The U.S. firm of PricewaterhouseCoopers plans to stop offering some types of consulting services to its SEC-registered audit clients to provide greater independence, and will cut the compensation of top leaders if the firm's audits fall short on quality.
PwC unveiled the changes as part of a series of actions planned over the next three years in the areas of accountability, quality, independence, transparency and engagement. The firm will continue to provide tax compliance services as well as technology consulting for non-audit clients.
Other plans involve expanding the critical audit matters disclosed in the U.S. firm's audit reports to include the more detailed kinds of key audit matters disclosed in its U.K. audit reports. It will also include disclosures about any potential conflicts of interest in its annual audit quality reports. The firm also plans to enhance its procedures related to fraud and do more training on fraud and going concern procedures.
PwC also hopes to bring more young people to the profession by committing 1 million hours to a multiyear campaign to raise awareness of careers in accounting and auditing, as well as set up an Investor Center for Investor Advocacy and an Audit Committee Institute to provide training on the role of independent accountants.
PwC sees it as an extension of the New Equation strategy it unveiled two years ago (
"This is an evolution of our strategy, and it's part of our ongoing quality journey, which is a commitment that we will never waver from," said Wes Bricker, vice chair and U.S. Trust Solutions co-leader at PwC. "We're doing this because we felt there was a need. We're adapting to the evolving needs of our stakeholders. We want to enhance the quality and the confidence in the information that builds the markets, information that underpins decision-making in our markets. All of that goes back to the important role that we play as auditors because we serve the public. That's why we're committing to a series of 12 actions over the next three years, starting in 2024, that will take us through 2026."
Compensation at risk for firm leaders
In the area of accountability, PwC plans to implement measures to demonstrate to its stakeholders that the leaders of its audit practices are accountable for audit quality. That includes provisions for putting the firm leadership's compensation at risk if audit quality lags, and public leadership certifications on PwC's own system of quality controls.
"We think those two are areas where we can lead the profession in accountability of the quality of work that we do and connecting it to the firm level of accountability for compensation, as well as public certifications," said Bricker.
Leaders of the firm could see some of their total pay and compensation reduced if there are problems with the audits.
"We think it's important now across our firm's leadership team to be committed to audit quality, and we are today," said Bricker. "The way we will demonstrate accountability for that commitment to audit quality all across our firm level of leadership is to make sure compensation is at risk. For our partners who participate in the firm's results, they could see their pay negatively adjusted if we have an audit issue."
Clawbacks on pay already exist for auditors whose audits are found to be faulty, but the provision will now focus on the leadership of the firm as well.
"Today we have accountability measures built in for lead engagement partners and others who are involved in an engagement," said Bricker. "This is connecting that accountability to all levels of our firm, including firm leadership."
The pay clawback provisions would apply to the seven members of the PwC US leadership team in case there are ethics scandals or other firm-wide failures, according to the
Key audit matters
In the quality area, PwC plans a series of initiatives designed to enhance confidence in the audit quality it delivers to clients. "We'll focus on areas of fraud and going concern to create a more robust and expansive approach to communicating key judgments, including through our audit report," said Bricker.
The audit reports will do something similar to the International Auditing and Assurance Standards Board's standard for disclosures of key audit matters, or KAMs, as they're used in the U.K. and other European countries, while still abiding by the Public Company Accounting Oversight Board's standard for disclosing critical audit matters, or CAMs, in the U.S.
"The approach that we're taking on the audit report is to be more expressive, but to continue to apply the existing standards, and the existing standards under the PCAOB have a very specific definition of critical audit matter, which we will continue to apply," Bricker explained. "The level of expression that we choose to provide in relation to that definition will expand. A key audit matter is generally resulting in a much more expressive audit report. We will have more expression in our critical audit matters in the U.S., but we will still apply the PCAOB's standard."
Fewer consulting services
In the independence area, the firm hopes to improve confidence in auditor independence by no longer offering certain permitted consulting services to its public company audit clients.
"The services that we no longer plan to offer to clients are what I call pure consulting services," Bricker explained. "That's different from services that are normally undertaken by the independent auditor with accounting expertise."
As an example of the type of service the firm will no longer be offering, he cited the design and implementation of supply chain management systems.
