BAAFM23 PwC SEC Case Study Assignment : Auditing | KU

Task – A critique of ChatGPT’s response

1. Read the following extract of an article

Adapted from: SEC Charges PwC LLP With Violating Auditor Independence Rules and Engaging in Improper Professional Conduct

Extract:

Washington D.C., Sept. 23, 2019 —

The Securities and Exchange Commission today charged accounting firm PricewaterhouseCoopers LLP with improper professional conduct in connection with 19 engagements on behalf of 15 SEC-registered issuers and violating auditor independence rules in connection with engagements for one issuer where the firm performed prohibited non-audit services. The SEC also charged PwC partner Brandon Sprankle with causing the firm’s independence violations. Both respondents have agreed to settle the charges, and PwC will pay over $7.9 million in monetary relief.

The SEC’s order finds that PwC violated the SEC’s auditor independence rules by performing prohibited non-audit services during an audit engagement, including exercising decision-making authority in the design and implementation of software relating to an audit client’s financial reporting, and engaging in management functions. In connection with performing non-audit services for 15 SEC-registered audit clients, the order states that PwC violated Public Company Accounting Oversight Board (PCAOB) Rule 3525, which requires an auditor to describe in writing to the audit committee the scope of work, discuss with the audit committee the potential effects of the work on independence, and document the substance of the independence discussion.

2. ChatGPT Prompt

“In the context of the above article, identify and explain the threats to independence faced by the auditors that could have compromised their objectivity and professional scepticism.”

3. ChatGPT’s Response

Here are some of the key threats to independence that the auditors may have faced:

In the context of the SEC’s charges against PricewaterhouseCoopers LLP (PwC) and its partner Brandon Sprankle, the following threats to auditor independence that could have compromised their objectivity and professional scepticism were identified:

(a) Self-Review Threat

PwC provided prohibited non-audit services, including decision-making authority in designing and implementing software related to the audit client’s financial reporting. This created a self-review threat, as PwC was effectively auditing its work. Auditors must maintain independence by avoiding situations where they may need to review and audit their services or judgments. The SEC stated that this activity compromised PwC’s independence, as the firm engaged in management functions, impairing its ability to exercise unbiased judgment during the audit.

(b) Management Participation Threat

PwC’s involvement in management functions, including decision-making authority over financial reporting systems for their audit clients, resulted in a management participation threat. Auditors are prohibited from assuming managerial responsibilities because it conflicts with their role as independent assessors of financial statements. By engaging in these activities, PwC essentially became part of the client’s management, making it difficult for them to maintain impartiality and objective judgment in the audit.

(c) Familiarity Threat

The long-standing relationship with multiple audit clients, along with the failure to properly disclose non-audit services to audit committees, could have led to a familiarity threat. Familiarity threats arise when auditors develop too close a relationship with their clients, potentially impairing their objectivity. This is exacerbated by the fact that PwC failed to have appropriate quality controls in place to monitor independence, suggesting the auditors may have become too comfortable with their clients and overlooked important independence considerations.

(d) Advocacy Threat

PwC’s actions, particularly in taking on decision-making roles and providing non-audit services, could also pose an advocacy threat. By engaging in management functions or providing significant non-audit services, the firm might have had an incentive to promote the client’s interests, rather than maintaining an independent, unbiased position during the audit. The SEC highlighted that PwC’s failure to properly communicate the scope and effects of their non-audit services to the audit committee deprived these committees of essential information to assess independence, potentially leading to a scenario where PwC could have been seen as advocating for its clients’ positions.

(e) Compliance and Regulatory Threat

The SEC also noted that PwC violated Public Company Accounting Oversight Board (PCAOB) Rule 3525 by not providing adequate written documentation or discussing the potential effects of non-audit services on independence with audit committees. This failure in communication poses a compliance threat, as it undermines the audit committees’ ability to assess PwC’s independence. Furthermore, PwC’s lack of robust quality controls to ensure that non-audit services were permissible under independence rules directly contravened regulatory requirements, leading to improper professional conduct.

Conclusion

These independence threats highlight how PwC’s actions, specifically performing non-audit services, engaging in management functions, and failing to properly communicate with audit committees, could have compromised their objectivity and professional scepticism. These issues reflect significant breakdowns in PwC’s internal controls related to maintaining auditor independence.

4. Provide a critique of items (a) to (e) in ChatGPT’s response

For all items (a) to (e):

(i) Fact-check each item.
(ii) Provide supporting evidence to justify if ChatGPT’s response is accurate (factual) or inaccurate for each item (a) to (e).
(iii) For items that contain factual errors, describe how the response from ChatGPT should be edited.
(iv) Discuss how ChatGPT’s answer can be improved.
(v) How have recent changes in regulatory frameworks, such as those introduced by the Public Company Accounting Oversight Board (PCAOB) and the Securities and Exchange Commission (SEC), influenced auditing practices, particularly in ensuring auditor independence and objectivity? Provide examples of how regulatory developments might have impacted the practices of firms like PwC in the given case.

5. Recommended Format

Introduction

State the purpose of this critique. For instance, you are critically evaluating ChatGPT’s response to assess whether it accurately identifies threats to independence in the case and proposing improvements where necessary.

Critique of Items (a) to (e)

For each item (a) to (e) in ChatGPT’s response:

• Evaluate if the response is factual and accurate.
• Justify your critique using research and sources on the case, threats to auditor independence, and applicable auditing standards (e.g., IFAC Code of Ethics).
• Reference all research clearly in your critique.

Conclusion

Summarise the overall quality of ChatGPT’s response to the question: “In the context of the above article, identify and explain the threats to independence faced by the auditors that could have compromised their objectivity and professional scepticism.”

Include an evaluation of ChatGPT’s accuracy and the improvements it could make.

6. Learning Outcomes Assessed

• Critically appraise the role and responsibility of auditors, both statutory and non-statutory.
• Discuss new developments in auditing, including challenges.

7. Additional Information

Word Count

Your report should be double-spaced and word-processed. The 1,500-word limit includes only the introduction to the conclusion. Any other content (references, cover page, etc.) is excluded from the word count.

Weighting

10% of your overall mark

Submission

Assignments submitted will be subject to Turnitin’s assessment of originality in Moodle. This also seeks to ensure proper citation of references by comparing students’ electronic documents to a variety of online sources and to the Turnitin database.

Marking Grid

Please refer to the generic grade criteria applicable to essays, reports and aspects of projects and dissertations.