment transactions, and require partners and managers to record their investments on a timely basis; systems that facilitate the evaluation of non-audit services for permissibility and submission to audit committees for preapproval; systems that pre-clear and subsequently monitor the firm’s business relationships; annual confirmation of all partners’ and managers’ compliance with restrictions on investment, financial, and banking relationships; Our focus on audit quality 45
  • systems to initiate independence consultations; systems to assist engagement teams through the process of assessing potential independence matters for current or prospective assurance clients; and compliance testing of selected individual professionals. Under the firm’s consulting protocol, there are specific matters for which consultation with our National office is required. Engagement teams are encouraged to consult on other matters as warranted by facts and circumstances. In the event an audit partner disagrees with the advice provided by our National office, a resolution process provides guidance for moving the discussion through our chain-of-command until the matter is satisfactorily agreed upon and resolved collectively. The experienced partners and other professionals in our Chief Auditor Network also provide local access to subject-matter expertise on audit policy and methodology. The activities of our Chief Auditors’ Network are coordinated from the National office, through our Auditing Services Group. Under the firm’s human resource strategies, stringent hiring standards for entrylevel and experienced recruits are in place, which include assessing academic records and background and reference checks. Once hired, our professionals participate in a variety of local and national training courses, with a curriculum that matches their roles and responsibilities as they progress in their careers. The performance of our professionals is evaluated annually through a process that includes feedback from peers, subordinates, and supervisors. We evaluate, recognize, and reward our people for competent performance, consistent with the firm’s focus on quality. Our partner performance evaluation and compensation processes are in accordance with rules prohibiting direct compensation for selling non-audit services to audit clients. The annual assessment process captures information about how well each of our people has performed relative to our quality objectives and the goals each set for the year. For our assurance partners and other professionals, this process emphasizes our top priority of sustained audit quality, relative to other performance criteria. Risk assessment PwC’s risk management structure includes more than 100 experienced partners in national and regional roles who devote time to risk management activities. In addition, audit teams are required to consult with a risk management partner on a variety of issues, such as certain materiality, error correction, principal auditor, and going-concern matters. Risk management partners are integral to the firm’s client acceptance and retention process, assessing risk on both a qualitative and quantitative basis. Using the firm’s proprietary information system, they work with the audit team and the firm’s industry experts to assess whether the risks related to existing or potential audit engagements can be adequately addressed through our audit procedures, and whether PwC is willing to be associated with the particular company and its management. 46 PwC 2012 Transparency report
  • Control activities To promote consistent audit engagement performance, the PwC network has a baseline audit methodology that is applied on a global basis. We supplement it through the development and enhancement of audit tools and related guidance that is specific to the needs and requirements of the firm. The firm also has comprehensive policies and procedures governing its accounting and auditing practice. These policies and procedures cover professional and regulatory standards, and provide guidance on how best to implement and apply the standards. They’re updated to reflect new professional developments and address emerging issues. Certain engagement-specific quality controls apply with respect to particular audits. For example, we assign a quality review partner to our public company audit engagements, and certain other audits, to conclude on the effectiveness of the audit and decide whether to provide concurring approval of the issuance of PwC’s audit report. That partner’s responsibilities include reviewing the audit strategy, considering the firm’s independence, and discussing the significant risks identified by the audit team and the responses to those risks. The quality review partner is also a key reviewer of significant accounting, auditing, and financial reporting matters; significant audit judgments; the resolution of significant issues; and the financial statements and related disclosures. Many of our public-company audit engagements also have a designated SEC review consultant (a member of our National office). The consultant’s role is to provide additional expertise with respect to accounting, auditing, and financial reporting; SEC rules, regulations, and interpretive positions; and capital market activities. The Assurance Quality and Transformation Organization includes functions critical to quality, such as Learning and Development, Internal Inspections, and the National