oversight

Public Company Accounting Oversight Board Criticisms of Public Accounting Firms that do Business with GSEs

Published by the Federal Housing Finance Agency, Office of Inspector General on 2013-05-03.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                           OFFICE OF INSPECTOR GENERAL
                                       Federal Housing Finance Agency

                               400 7th Street, S.W., Washington DC 20024

BATE:                May 3, 2013

TO:                  Edward J. DeMarco, Director (Acting)

FROM:                Steve A. Linick, Inspector General

SUBJECT:             Public Company Accounting Oversight Board Criticisms of Public
                     Accounting Firms that Do Business with the GSEs


I am bringing to your attention the fact that the federal regulatory organization responsible for
oversight of firms conducting audits of public companies in the United States has been publicly
critical of past audit work conducted by public accounting firms engaged to perform audits of the
housing Government-Sponsored Enterprises (GSE5).

The Public Company Accounting Oversight Board (PCAOB or the Board) is a nonprofit
corporation established by Congress, pursuant to the Sarbanes-Oxley Act of 2002 (the Act), to
oversee the audits of public companies in order to protect investors and the public interest by
promoting informative, accurate, and independent audit reports. The Securities and Exchange
Commission (SEC) has oversight authority of the Board, including the approval of the Board’s
rules, standards, and budget.

The Board inspects selected audit work of registered public accounting firms to assess
compliance with the Act, the rules of SEC and the Board, and professional standards. The Board
is required to conduct those inspections annually for firms that regularly provide audit reports for
more than 100 public companies, and at least triennially for firms that regularly provide audit
reports for 100 or fewer public companies.

        PCAOB Guidance Issued on Public Disclosures

On August 26, 2004, the PCAOB issued as a release (No. 104-2004-001) a statement concerning
the issuance of inspection reports.’ The release provided information concerning the inspection
report process and the public availability of information in the reports. The statement explains
that “[i]n the context of an inspection report, the Board generally will maintain as nonpublic any
otherwise nonpublic information that the Board obtained concerning the firm or its clients
(except where disclosure is incident to disclosure of a quality control defect that the firm has not
addressed to the Board’s satisfaction).” In addition, the release explains that if a violation of
law, Board rules, SEC rules, or professional standards is established, that information will

‘Available at http://pcaobus.org/Inspections/Documents/Statement Concerning Inspection Reports.pdf.
become public through the appropriate disciplinary and enforcement processes. Nonpublic
content includes a discussion of potential defects in an audit firm’s system of quality control.
Such quality control criticisms remain nonpublic if the firm satisfactorily addresses them within
12 months of the report date.

           PCA OB Guidance Issuedfor Audit Committees

In August 2012, the PCAOB released a memorandum entitled “Information for Audit
Committees About the PCAOB Inspection Process.” The memorandum explains that the
PCAOB cannot disclose to the audit committee the nonpublic portion of an inspection report or
other nonpublic inspection information including whether the inspection identified deficiencies
                                                —




in the audit that the audit committee oversees. Furthermore, the PCAOB cannot require an audit
firm to disclose such information to an audit committee. However, the memorandum states that
audit committees might wish to review PCAOB inspection reports with their audit firm and
discuss the results with the firm. The memorandum contains sample questions that an audit
committee might ask their audit firms after a PCAOB inspection.

           Board Criticisms Made Public

The Board has publicly released adverse information concerning public accounting firms that are
used by the housing GSEs. For example, on October 17, 2011, the Board publicly disclosed
audit deficiencies identified at Deloitte & Touche LLP (D&T) during its 2007 inspection of that
firm. D&T is a public accounting firm that conducts the annual financial statement audits of
Fannie Mae.

On March 7, 2013, the Board publicly released adverse information from inspection reports of
PricewaterhouseCoopers (PwC), the public accounting firm that conducts the annual financial
statement audits of Freddie Mac and all 12 Federal Home Loan Banks. Specifically, the Board
made public certain criticisms of PwC for audit years 2008 and 2009 because PwC had not
satisfied the Board’s concerns within the 12-month remediation periods.
                                                               2 The Board’s
unresolved concerns with regard to PwC’s audit work included the areas of:

      •    Professional skepticism and due care
      •    Supervision and review
      •    Reliance on controls
      •    Use of the work of others
      •    Estimates and fair value measurements




2
    PCAOB’s public reports can be found at http://pcaobus.orJInspections/Pages/default.aspx.

                                                          2
       OIG Concerns

The GSEs regularly do business with public accounting firms subject to PCAOB oversight and
inspection. It is my understanding that GSE audits were not part of the deficiencies identified by
the Board at D&T and PwC. Nevertheless, my office met with FHFA’s Chief Accountant on
March 14, 2013, to discuss the PwC matter. The Chief Accountant appeared to be aware of the
issue and has been in communication with affected parties, including the GSEs. He expressed
confidence that awareness of the issue is high among the GSE audit committees. Additionally,
the Chief Accountant and FHFA examiners meet regularly with public accounting firms to
discuss various audit issues, and have reportedly discussed the results of the PCAOB inspections
at length.

While FHFA’s awareness and monitoring of the PwC matter is notable, we recommend that
FHFA request that Fannie Mae, Freddie Mac, and each FHLBank provide FHFA with
confirmation that their audit committees and management are providing elevated attention to
audit quality at D&T and PwC and the specific steps being taken.

Looking forward, such information may prove useful for supervisory purposes and, in the case of
Fannie Mae and Freddie Mac, conservatorship oversight.

Please let me or Russell Rau, Deputy Inspector General for Audits, know if you would like to
further discuss this matter.



cc:    Jon Greenlee, Deputy Director, Division of Enterprise Regulation
       Fred Graham, Deputy Director, Division of Federal Home Loan Bank Regulation
       Nina Nichols, Deputy Director, Division of Supervision Policy and Support
       Jeffrey Spohn, Deputy Director, Office of Conservatorship Operations




                                                3