Pwc our-focus-on-audit-quality

Our focus on audit quality
October 2012

Contents

A message from senior leadership

1

Executive summary

3

Audit quality principles and practices

7

Promoting audit quality

11

Tone at the top

11

Accountability 12
Independence, integrity, and objectivity

12

Methodology, tools, and processes

14

Chief Auditor Network

16

Human capital strategies

17

Learning and development

18

Growth and profitability strategies

20

Global network

22

Assessing audit quality

25

Internal inspections of our audit practice

25

External inspections of our audit practice

29

Additional audit quality indicators

31

Contributing to audit quality in the marketplace

33

Professional and regulatory

33

Audit committees

34

Investing community

35

Academia 35
Our commitments

37

Transparency report

39

To capital market stakeholders

Accurate and reliable financial information is essential to investor
confidence and the effective functioning of the capital markets. The
US firm of PwC plays an important role in promoting the reliability of
financial information through the performance of high-quality audits.
Our reputation as a leader in the auditing profession is built on our rich
history of providing quality audits for the benefit of the capital markets.

This year marks the tenth anniversary
of the Sarbanes-Oxley Act, which
ushered in a new era of increased
accountability of those in the financial
reporting system. Over that ten-year
period, audit quality and the quality
of financial reporting have significantly improved. We are proud to have
contributed to these improvements.
But, while much has been accomplished, there is still more to do.
We are one of the world’s largest audit
firms and a leader in the auditing
profession. Being a leader comes with
responsibility. In particular, we must
be at the forefront of the profession in
performing high-quality audits. This
means we must continually raise our
audit quality and expect that regulators
and investors will challenge us to do
the same.
During our fiscal year ended June 30,
2011, we made a number of strategic
decisions and took actions to enhance
our ability to consistently perform
high-quality audits. We described those
in our 2011 report, Our focus on audit
quality. During our fiscal year ended
June 30, 2012, we continued to take
actions toward achieving our audit
quality objectives. We are pleased to
provide you with our 2012 report, in
which we describe those actions.

Our actions included increasing by
more than 40% the number of partners and other professionals in our
Assurance Quality and Transformation
Organization to provide more support
for our audit teams. We also delivered
learning and development programs
that reinforce the importance of
exercising objectivity and professional
skepticism. And, we further enhanced
our audit processes to improve the effectiveness and efficiency of our audits.
Our focus on audit quality extends
beyond US borders. We’ve increased
our commitment to regularly work
with other members of the PwC global
network of firms to share our expertise
on US accounting, auditing, and regulatory requirements. Together we achieve
effective and timely resolution of US
financial reporting issues and meet the
needs of the US capital markets.

our culture, and vigilance to
monitor our performance and seek
improvements.
Through clear leadership messages
and our individual actions, we
continually reinforce for our people
that quality is our highest priority.
We are committed to maintaining
our leading role in promoting further
improvements in auditing and financial
reporting and delivering the highestquality audits in the profession.
We are proud of our partners and
other professionals, who deliver on
our commitment to audit quality and
continuously strive to improve quality
in every audit we perform.

Bob Moritz
US Senior Partner

Tim Ryan
US Assurance Leader

Today’s audits benefit greatly from
the use of technology, but an audit
is still an inherently human process
that requires many judgments. Thus,
although our report describes a
number of technology-based quality
improvements, we cannot lose sight
of the importance of the human
element, of its strengths and its
weaknesses. It means that we need
rigor in our processes, discipline in


1

We embrace our role in
the global capital markets
and we are committed to
performing high-quality
audits on a sustained basis.

2

Executive summary

PwC has long provided audit and assurance services, which enhance
the reliability of financial information. For generations, audit quality
has been a priority of PwC audit professionals from their first day of
employment because, quite simply, our reputation for quality defines
our brand and our culture. Our stakeholders expect us to meet everevolving challenges by continually improving what we do to consistently
perform high-quality audits.

During our fiscal year ended June 30,
2012, we continued to make improvements designed to support our commitment to audit quality. We identified
the improvements based on feedback
obtained from our professionals, our
stakeholder outreach activities, and
post-completion inspections of selected
audit engagements. The improvements
also help us respond to the changing
expectations of investors and regulators
regarding the audit.

We’ve continued to reinforce
our tone at the top.
We believe our tone at the top has
consistently conveyed high expectations about our top priority—audit
quality. Firm leaders devoted even
more attention to audit quality in
fiscal year 2012, allocating more time
to understand, evaluate, and implement actions to support achievement
of our audit quality objectives. And,
we’ve appointed a partner whose
primary responsibility is to promote
our audit quality message with our
people and enhance their understanding of the importance of our
audits to the capital markets.

We’ve continued to stress
accountability for quality.
We hold firm leadership and our audit
partners accountable in their roles for
promoting audit quality throughout
the firm. We re-emphasized this with
our audit partners as they set their
performance goals for fiscal year 2013,
and highlighted that audit quality
is the top priority relative to other
objectives, including revenue growth.
To further enhance accountability,
in fiscal year 2012 we provided
all of our assurance leaders with
updated comprehensive guidelines
re-emphasizing who within leadership
is responsible in their roles for various
activities that drive audit quality.

We’ve grown our Quality
Organization.
In fiscal year 2011, we initiated a
substantial investment to expand
our audit support and inspections
network through the establishment
of a broader Assurance Quality
and Transformation Organization
(“Quality Organization”). During

fiscal year 2012, we increased by
more than 40% the number of partners and other professionals in this
organization.
One of the groups within the Quality
Organization is our Chief Auditor
Network. We have now nearly tripled
the total amount of time partners
in our Chief Auditor Network have
committed to spend on activities to
support audit teams. These activities include helping our teams design
effective and efficient audit procedures. They also include reviewing
specific elements of audit plans for
selected engagements and recommending additional or different
procedures to be performed prior to
completion of our audits.
We also significantly expanded our
inspections group. This group inspects
selected audit engagements after they
are completed to assess whether our
audit quality objectives have been
achieved and identify areas where we
should focus our improvement efforts.

We’ve further enhanced our
audit processes.
In addition to adding more resources
to our Quality Organization, we’ve
enhanced our audit processes,
starting with the partner assignment
process. We’re placing greater focus
on assigning roles to partners that
best align with their capacity, tenure,
capability, and industry experience.
We believe this will facilitate partners’
performance of high-quality audits.