office, which includes Accounting Services, Auditing Services, SEC Services, Risk Management, and Audit Methodology. The partners and other professionals in the National office are experts in these functional areas. They advise on matters involving significant, unusual, or complex accounting, auditing, and SEC matters, and they establish firm policies, positions, and methodologies. Information and communication Information necessary to keep up to date on professional standards and developments is available to audit professionals regardless of their location. Our system of databases and on-going electronic communication of information helps ensure that appropriate information is available to audit teams when needed. Regular communications alert our audit professionals to new standards and provide related guidance to assist them in providing high-quality audits and other services. Alerts on regulatory, accounting, and auditing developments are distributed to the assurance practice through communications that typically occur weekly, more often when needed. Such alerts are periodically reinforced through training and on-line webcasts. Our focus on audit quality 47
  • Monitoring PwC’s internal quality-monitoring program is an important part of how we assess our audit quality and an integral part of our continuous improvement efforts. The program includes inspection of an audit partner’s work and various aspects of our quality control system to evaluate whether our quality controls are functioning properly. This provides firm leadership with reasonable assurance that our audits and other assurance services are being performed in accordance with applicable professional standards and the firm’s policies and procedures. Inspections are conducted annually, with engagement partners subject to inspection generally at least once every three years. Our inspection process also involves periodic testing of the effectiveness of our quality controls in functional areas, such as leadership responsibilities for quality, ethics and compliance, acceptance and continuance of engagements, human resources, and engagement performance. We continually evaluate inputs from formal programs such as this and from a variety of informal sources, in an ongoing effort to improve our policies, procedures, and the consistency of the quality of our work. In addition, we continually evaluate the effectiveness of the design and operation of our quality control system. To foster compliance with applicable laws, regulations, independence requirements, and certain internal policies, the firm has a full-time Chief Ethics and Compliance Officer. Our compliance program is designed to foster integritybased decision making and provides tools and resources to support the firm’s and its employees’ compliance efforts. It encompasses a number of compliance functions, including independence, CPA licensing, continuing professional education, and privacy and ethics. It also supports other compliance functions within assurance and the firm’s other lines of service. Statement concerning last quality assurance review PwC is a public accounting firm registered in the US with the PCAOB. The PCAOB conducts inspections of the major accounting firms annually, focusing on those portions of the firms’ accounting and auditing practices that relate to public companies. The PCAOB’s 2010 inspection of PwC (for which the report was released in November 2011) generally covered calendar 2009 audit engagements. Independence practices Organization The firm’s full-time Partner Responsible for Independence is supported by a core team of independence specialists who help to facilitate application of the firm’s independence policies and procedures through consultations with audit teams. The firm’s full-time Chief Ethics and Compliance Officer leads a team of compliance professionals that facilitates and monitors compliance with the 48 PwC 2012 Transparency report
  • firm’s Independence Policy and other compliance and business conduct requirements. Both the Partner Responsible for Independence and the Chief Ethics and Compliance Officer are members of firm leadership, report directly to the firm’s General Counsel, and regularly report to the Board’s Risk Management and Ethics & Compliance Committee. Policies The PwC network’s Global Independence Policy is based on the Code of Ethics for Professional Accountants of the International Ethics Standards Board for Accountants. This policy also encompasses, where appropriate, SEC and PCAOB regulations, and sets forth the minimum standards that should be observed and processes that should be followed in order to maintain independence with respect to the companies audited by member firms in the PwC network and other assurance clients. The firm supplements the Global Independence Policy based on requirements mandated by US standard setters and regulators. The firm’s Independence Policy is supported by practical guidance, tools, and templates, which address the application of the Independence Policy to interests in, services to, and relationships with companies we audit and other assurance clients. Training and confirmations Annually, all partners and employees receive training on elements of the firm’s Independence Policy and related topics. Our independence training programs reinforce the importance of being independent in fact and appearance, and combine instruction with practical examples. Upon joining the firm, and at least