PCAOB Slaps PricewaterhouseCoopers with $1 Million Fine

Chris Gaetano
Published Date:
Aug 4, 2017

The Public Company Accounting Oversight Board (PCAOB) announced that it has imposed a $1 million penalty against PricewaterhouseCoopers over issues in its audit of Merrill Lynch's compliance with SEC rules. Specifically, PwC was auditing Merrill Lynch's compliance with the Customer Protection Rule, which requires a broker-dealer to hold certain customer securities in lien-free segregated accounts to protect them from creditor claims should the broker's business fail. Merrill Lynch reported that it had complied with the rule in fiscal year 2014 and that its internal control over compliance with the rule was effective. 

The PCAOB said that PwC's audit and examination reports were issued without obtaining sufficient evidence about Merrill Lynch's compliance assertions, especially considering that, two years later, the SEC found that the firm had been holding tens of billions of its customers' fully paid and excess margin securities in accounts that were subject to liens by third parties. This was a violation of the Customer Protection Rule that Merrill Lynch said it was obeying. 

The board's report said that PwC understood that Merrill Lynch maintained billions of dollars in customer securities in accounts at various third party institutions, and had designated all of these accounts as "good control locations" that were compliant with the Customer Protection Rule requirements that such securities were either in Merrill Lynch's possession or control if held at a third party institution. However, the board faulted PwC for failing to gain an understanding of exactly what criteria Merrill Lynch was using to determine that these were "good control locations." In particular, it failed to account for whether or not Merrill Lynch considered how the "no lien" provision of the Customer Protection Rule played into its determination. Further, the PCAOB said PwC did not obtain any evidence that Merrill Lynch actually reviewed and validated account documents of good control locations in accordance with SEC regulations, though the PCAOB said there were clear red flags indicating there was something wrong happening. 

Further, the PCAOB said that Merrill Lynch's supplemental information said that, with respect to customers' fully paid and excess margin securities that it held in
accounts at U.S. Banks and foreign depositories, Merrill had issued instructions (whether through custodial agreements or otherwise) to maintain the securities in compliance with the "no-lien" requirement. While PwC opined in its audit report that this was fairly stated in relation to Merrill Lynch's financial statements as a whole, it actually had not obtained sufficient audit evidence to support this opinion. The PCAOB said that the only procedures PwC performed relating to compliance with the "no-lien" requirement was the aforementioned faulty control testing. 

"Investors should not have to worry that their brokers' auditors are failing to perform appropriate work in examining the safeguards around their funds," said Claudius B. Modesti, Director of PCAOB Enforcement and Investigations. "Today's order demonstrates the enforcement division's commitment to using its authority to police and sanction those who place investors at risk."

PwC consented to the Board's order without admitting or denying the findings in the order. A spokesperson with PwC later contacted the Trusted Professional with the following statement: 

“We are pleased to have resolved the matter. Delivering quality is our top priority.”

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