3

We’ve also leveraged technology
to enhance our audit methodology
and improve the effectiveness and
efficiency of our audits. We provided
additional guidance in certain areas,
such as the highly judgmental area of
how much audit evidence we should
obtain when testing on a sample basis.
And, we developed additional tools
to help audit teams document audit
evidence and demonstrate compliance with auditing standards.

We’re continually enhancing
our learning and development
programs.
We’ve increased our focus on communicating, throughout the firm, the
importance of our role in the capital
markets and the individual behaviors and practices that we believe are
necessary to perform a high-quality
audit. By doing so, we consistently
reinforce for our audit professionals
that they are personally responsible for
achieving our audit quality objectives.
We’ve also invested in enhanced
learning and development programs,
increasing our assurance training
expenditures for fiscal year 2012
by over 50% as compared to the
prior year. And, we expanded the
use of post-course tests, which must
be completed by attendees of our
required technical courses. This helps
to reinforce the concepts covered in
the course, helps our professionals
to focus on areas requiring improvement, and assists us in identifying
where course modifications or other
training may be needed.

4

We’re expanding how we
monitor audit quality and learn
from our shortcomings.
Inspections of completed audits are
an important part of our audit quality
monitoring efforts. We use the results,
along with other information, to assess
where additional guidance, training,
modifications to our audit methodology,
or targeted messaging from leadership
are needed.
We believe, however, that there are
other measures of audit quality.
Accordingly, we encouraged the
Center for Audit Quality, an autonomous, nonprofit group dedicated to
enhancing investor confidence by
fostering high-quality performance by
public company auditors, to develop
additional audit quality indicators.
We are working with members of the
Center for Audit Quality to develop
those indicators.
We evaluate the potential causes of
instances where we may not have
consistently achieved our audit
quality objectives. Learning from such
instances is an important part of our
audit quality improvement efforts.
We’re exploring ways to deepen our
understanding of the potential causes of
such instances and the actions that we
might take. This will help us to further
improve the design and implementation
of our audit quality enhancements.

We’re engaged in the broader
dialogue on audit quality.
As a leader in the profession, we’re
focused not only on our own audit

quality objectives, but on how we can
help enhance the broader financial
reporting system. We continue to
engage in ongoing discussions about
how best to achieve that result. This
includes ongoing outreach and communications with audit committees and
the investing community, as well as
publicly issuing materials that set out
our point of view and contribute to
these important discussions.

We’re responding to the desire
for more transparency.
In the past few years, capital market
participants have been seeking more
transparency from audit firms, looking
for insight into a firm’s management
and operations. In response, we have
included our 2012 Transparency
Report at the end of this report.
Our Transparency Report, which
provides information that meets the
requirements of Article 45(5)(e) of the
European Union’s (“EU”) Directive on
Statutory Audit 2006/43/EC, describes
our internal quality control systems,
our legal and governance structures,
certain financial information about the
firm, and other topics prescribed by
the EU. The information it contains also
is generally consistent with the information that the Center for Audit Quality
recommends be included in an audit
firm’s transparency report.
In this report, we hope you will see that
we’ve embraced our important role in
the global capital markets and that we
are committed to performing highquality audits now and in the future.

Performing a high-quality audit
means being objective and skeptical,
and taking personal responsibility
for quality.

6

Audit quality principles and practices

PwC’s brand has been built on a reputation for performing high-quality
audits. At PwC, quality is—and always will be—our top priority.
It’s how we bring value to the capital markets—by providing assurance
that enhances user confidence in the financial statements that are
accompanied by our audit reports.

There are many different views
on what constitutes audit quality.
Although audit quality is difficult to
define, in our view the principles of
audit quality require us to (i) comply
with accounting, auditing, and
regulatory requirements, (ii) have a
deep and broad understanding of the
companies we audit and the business
environments in which they operate,
(iii) use our expertise to identify and
resolve issues early, and (iv) exercise
objectivity and professional skepticism
when performing our audits.
To reinforce these principles for our
audit professionals in their daily
activities, we issued guidance that more
directly links the principles to the individual practices we believe are necessary
to perform a high-quality audit. The
practices include asking tough questions, staying current on professional
standards, applying an objective and
skeptical mindset, and taking personal
responsibility for quality.

Core behaviors
Our individual practices are supplemented by our firm’s four core behaviors—investing in relationships, sharing
and collaborating, putting ourselves in
others’ shoes, and enhancing value—
which form the basis of our culture
and guide our people in delivering
high-quality audits.

For example, by investing in relationships we develop mutual respect with
members of audit committees and key
members of management. This helps
us to gather relevant facts, consider
different perspectives, understand
the companies we audit, apply critical
thinking, make balanced independent
judgments, and “call it like we see it.”
Thus, by investing in relationships, we
are better able to challenge management’s judgments and accounting
conclusions.
Given the increasing number of
instances where financial reporting
requires management to make significant judgments, it has become more
important than ever for us to challenge those judgments. For example,
we objectively assess the assumptions
management makes in estimating the
fair values of financial instruments and
tangible and intangible assets. And,
we make candid observations about
matters affecting financial reporting,
such as a company’s internal control
processes. These difficult conversations have always been a critical part
of our role as auditors and are facilitated by having strong professional
relationships.
A culture of sharing and collaborating
means that our people understand
the importance of bringing the proper
expertise to bear on complex issues.


7

Leveraging that expertise allows us to
better understand complex transactions, assess the appropriate accounting
treatment, and identify areas where we
need to be particularly skeptical.
This includes, for example, leveraging
the skills and knowledge of our tax and
valuation specialists when auditing
complex management estimates.
Our specialists help our audit teams
determine when to challenge management’s judgments. Thus, their advice
helps to inform our conversations with
management and audit committees on
highly judgmental matters.
We also listen to and understand
others’ perspectives by putting
ourselves in others’ shoes. When we
understand a company’s business and
the perspectives of management, we
can design and conduct effective and
efficient audits that better serve the
capital markets.
Putting ourselves in others’ shoes
also allows us to more effectively
communicate with audit committees
and management. These communications involve, in many cases, raising
questions about management’s
accounting conclusions and presenting
our objective point of view. Robust
conversations with audit committees
and management about accounting
and financial reporting matters
contribute to the quality of a
company’s financial information.
We believe quality is foundational
to enhancing value. Our audits have
value to the capital markets because
we perform them with an independent
mindset. We also have the courage to

8

ask difficult questions, raise sensitive
audit issues, challenge questionable
accounting or disclosures, and voice
concerns.
Investors and other stakeholders do
not see these “behind the scenes”
actions. It is through those actions
that we defend and stand firm in our
conclusions and improve financial
reporting, thus enhancing the value
of financial information for the
capital markets.
The understanding we gain of a
company’s business through our audits
also enables us to identify issues that
are important to audit committees
and management. This facilitates our
ability to bring value by providing
recommendations that can improve
operations, controls, and other aspects
of the business.

