PwC to Relinquish Millions in Consulting Work for US Audit Clients to Mitigate Conflicts of Interest

Accounting giant PricewaterhouseCoopers (PwC) is set to forgo tens of millions of dollars in consulting work provided to its US audit clients in a bid to minimize potential conflicts of interest, a move that challenges its fellow Big Four firms to follow suit. This decision comes as part of a broader overhaul of PwC's audit practices, responding to global concerns about maintaining independence between auditing firms and the companies they audit, especially in the wake of corporate scandals such as the collapse of Carillion in the UK.

PwC has begun informing its clients that it will cease offering specific advisory services, even though such services are permitted under US regulations. This strategic shift aims to address growing apprehensions among clients, whose stakeholders are increasingly vigilant about potential conflicts of interest. It also seeks to bolster the reputation of an industry struggling to attract young talent.

Additionally, PwC's US leadership has approved a series of reforms, including the introduction of clawback provisions in executive compensation and enhanced disclosures about the firm's conflict of interest management. These measures are intended to align with evolving industry standards and expectations.

PwC had initially explored the possibility of coordinated action by the major accounting firms through an industry group called the Center for Audit Quality but did not garner broad support for its initiatives. Tim Ryan, Senior Partner of PwC US, noted, "We have really good competitors but what they do is up to them."

In the United States, the Sarbanes-Oxley Act, enacted in 2002 following the Enron scandal, significantly restricted the range of consulting services that accounting firms could provide to their audit clients. However, US rules still permit a broader array of non-audit services than regulations in other regions, particularly Europe.

PwC's decision will result in the forfeiture of approximately $100 million in annual fee income, affecting services such as assessing non-financial systems and offering strategic advice to clients. Although PwC's non-audit work makes up a smaller share of its fees from US audit clients compared to Deloitte and EY, the move underscores the firm's commitment to preserving independence and avoiding any perception of undue proximity to clients.

The decision primarily impacts miscellaneous consulting services and will not extend to tax-related work. It may affect PwC's consulting revenues outside the United States if local member firms serve overseas subsidiaries of US audit clients. The transition is set to be completed by 2025.

The unveiling of these reforms was delayed until now due to a scandal in Australia involving PwC partners who were found to have misused confidential information about the government's tax plans.

These twelve new policies, set to be implemented over the next three years, are expected to be adopted by PwC member firms worldwide. Among the initial measures will be the introduction of pay clawback provisions for the seven members of PwC US's leadership team, triggered in cases of ethical breaches or firm-wide failures.

Furthermore, PwC US will introduce enhanced audit procedures in the coming year to better detect fraud and broaden the factors considered when assessing a client's risk of bankruptcy. Additionally, the firm plans to expand the audit report accompanying its US clients' annual reports, aligning it with the UK model, which requires additional disclosures regarding contentious audit issues. This change will be implemented from 2025.

By fLEXI tEAM