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PCAOB On PwC

Dec 18

Written by: Jack Ciesielski
12/18/2006 7:09 AM

Last Thursday, the Public Company Accounting Oversight Board issued its report on its 2005 inspection of PricewaterhouseCoopers.

It found that the firm's quality control was lacking in some audits: revenue and receivables at one audit client were inadequately tested, for one example. When the auditors repaired their audit, they increased the confirmations of accounts receivable by a factor of ten. On other engagements, the firm had failed to test impairment charges, various aspects of inventory and fair values of investments. PwC acknowledged the deficient audits and remedied them.

One could look at the report - and the one issued on Deloitte & Touche last week as well - and get the idea that the Big Four are out of control. And certainly, it's bound to be spun that way in the press.

No apologies here for their mistakes - they don't even sound like they're failures involving extremely vexing issues. But it's not an unfair question to ask all involved: what do you expect a regulator like the PCAOB to do? How can you expect them to inspect the Big Four each year and NOT find something? After all, their existence has to be justified as well - and if there are tens of thousands of audit engagements occurring each year, they're not all going to be pristine. One would believe there's plenty of meat for the PCAOB to chew if it wants to find it.

The fact that there's a PCAOB inspection lurking in the bowels of each Big Four firm each year probably raises the quality of each employee's work over what it would be in the absence of an inspection machine. But just because the PCAOB doesn't bring one member of the Big Four to its knees each year doesn't mean it's not doing its job, either. Hopefully, if one of the Big Four goes off the rails into a swamp of total audit sleaze, the PCAOB mechanism is there to get them back onto the rails. Because it hasn't happened yet, investors should be glad.

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Pension & Other Benefit Plans: A Look Ahead

Investors in firms with defined benefit pension plans always face the risk of suddenly being pushed farther back in line when it comes to being served their returns. Variability in plan assets and variability in benefit plan obligations are the reason: poor asset returns coupled with sinking interest rates always spell tough times for defined benefit plan funding. In that regard, this year’s asset returns combined with the Fed’s “Operation Twist” add up to “Operation Agony” for defined benefit pension plans. If trends continue along their current path, firms that may have anticipated moving to more realistic pension accounting - like Honeywell, AT&T and Verizon already have done - might forego that decision. It could be just too painful.

Pensions aren’t the only kind of benefit plan affected by Operation Twist. Other postemployment benefit (OPEB) plans share much the same accounting model as pensions, including the calculation of a projected benefit obligation that similarly incorporates a discount rate - one that will also be affected by Operation Twist. The net OPEB obligations were slightly less than pension obligations at the end of 2010, but also promise to grow in 2011. Investors perceive them as less threatening than pension obligations because they don’t require funding. Strangely, there are a number of firms that are recognizing income from these benefit plans - without ever creating a dime of cash for investors.

A recent edition of The Analyst’s Accounting Observer dissects these issues, and is available only to paid subscribers. A condensed version is available for free upon request. To receive it, send an e-mail to Brenda Rappold at brappold@accountingobserver.com, with “PENSIONS” in the subject line.

For information about subscribing to The Analyst’s Accounting Observer, click here.