Decision-making philosophy
Our core behaviors also facilitate
our decision-making philosophy
for resolving accounting, auditing,
and financial reporting issues. For
example, when assessing a proposed
accounting treatment, we first seek
to understand the transaction and
the different perspectives on the
accounting. The exercise of integrity,
objectivity, and professional skepticism enhances our ability to perform
this assessment effectively.
We focus on whether the company’s
accounting is appropriately supported
and the economics of the transaction are transparently reflected after
considering the associated disclosures. We will accept an accounting

treatment only if those conditions are
met. If management decides to use
a treatment that we find acceptable
but not preferable, we discuss our
point of view with management and
the audit committee.
As part of our collaborative culture,
the audit partner is expected to
leverage the full quality support
network of the firm when difficult
accounting, auditing, and financial
reporting matters arise. This includes
our National office, Chief Auditor

Network, risk management partners, the engagement quality review
partner, and partners who lead the
audit practices in our market and
industry groups. Thus, in reaching
conclusions, especially on some of
the most difficult aspects of an audit,
the audit partner and the firm will
have an opportunity to align their
views. Whether the matter involves
an accounting, auditing, or financial
reporting issue, this alignment occurs
before decisions are conveyed to the
audit committee and management.


9

Clear messages from firm
leadership motivate individual
behavior and drive audit quality.

10

Promoting audit quality

Performing high-quality audits requires a strong foundation that
promotes audit quality. We continue to make significant investments
in one of the key elements of our foundation—our quality control
system. We continuously seek to identify and anticipate where
improvements are needed to achieve sustained audit quality.

The elements of our audit quality foundation, and the actions we have taken
and continue to take to promote audit
quality, are described below. Over the
next year, we will continue to build on
our audit quality foundation and make
additional investments where needed.

individual behavior and drive audit
quality. Leadership’s philosophy and
messages about quality, their decisions
to invest in enhancements that drive
quality, and their personal accountability in their roles for quality foster a
culture of quality throughout the firm.

Tone at the top
Audit quality begins with our firm’s
tone at the top. Clear messages and
actions from firm leadership combine
with policies and programs to motivate

Firm leadership regularly conveys its
high expectations about audit quality
to our partners and other professionals.
During fiscal year 2012, firm leaders
devoted even more of their time to
promoting audit quality in a variety of

ways. For example, they continually
emphasized the importance of quality
in periodic emails, webcasts, town-hall
meetings, and various learning and
development programs. They engaged
in rich dialogues with our people about
audit quality—sharing stories of their
personal audit experiences and those
of other audit teams, recognizing what
we do well, and emphasizing where we
need to improve. These activities help
keep audit quality top of mind for our
partners and other professionals.
Leadership also regularly discusses
with a standing committee of the firm’s
governing board1 matters of strategic
importance to audit quality. The
standing committee is charged with
overseeing certain aspects of the firm’s
audit practice, including monitoring
the development and evaluation of
appropriate policies and procedures
that promote consistent performance
of high-quality audits.

Quality Organization staff levels
FY2010

FY2011

FY2012

283

In fiscal year 2012, we added significant resources to our

331

476

Quality Organization, which is a key component of our
foundation that promotes audit quality. The Quality
Organization includes our National office (audit, accounting,
and financial reporting experts, and our audit methodology
and risk management groups), Chief Auditor Network,

1 The firm’s governing board is the Board of
Partners and Principals and the standing
committee is the Accounting & Audit Practice
committee. Refer to the accompanying
Transparency Report for more information.

assurance learning and development team, regulatory
relations group, and internal inspections group.


11

To be effective, the tone at the top and
messages from leadership about quality
must be consistently communicated to
and understood by our people. We have
appointed a partner to assist in driving
our culture of quality, identifying
additional ways to promote greater
audit quality throughout the practice,
and promoting a greater understanding
by our professionals of the importance
of our audits to the capital markets.
We annually survey our people to
obtain feedback on how they view PwC
as a place to work. In fiscal year 2012,
the people in our assurance practice
rated the “quality service” category the

We continue to emphasize
to our audit partners the
primary importance that
should be placed on audit
quality relative to other
objectives, including
revenue growth. In fiscal
year 2012, we moderated
the growth goals for our
audit practice to increase
the focus on audit quality
as our top priority.

highest. Specifically, 94% of respondents strongly agreed or agreed with
the statement “PwC leadership is
committed to providing high-quality

12

services to external clients.” This
result helps validate that messages
from leadership about quality are
understood by our people.

Accountability
Personal accountability for quality is
an important component of how we
promote audit quality throughout
the firm. All levels of firm leadership,
along with all of our partners involved
in the audit process, have important
roles in achieving audit quality and
are held accountable for the performance of their roles. We also assess
contributions to audit quality by other
audit professionals when evaluating
their performance annually.
In fiscal year 2012, we provided all
levels of assurance leadership with
updated, comprehensive guidance
re-emphasizing who within leadership
is responsible for various activities that
affect audit quality. The guidance reinforces that our leaders are accountable
in their roles for the achievement of
consistent audit quality throughout the
segment of the assurance practice that
they lead. The guidance also provides
recommendations to help assurance
leaders in performing their roles.
For example, our market and industry
group assurance leaders’ roles include
implementing and monitoring our audit
quality initiatives and overseeing our
system of quality control. They also
include recognizing and rewarding our
people for audit quality.
In fiscal year 2012, we enhanced
the process for reviewing and monitoring partner assignments within
our market and industry groups. The

enhanced review process facilitates
a greater focus on assigning roles to
partners that best align with their
capacity to perform a quality audit,
including having sufficient time to
effectively review the audit work
and supervise the engagement. It
also places greater focus on a partner’s tenure, capability, and industry
experience. The enhanced monitoring
process focuses on determining that
partners whose responsibilities change
continue to have the capacity to
The achievement of our quality goals,
and lapses in quality, are carefully
considered in determining partner
compensation. Our partners understand this. But to emphasize that
audit quality is our top priority, we
took two actions before our partners
developed their performance goals
for fiscal year 2013. We highlighted
the primary importance that should be
placed on audit quality relative to other
objectives, including revenue growth.
And, all audit partners were required
to participate in a planning session that
reinforced our quality expectations.