annually thereafter, all partners and employees are required to confirm their independence with all aspects of the firm’s Independence Policy. In addition, all partners confirm that all business relationships for which they are responsible are in compliance with the Independence Policy and that firm processes have been followed in accepting these relationships. Monitoring independence The firm has a comprehensive independence monitoring and testing program. An internal review of independence compliance has been conducted. The results of the firm’s monitoring procedures are reported to firm leadership and provide assurance that the firm’s policies and processes are being followed. Continuing professional education of auditors Learning and development at PwC is an ongoing process. Development begins when a person is hired and continues throughout his or her career. We have a formal continuing professional education policy and provide an annual required curriculum. Through a variety of technical guidance, practice aids, on-going communication, personal development, on-the-job coaching, and training, our people receive a comprehensive understanding of the accounting and auditing areas to which they are assigned. Our focus on audit quality 49
  • Firm partners and employees, both CPA and non-CPA, have a personal responsibility to achieve and maintain the level of competence required to fulfill their assignments. This level of competence is generally measured by compliance with an annual continuing professional education (CPE) requirement mandated by the AICPA. In addition, professionals carrying out audit or assurance work in certain specialized industries may be subject to additional credit requirements for which the firm monitors their compliance. The AICPA and the National Association of State Boards of Accountancy (NASBA) jointly issued nationally recognized Standards for Continuing Professional Education Programs. As a NASBA CPE Program Sponsor, the firm is required to comply with these Standards when issuing CPE credits for courses PwC professionals have taken. The firm monitors compliance with CPE requirements, including the completion of required training programs. As previously described, the Ethics and Compliance office conducts an annual monitoring process by which it is confirmed that all partners and staff subject to the CPE requirements are in compliance with the guidelines. In addition, all courses for which the firm awards CPE credits are put through a review process to affirm that the course meets the AICPA and NASBA standards and the number of CPE credits to be awarded are appropriate. Firm financial information The firm’s revenue for the fiscal year ended June 30, 2012 is shown below: US Firm Gross Revenue ($mil) 10,157 US Gross Revenue Mix—By Practice Area: Assurance . . . . . . . . 43% Tax . . . . . . . . . . . . 29% Advisory . . . . . . . . . 28% Partner compensation Partner performance is evaluated annually through a review process that includes feedback from peers, subordinates, and supervisors. Partners are evaluated, recognized, and rewarded for performing as competent accountants and auditors, consistent with the firm’s focus on quality. Our partner performance evaluation and compensation processes are in accordance with rules prohibiting direct compensation for selling non-audit services to companies whose financial statements we audit. The annual assessment process captures information about how well each of our people has performed relative to our quality objectives, the goals each partner has set for the year, and their peers. This process also emphasizes to our partners the importance and top priority of sustained audit quality, relative to other performance criteria. 50 PwC 2012 Transparency report
  • Public Interest Audit Entities As defined in Article 4(1) of Directive 2004/39/EC, below is a list of our relevant audit clients that have issued transferable securities on a regulated market within the EU: American Express Company IKB Funding Trust II American Express Credit Corporation International Business Machines Corporation Bank of America Corporation JPMorgan Chase & Co. BB&T Corporation Kraft Foods Inc. Caterpillar Inc. Merrill Lynch & Co., Inc. Commerzbank Capital Funding Trust III Northern Offshore Ltd. Dresdner Funding Trust I NYSE Euronext Dresdner Funding Trust III Royal Caribbean Cruises Ltd. Dresdner Funding Trust IV Sara Lee Corporation E.I. Du Pont De Nemours and Company Eurohypo Capital Funding Trust I Sankatee Credit Opportunities (offshore) I Ltd. Eurohypo Capital Funding Trust II Schlumberger Limited Ford Motor Company The Central Europe and Russia Fund, Inc. Ford Motor Credit Company LLC The Goldman Sachs Group, Inc. Federal Home Loan Mortgage Corporation The Goodyear Tire & Rubber Company Hexcel Corporation The Hertz Corporation Honeywell International Inc. Toyota Motor Credit Corporation IKB Funding Trust I © 2012 PwC. All rights reserved. “PwC” refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. NY-11-0849 Our focus on audit quality 51
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  • www.pwc.com This publication is printed on Mohawk Options 100PC. TM It is a Forest Stewardship Council  (FSC®) certified stock using 100% post consumer waste (PCW) fiber and manufactured with renewable, nonpolluting, wind-generated electricity. © 2012 PwC. All rights reserved. “PwC” refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. NY-13-0008