"What we don't want to put ourselves in the position of doing is shifting focus to operational systems, and away from our core work of building trust in information through assurance," said Bricker.
However, PwC will continue to offer services in areas such as tax compliance, technology and climate risk consulting.
"Climate risk is a pervasive risk that increasingly is reported on by companies voluntarily through their net zero commitments, through their statistical reporting, and for certain companies their mandatory reporting requirements," said Bricker. "Climate risk can have an impact on understanding a company's pricing strategy and their capital expenditure and operating expenses. It can impact the financial statements, the assets that companies maintain and the liabilities that they recognize. That's an area where we would anticipate continuing to provide services that involve the readiness of companies for reporting and their preparedness for assurance on those results. And you can take that same topic and apply it to things like AI. You can apply it to data that gets incorporated into disclosures. Where we see decision-making in the markets being impacted by a need for assurance and trust, those are the kinds of services that we would plan to continue to offer. And we believe there is a growing need for investor-grade reporting and assurances in that space."
PwC will still be offering many of the types of consulting services that are still allowed for auditing firms after passage of the Sarbanes-Oxley Act of 2002.
"The types of permissible consulting services that we're choosing to not offer would typically fall under the 'other' category in the proxy statement for our SEC-registered audit clients," said Bricker. "It wouldn't be all services that are captured in that category."
He cited tax, audit and audit-related as categories of permissible work that PwC will continue.
"The current rules under Sarbanes-Oxley, of course, prohibit the provision of certain non-audit services to a firm's audited public companies, and we don't want to be close to that line," he added.
The consulting side of the firm will still provide technology services to non-audit clients, however.
"For audit clients, we would not be providing pure consulting services," said Bricker. "That distinguishes between the multidisciplinary approach that we have across the firm, where we have audit clients, and then we have clients where we're not their auditor. Where we're not an auditor, then we will continue to provide consulting services to other clients. We find that experience with other clients helps us bring a sharper, more informed perspective when we're auditing our audit clients, but not when we're trying to sell them services."
Reporting on conflicts of interest and KPIs
In the transparency area, PwC expects to increase the level of transparency over key aspects of quality performance, including publishing annually an enhanced audit quality report that provides additional key performance indicators and new conflicts of interest reporting.
"Today, we have an annual audit quality report, with transparency data points included in it," said Bricker. "We will continue to expand and enhance that information as we continue to incorporate data and material data elements into our delivery of quality audit services, and the monitoring of the quality of our audit services."
He distinguished that from the kinds of audit reports that PwC provides for specific clients. "This is transparency reporting of the firm," said Bricker. "We will have additional key performance indicators and new conflicts-of-interest reporting to deal with our approach to identifying and resolving and then reporting on potential conflicts of interest involving our firm."
In the engagement area, PwC plans a series of initiatives to enhance engagement across its key stakeholders, including potential talent, audit committees and investors.
Investing in future talent
"That includes investing a million hours to teach and expand the interest in the profession in high schools, colleges and universities," said Bricker. "That's really important, as we see across the profession a decline in talent. We want to do our part in continuing to build talent across the profession, but we also want to do our part in building capacity and the effectiveness of boards and audit committees, and building the capacity across investors to understand the assurances that we're providing, and to get feedback from investors, audit committees and talent about how they're experiencing our firm, our offerings and our purpose. It's a two-way dialogue that will make us better."
Some of these efforts were already underway, but PwC will be expanding them in the years ahead.
"The level and scale is new," said Bricker. "We have a rich history of engaging with investors, audit committees and future talent. This takes it to the next level where we're engaging and taking feedback in a much more dynamic way as we build capacity across boards and audit committees as we help inform investors on how they use assured information, and then also take feedback from them about what's working and what's not, and a path forward so the engagement is at a level of leadership across the profession to be relevant and continue to earn the trust that's placed in our brand."
So far, the reactions at the firm to the new initiatives have been mostly favorable.
"We've been enjoying a very positive reaction to being a first mover," said Bricker. "There's a lot of excitement about where we're going in that this is the next step in our quality journey. It's a commitment to quality that we will never waver from. There's a lot of excitement across our firm around bringing our purpose of building trust in society and solving important problems to these issues, and these 12 voluntary actions that help us lead."