Independence, integrity,
and objectivity
A critical underpinning of our audit
quality foundation is our commitment
to independence. Being independent
enables us to arrive at and express
accounting and audit conclusions
without being affected by influences
that could compromise our professional
judgment. It facilitates our acting with
integrity and objectivity, and exercising
professional skepticism, all of which are
critical to making the sound judgments
required in an audit.

We take great care to evaluate all
professional services to be provided
to companies we audit for compliance
with applicable independence requirements. Once we determine that the
services are permissible under those
requirements, we seek preapproval of
those services from audit committees
as required by law. We also focus our
compliance efforts on other matters
that have independence implications,
such as joint business relationships and
procurement of goods and services by
the firm.

During fiscal year 2012, there were over 22,000
independence inquiries and consultations, an increase
of 9% over the prior year.

Applying professional skepticism
requires a combination of technical
skill, to recognize when additional
evidence is needed to reach a conclusion, and strength of character, to
ask the difficult questions that are
necessary during an audit. All team
members, from a new associate to an
experienced partner, must maintain
their professional skepticism in each
audit test they perform.
At PwC, our culture promotes a
questioning mindset. Importantly, it
encourages all of our professionals
to take the time during the audit to
exercise professional skepticism as
they evaluate various audit issues.
We support our professionals in asking
the right questions, independently
thinking through issues and arriving
at conclusions, and standing firm in
the name of audit quality. Through our

communications, training programs,
and messaging from leadership, we
reinforce our commitment to integrity,
objectivity, and professional skepticism, and enable our people to deepen
their understanding of what it means
to be an auditor.
Our independence training programs
reinforce the importance of being independent in fact and in appearance, and
combine instruction on the relevant
literature with practical examples.
We provide our people with written
independence policies and procedures,
along with various technology-based
tools to support them in maintaining
their independence. Our professionals
also have access to dedicated independence subject matter experts to help
navigate personal and engagementrelated independence matters.

When they join the firm, and at least
annually thereafter, all partners and
employees are required to confirm
their compliance with all aspects of the
firm’s independence policy. In addition,
all partners confirm that the business
relationships they are responsible
for are in compliance with the firm’s
independence policy and that the
firm’s processes have been followed in
accepting these relationships. These
confirmations serve two primary
purposes: to identify, and then address,
any threats to independence that may
have arisen, and to provide a periodic
reminder of the firm’s independence
policies and procedures.
Each partner’s compliance with the
personal independence requirements
is generally audited every four years,
while partners who comprise firm
leadership are audited every two
years. Other employees are subject
to audit periodically. We performed
over 1,000 personal independence
audits during fiscal year 2012, a 10%
increase over the prior year.
In compliance with SEC and PCAOB
requirements, lead audit partners and
quality review partners on each public

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company we audit rotate every five
years. Certain other partners rotate
every seven years. We also have our
own internal rotation requirements
for partners and managers on nonpublic company audits. Partner rotations provide an appropriate balance
between maintaining our knowledge
of the companies we audit and periodically bringing a “fresh look” and
different perspective to the audit.

Methodology, tools, and
processes
The identification and evaluation
of audit risks is a central feature of
our audit methodology. Under our
approach, we seek insights into the
business, the risks inherent in that
business, and the related financial
reporting and audit risks. The audit
team then plans an effective audit
approach by identifying the procedures that are necessary for us
to gain sufficient audit evidence to
reach appropriate conclusions.
To audit effectively in a changing
environment, we enhance our audit
methodology, tools, and processes on
an ongoing basis. This includes taking
advantage of new technologies that
can improve both the effectiveness
and efficiency of our audits. During
fiscal year 2012, we made such
enhancements based on input from
our audit teams, inspection results,
and the results of other quality-related
activities. We also added experienced
auditors to our audit methodology
group to further contribute to these
ongoing improvements.
As part of our improvement efforts, we
provided additional, specific guidance
through a series of communications,
14

including “how to” guides designed to
assist audit teams in addressing certain
highly judgmental aspects of an
audit. This guidance addresses topics
such as the amount of audit evidence
we should obtain when testing on a
sample basis and the evaluation of
key assumptions used in developing
accounting estimates (including fair
value measurements for investments,
business combinations, and impairment of indefinite-lived intangible
assets). The guidance also covers
enhanced supervision and review
techniques, such as how to guide
others in approaching, addressing,
and resolving matters with appropriate
professional skepticism when contrary
audit evidence is identified.
Other areas where we have enhanced
our guidance include substantive
analytics, multi-location scoping,
testing of investments, application
of risk assessment standards, evaluation of likely sources of misstatements, and using the work of others. In

coordination with industry group assurance leaders, we have also developed
more industry-specific examples and
guidelines to help our teams translate
our audit methodology into effective
and efficient audit steps that incorporate common audit risks and business
issues found in certain industries.
We issued our enhanced guidance by
June 2012 so that teams can leverage
it when planning their 2012 audit
engagements. We also set clear timing
goals for early completion of audit
planning activities and we’ve added
additional training on techniques to
better manage the steps in an audit
engagement. By completing audit
planning early in the audit cycle, our
teams can identify issues earlier. This
provides more time to execute our
audits and perform effective review
and supervision.
In addition to enhancing our guidance,
we’ve been refining the audit tools
we use. Some of these are related to

the audit of management’s significant
estimates and judgments, such as
those involving investment fair values.
Recently implemented automated tools
help audit teams to more efficiently
audit investment securities.
We also developed standardized
processes to help our audit teams
perform certain audit procedures
earlier in the audit cycle, which
translates into more time to resolve
audit issues. Some of our standardized processes help our teams to more
effectively coordinate with valuation
specialists, execute audit procedures,
and document the audit evidence they
obtain in a more consistent manner.
Our efforts in fiscal year 2012
also focused on standardizing the
processes, tools, and templates
we use to understand a company’s

business and identify potential
sources of financial statement
misstatement. Our processes, tools,
and templates assist audit teams in
evaluating the design and effectiveness of associated internal controls
and linking that evaluation to our
planned audit procedures.
Two elements of our audit processes
are Aura, our audit software, and our
Global Assurance Delivery Model.
Both elements are designed to facilitate improved consistency in executing
our audits. Aura is used by over 70,000
professionals in the PwC network2
of firms and represents a significant
investment by the PwC network. Aura
facilitates the analysis and evaluation
of audit risks specific to each company
we audit, which we build into our audit
strategy to develop an effective riskbased audit approach.

Our Global Assurance Delivery Model
allows certain routine audit activities to
be performed by audit team members
who are located in one of three centralized service centers, two of which
are outside of the United States. This
enables us to improve the quality and
consistency of our performance of these
procedures because they are conducted
by individuals who focus on those
specific aspects of our audits. It also
provides our locally based audit teams
with additional time to focus on the
non-routine aspects of our audits. We
believe this provides a better developmental experience for our people.
To standardize the execution of our
audits and achieve greater audit
quality in specialized areas, the firm
has subject matter experts who assist
audit teams in considering key matters
that may arise in an audit, such as

Service center hours
FY2011

FY2012

520,000

720,000

By transferring certain audit activities to
FY2013 Projected

1,000,000

our service centers, our locally based audit
teams have additional time to focus on the
non-routine aspects of our audits.

2 The “PwC network” refers collectively to those firms that are members in
PricewaterhouseCoopers International Limited (“PwCIL”). Each member firm is a
separate legal entity and does not act as agent of PwCIL or any other member firm.


15

when auditing the valuation of financial instruments. We also have subject
matter experts who are dedicated to
auditing employee benefit plans.

Our Chief Auditor Network provides
valuable locally based support for our
audit professionals in each of our US
markets. The primary purpose of the
Chief Auditor Network is to provide
auditing advice, leveraging the deep
expertise of the professionals in the
network on auditing standards, policy,
and methodology. This support helps
our audit teams to identify where audit
attention is warranted and design effective and efficient audit procedures.
The Chief Auditor Network also coordinates and shares knowledge with other
groups in our Quality Organization. This
includes the audit methodology group,
the inspections group, and our assurance learning and development team.

Because they are based throughout
the country, the partners in the Chief
Auditor Network and the roughly
65 highly experienced audit professionals who support them are easily
accessible to audit teams. They
provide on-the-ground support to
audit teams and participate in market
and industry group meetings. In this
way, they share knowledge about
frequently asked questions and areas
that require increased attention. And,
because of their role, they also have
a strong connection to our National
office audit experts.
Though the Chief Auditor Network
has been in place for several years,
we continue to enhance and invest in
this group. For example, as of June
30, 2012, our Chief Auditor Network
included approximately 35 partners,
each of whom is committed to devote,
on average, about 1,000 hours annually to chief auditor activities. This
contrasts with the previous model

in which 40 partners committed to
devote approximately 300 hours each
year to chief auditor activities.
Expanding the time commitment of
partners in the Chief Auditor Network
enabled them and the professionals
assisting them to provide significantly
greater support to our audit teams in
fiscal year 2012.
Based on the results of our inspections,
we identified certain audit procedures
that require significant judgment and
therefore pose greater challenges to
design effectively. Members of the
Chief Auditor Network devoted additional attention to those procedures
when consulting with audit teams, in
order to help drive quality and consistent execution.
Other Chief Auditor Network activities during fiscal year 2012 included
performing targeted pre-issuance
reviews of specific elements of the

Total partner hours committed
FY2011

FY2012

12,000

35,000

Over the past year, there were over 2,000
consultations with partners and other
professionals in our Chief Auditor Network
initiated by audit teams seeking to leverage
their technical expertise and experience.

16

audit plans for approximately 180
audit engagements. Through these
real-time reviews, professionals in the
Chief Auditor Network recommended
additional or different procedures
to be performed prior to completion
of our audits.
As mentioned in the discussion of
methodology, tools, and processes,
another area of focus for our audit
teams is accelerating their audit planning procedures. During fiscal year
2013, the Chief Auditor Network will
be providing assistance to audit teams
to help them achieve this objective.
The Chief Auditor Network has also
enabled us to enrich our audit training
courses. Members of our Chief Auditor
Network contributed extensively to our
required annual audit training held in
the spring and summer of 2012. This
included serving as lead instructors in
many of the audit training sessions.

Human capital strategies
The quality of our work depends on
the people we hire and our programs
designed to support their development.
Accordingly, effective human capital
strategies are critical to achieving
sustained audit quality. Our strategies
start with a rigorous recruiting program
to bring in a mix of highly qualified
candidates, at all levels, who have
diverse backgrounds and skills.
Our recruiting of experienced
professionals is an important part of our
human capital strategies. We actively
target individuals who possess the
specific skills, knowledge, and personal
attributes we believe are necessary to

During fiscal year 2012, we hired into
our assurance practice approximately
1,200 experienced professionals. Our
overall headcount increased as of June
30, 2012 to approximately 13,500
assurance professionals, which is up
from approximately 12,000 a year ago.
Increasing our headcount provides
each of our professionals more time
to focus on how they can best deliver
on our commitment to perform highquality audits. This includes exercising professional skepticism when
evaluating various audit issues.
To promote their development, our
professionals are provided with
increasingly challenging experiences
and professional growth opportunities.
They receive on-the-job coaching and
mentoring, as well as feedback on their
performance, including their contributions to quality. Our non-partner
professionals are recognized for career
milestone successes and participate in


17

a performance bonus plan that is based
on achievement of quality and financial performance goals.
The retention of highly qualified
people is an important contributor
to our achievement of sustained
audit quality. Our people told us that
one way to increase retention is by
increasing their flexibility to allow
them to better balance their professional commitments to the firm with
their other commitments. Importantly,
they said that flexibility is not necessarily about working less, but about
working differently.
So, during fiscal year 2012 we emphasized our flexible work arrangement
opportunities and launched an initiative to enhance flexibility for all of our

professionals—in the way we work,
in our career paths, and in the career
opportunities we offer our people.
By helping our people to meet their
professional commitments in flexible
ways, we are making it easier for them
to meet their personal commitments.
This energizes their passion for and
commitment to delivering quality,
creates a more rewarding experience
for them, and increases their desire to
remain with the firm longer.
As a result of our human capital
strategies, our people are highly
motivated and disciplined about
achieving their professional growth
goals. And, the strategies have been
successful in boosting employee
retention. In fiscal year 2012, our
assurance staff turnover decreased to

14.2% from 18.8% in the prior year.
This is notable, particularly in an
environment where the demand for
accounting professionals is increasing.

Learning and development
Our audit professionals hone their skills
through a combination of on-the-job
training and firm-developed learning
and development programs. At PwC,
a significant amount of learning
takes place in an environment where
our professionals are coached and
mentored by more experienced team
members. This includes discussing
the resolution of complex audit and
accounting matters and providing each
other with real-time feedback.

Assurance partner internal admissions
FY2010

FY2011

33

53

Increasing the number of assurance partners
FY2012

66

in our firm helps facilitate a more balanced
workload for our assurance partners, which
increases our ability to consistently perform
high-quality audits.

18

Understanding complex accounting, disclosure,
and industry matters also contributes to audit
quality. We provide regular updates on accounting
and reporting matters through various national
and industry communications, including quarterly
National office webcasts and communications,
to help our teams learn about these important
matters and how they affect the design and
execution of our audits.

Team members also learn to exercise
professional judgment by watching
more senior professionals interact
with management and audit committees and resolve issues. They learn
the importance of objectivity, professional skepticism, and asking the right
questions to understand business
transactions. Thus, they develop these
qualities and put them into action
under the watchful eye of senior
team members. We are proud of the
career-enhancing on-the-job training
our people receive.
Our learning and development
programs prepare our professionals
to tackle the rigors of an audit. They
include business and industry developments as well as a significant focus
on audit and accounting skills. In
developing the content for our training
courses, we draw upon what we’ve
learned from our internal and external
inspections, along with observations
from our Chief Auditor Network. The
training we provide our professionals
has consistently been recognized by
outside organizations as best in class.

Even so, we continue to enhance our
programs, recognizing that effective
training is critical to achieving consistent quality in our audits.
In fiscal year 2012, we increased our
actual assurance training expenditures
by more than 50% over the previous
fiscal year. This provided the resources
to increase in-person training for our
people from entry-level professionals
through partners. We also redesigned
the curriculum for our entry-level
professionals to include a new simulated audit engagement experience that
emphasizes the importance of integrity,
objectivity, and professional skepticism.
An important component of an individual’s performance assessment is
whether the individual has attended
all required training sessions. We
continue to require our audit professionals, from first-year staff to partners,
to attend various audit training courses,
including our annual audit training
course, which is delivered over a period
of up to three and a half days.


19

We also hold industry-specific meetings for our managers and partners
to highlight hot topics and business
trends that impact our clients and
may potentially need to be incorporated into our risk assessment and
audit approach. And, to help our
people understand and appreciate the
importance of our role in the capital
markets, we also share with them
broader issues being addressed by the
PCAOB and regulators outside the
United States regarding audit quality.
Much of our training in fiscal year
2012 focused on refining our auditing
skills, including strengthening our
auditors’ objectivity and skepticism,
emphasizing the importance of a
questioning mindset, and evaluating
the sufficiency of audit evidence.
Real-life examples were used to
discuss how to apply these concepts
in practice.

Passing the CPA exam, a
significant step toward
obtaining the CPA credential, is a prerequisite for
advancement to the senior
associate level.

20

Our training programs are only
successful, of course, if our professionals understand and retain the
information. We have expanded the
use of post-course tests, which must be
completed by attendees of our required
technical courses to reinforce the
concepts covered in each course. These
tests also help our professionals identify areas in which they need to focus.
And from a continuous improvement
perspective, we use the results of these
tests to identify whether additional
targeted training or course modifications are needed.

Growth and profitability
strategies
Our strategy is to invest in the fundamentals of our business that will
continue to promote greater quality
in our audit and other services, and
develop our people. This allows us to
grow the firm profitably by expanding
both our assurance practice and our
non-assurance practice in a careful
and controlled manner. Further, the
continued growth and profitability
of our assurance practice is essential
to helping our people grow professionally, which positively impacts
employee retention. This, in turn,
contributes to our ability to improve
audit quality.
While it is important that we continue
to expand our assurance practice, we
remain selective in accepting new
audit engagements and renewing
existing ones. As part of our evaluation of each engagement, we identify
potential areas of high risk. This

helps us assess whether we have
the resources with the right skills,
experience, industry knowledge, and
capacity to perform a high-quality
audit in light of the identified risks.
It also helps identify whether the
engagement aligns with our strategies
for growing our practice. If we decide
to perform the audit, this assessment
becomes part of our analysis and
evaluation of audit risks for purposes
of planning our audit procedures.
To grow our assurance practice, we
must increase our resources and
service capabilities. As part of this
growth, we continue to hire individuals, primarily partners and other
highly experienced professionals, who
have distinctive skill sets and who we
believe can make an immediate and
significant contribution to our quality,
growth, and people objectives.
We also continue to increase the
number of non-audit specialists in our
firm through both direct hiring and
strategic acquisitions. We added more
than 500 partners and other professionals to the firm through strategic
acquisitions during fiscal year 2012.
Continued growth in professional
services other than audits contributes to our diversified and financially
sound business and our ability to
continue to invest in our people, our
audit quality programs, and the other
fundamentals of our business.
Some of the specialists we’ve hired
assist our audit teams by providing
support in certain highly technical audit
and accounting areas. Our audit teams

It’s important that audit fees be
sufficient to promote a highquality audit. But regardless
of any individual fee amount,
audit teams are expected to
perform all audit work that is
necessary for us to meet our
audit quality objectives. We will
not compromise audit quality
for any reason.

leverage the knowledge and expertise
of these specialists to identify audit
risks, design their audits, and more
fully understand the financial reporting
implications of certain transactions.
We believe we perform higher-quality
audits when we can draw upon these
specialized skills from within our firm.
For example, our valuation experts
are important contributors to our
audits, helping audit teams make
sound judgments on difficult issues
such as fair value estimates. Our
tax experts are a critical resource in
helping audit teams to understand
and effectively audit the accounting
for complex tax regulations existing
in jurisdictions around the world.
And, our actuarial experts help audit
teams understand employee benefit
issues that have audit implications.
Our growth and profitability strategies include providing high-quality
audits at a reasonable cost. In determining our audit fees, our audit
partners assess the scope of audit

procedures necessary to perform a
high-quality audit. They also consult
with others, including our market and
industry group assurance leaders,
who we hold accountable in their
roles for audit quality.
We communicate the importance of
setting fees at an appropriate level to
audit committees and management
and help them understand the value
we deliver through the audit process.
We believe that when we are able to
demonstrate the value we bring to
companies—through efficient and
effective high-quality audits, as well
as timely and relevant insights about
their businesses—we can have productive discussions about audit fees.
At times, discussions about audit fees
are challenging. In the past we’ve made
some difficult decisions to give up audit
engagements where we’ve concluded
that the fees are not sufficient to
support a sustainable high-quality
audit, and we will continue to do so.


21

Global network
The member firms of
PricewaterhouseCoopers International
Limited are from more than 150
countries and together form the PwC
network. Because we are a member of
the PwC network, we are able to serve
clients across borders and regions and
in emerging markets.

22

Achieving high-quality audits is our
top priority, regardless of whether the
audit procedures are performed inside
or outside the United States. Thus, the
firm’s assurance leader is a member
of the network’s global assurance leadership team. This team focuses heavily
on quality-related needs throughout
the network and makes suggestions on
how best to satisfy those needs.

The network provides processes,
tools, and resources to member firms
to assist them in meeting PwC quality
standards. These include maintaining
a global audit methodology, developing and providing training and
audit tools (such as Aura), coordinating resources to help member
firms perform quality reviews, and
assisting member firms in enhancing
their supporting infrastructure to
promote quality audits. In addition,
the network’s overall monitoring of
member firms’ audit quality can help
identify areas for increased attention.
A network quality review team,
consisting of full-time, dedicated
partners from firms throughout the
network, monitors a member firm’s
review of the quality of its management level controls and the quality
of the audit work it performed. This
team leverages additional partner
and other resources from various
member firms, including the US firm.
When issues are identified in the
audit quality systems or controls of
a member firm, the member firm
prepares a remediation plan and
the network monitors the member
firm’s implementation of the plan.
The network also may facilitate
inbound and outbound secondments
of experienced audit partners and
professionals who can contribute
to improving the auditing and
accounting skills of the partners
and other professionals in a member
firm. If a member firm has severe
or repeated audit quality issues,
the member firm may have to replace
its leadership.

The partners in each member firm understand
their local economic, business, risk and regulatory
environments, and can help other member firms
understand how those environments may impact
a company’s business and financial reporting.

Performing audits in emerging and
rapidly growing markets can present
challenges from an audit quality
standpoint. Various factors, such as
less-developed company governance
practices, culture, substantial economic
growth, and limited resources, may
create those challenges. Those factors,
in turn, reinforce the importance of
member firms in those markets building
and maintaining a quality organization
to facilitate the performance of highquality audits.
The network often provides assistance
to member firms in those situations.
Further, audit partners understand
their responsibility for quality and
address these challenges through
various means, including through
effective oversight of the audit work,
visits with audit teams of other
member firms, and secondments of
experienced professionals.


23

We monitor our own performance,
learn from our experiences, and
continuously make improvements
to enhance the quality of our work.

24

Assessing audit quality

To achieve sustained audit quality, we monitor our environment
to understand and anticipate changes in business practices and in
the companies we audit, and the changing expectations of investors,
regulators, and others. We also monitor our own performance,
learn from our experiences, and continuously make improvements
to enhance the quality of our work.

In considering what improvements
we should make, we evaluate the
results of our internal and external
inspections, and consider feedback
from our professionals and from our
stakeholder outreach activity. We
also identify and evaluate potential
underlying causes of instances in
which our quality objectives have
not been consistently achieved. For
example, we assess whether a partner’s workload had an effect on the
partner’s ability to effectively review
and supervise the audit, whether the
skills of the professionals assigned
to the audit should be enhanced,
and whether our audit guidance,
methodologies, tools, and processes
should be refined, to name a few.
We believe evaluating potential
underlying causes of inconsistencies
in achieving our quality objectives
is an important component of our
quality control system. Learning
from such instances helps us to assess
whether the actions we are taking
to promote more consistent audit
execution will be effective.
We are now exploring ways to deepen
our understanding of the causes of
such instances and the actions that we
might take in response. We’re doing
this so that we can further improve
the design and implementation of our
audit quality enhancements.

Recently the PCAOB released
Information for Audit Committees About
the PCAOB Inspection Process. The
release notes that information about
inspection results of a company’s audit,
and general inspection results of a firm,
can help audit committees in carrying
out their auditor oversight role.
We believe that audit committee oversight is one of the keys to promoting
greater audit quality. Thus, we agree
that an audit firm’s candid and robust
discussions with an audit committee
about its inspection results and what
they might mean to the audit can
be helpful to the audit committee.
We are committed to engaging in
those discussions. The primary
responsibility for such discussions
rests with our audit teams. While this
section presents an overview of those
results, this report is not intended to be
the primary source of information for
audit committees.

Internal inspections of our
audit practice
One of the important ways we
monitor our performance is through
our internal inspection program.
Under this program, certain audits
are selected for inspection. These
inspections are conducted by individuals who were not involved with
the audit.

25

The inspections group considers the
appropriateness of the judgments
made by the audit teams and looks
for instances where our audit quality
objectives were not fully achieved.
When such instances are identified, the
inspections group considers the potential underlying causes and whether
remediation is required. They also
work with our Chief Auditor Network,
audit methodology group, learning and
development group, and firm leadership to determine whether additional
guidance or training, modifications to
our audit methodology, or additional
targeted messaging from leadership
are needed to enhance the consistency
of our audit quality.

The inspections group today reflects
changes that we began making in
2011 to create a larger core team
of mostly dedicated professionals in
order to drive greater consistency
and quality in internal inspections
and enhance the rigor of those
inspections. As we perform individual
inspections we supplement the group
with experienced audit partners and
other senior audit professionals as
needed, particularly those with special
industry or technical expertise. Their
current audit, industry, and technical
experience brings added value to our
inspections process.

Learnings from our inspections team

Messaging
and guidance from
leadership and
the National ofﬁce

Chief Auditor
Network pre-issuance
reviews and required
consultations

Learnings
from our
inspections
team

Improvements
to our audit
methodology
and tools

26

Enhanced learning
and development
programs

During the past year, the inspections
group inspected over 300 public and
private company audits. We estimate
that the partners and other professionals in the inspections group will
spend approximately 70,000 hours
conducting our 2012 inspections of
2011 year-end audits. When combined
with assistance from experienced
audit partners and other senior audit
professionals, we estimate we will
spend approximately 100,000 hours
conducting our 2012 inspections.
Our 2011 internal inspections (our
most recently completed internal
inspections process), which cover 2010
audits, found a number of items that
were similarly identified in external
inspections of our audit practice
conducted by the PCAOB. Our findings
suggested that in the following overall
areas one or more inspected audit
engagements indicated an instance
where we can focus our improvement
efforts on certain specific matters:
(i) Auditing fair value measurements of financial instruments
This refers generally to understanding how management valued
its financial instruments, especially hard-to-value instruments;
evaluating the specific methods
and assumptions underlying the
measurements; and assessing the
implications of significant differences in measurements of an
instrument from various sources
(for example, pricing services).
(ii) Management’s estimates
This refers generally to evaluating management’s assumptions
underlying certain estimates, such

We consider causes underlying
the trends identified through
our inspections to inform
our continuous audit quality
improvement efforts. We time
our internal inspections so
that we can incorporate what
we learn from them into our
training programs before the
next audit cycle is completed.

as inventory reserves, and specifically considering information that
may contradict assumptions in
the estimate.

obtaining sufficient audit comfort
with the portion of a population
that remains after performing
targeted testing that represents a
significant amount of the account
being tested.

(iii) Fair value measurements
of items other than financial
instruments
This refers generally to understanding how management
measured the fair value of items
other than financial instruments,
such as when performing goodwill impairment testing, including
evaluating the specific methods
and assumptions underlying the
measurements.

(v) Using the work of others (for
example, internal audit)
This refers generally to evaluating
the quality, effectiveness, and
conclusions of the work, as well
as the competency and objectivity
of those who performed the work,
and sufficiently documenting the
nature, timing, and extent of work
performed.

(iv) Substantive analytic procedures
and targeted testing
This refers generally to tests of
revenue accounts, and involves
setting reasonable expectations
with appropriate precision when
performing substantive analytic
tests to provide audit evidence;
addressing differences between
expected and recorded amounts
that exceed an established
threshold for investigation; and

(vi) Auditing internal control
over financial reporting and
testing the controls in a
financial statement audit
This refers generally to understanding and documenting
the likely sources of material
misstatement; sufficiently testing
management’s controls, including
entity-level controls; and identification and sufficient evaluation of
control deficiencies.

Our improvement efforts in fiscal
year 2012 included enhanced audit
training, for example, focusing on
matters such as the exercise of professional skepticism, and issuance of 15
audit policy updates. We also issued
guidance on 25 separate occasions
to help our professionals apply the
auditing standards and our audit
methodology. The audit policy updates
and other guidance include a number
of new audit tools and templates
that are intended to enhance the
consistency of our audit execution.
To enable our audit teams to identify
audit issues earlier, we’ve set timing
goals for completing audit planning
activities and provided additional
training on techniques to better
manage the steps in an audit engagement. This will also facilitate our senior
team members’ review and supervision
of the audit work performed.
Our 2012 internal inspections,
which are ongoing and cover 2011
audits, show that we have improved.
Nevertheless, we know that changes in


27

(iii) Tests designed to detect fraud
This refers generally to documenting our process of selecting
items for testing, especially
journal entries, and linking
them to our assessment of risk,
including risks arising from
deficiencies in a company’s
internal controls.
(iv) Auditing income tax provisions
and related accounts
This refers generally to enhancing
our audit procedures, documentation, and coordination with tax
professionals supporting the
audit team.

the companies we audit and evolving
business and regulatory environments
require us to continuously evaluate the
effectiveness of our audit procedures.
Because the purpose of our inspections
group is to identify areas where we
can improve our audits, and because
auditing is a complex and judgmental
process, we expect the group will
always identify new areas for improvement. In this way, the inspections
group helps us to maintain a mindset
of continuous improvement.

our performance involving certain
specific matters:

A preview of the preliminary results
of our (still in process) 2012 internal
inspections, which cover 2011 audits,
follows. The results show that one
or more inspected audit engagements indicate an instance where we
need to improve the consistency of

(ii) Financial statement disclosures
This refers generally to identifying
disclosure errors and omissions,
and auditing a company’s internal
controls over financial statement
disclosures.

28

(i) Understanding likely sources
of potential misstatements
This refers generally to focusing
particularly on non-routine transactions, including business combinations and complex evaluations,
such as impairments and deferred
tax asset valuation allowances,
and understanding the controls,
processes, and management judgments that apply.

(v) Assessing and responding to
risks of material financial statement misstatements
This refers generally to focusing on
more formal upfront risk assessment and documentation of those
risks, pursuant to the PCAOB’s new
risk assessment standards that
became effective in 2011.
Our inspections group also annually
evaluates the firm’s system of quality
control for the assurance practice. This
includes leadership responsibilities for
quality (including the tone at the top),
oversight by all levels of assurance
leadership, relevant ethical requirements, acceptance and continuance of
clients, hiring and development of our
people, compliance with independence
requirements, continuing professional
education, and execution of our audits.
The inspections group also supports
audit teams whose audits have been
selected for inspection by the PCAOB.
This process, which was put in place in
2011, helps facilitate objective, timely,

and high-quality interactions with the
PCAOB inspection teams. We believe
this helps the PCAOB inspection
teams to complete their work sooner
and minimizes situations where
unresolved regulatory matters could
possibly interfere with a company
raising funds or entering into transactions involving the public markets.

External inspections of our
audit practice
The results of external inspections
of our public company audit practice
by our regulator, the PCAOB, and the
results of peer review of our private
company audit practice also contribute
to our assessment of where to make
improvements. PCAOB reviews take
place annually, whereas peer reviews
are performed every three years3. The
PCAOB’s inspections are conducted
using a risk-based approach. It notes
that its inspection results should not
be used as a gauge for assessing the
overall quality of a firm’s audit practice.
A PCAOB inspection report comprises
public (Part 1) and non-public (Part
2) portions. Specific audit inspection
findings of the PCAOB are generally
referred to by the PCAOB as instances
of “audit failure” and are included in
Part 1 of its report. The PCAOB uses
that term when it concludes that not
enough evidence was gathered to
support the opinion that the financial
statements are not materially misstated.
Its use of the term does not mean the
PCAOB has concluded that there is a
material misstatement.

When such instances have been
identified, they generally have not
related to our risk assessment or to our
judgments about the application of
accounting standards. Instead, they’ve
related to our execution of the audit
procedures we performed in order to
form an opinion about whether the
financial statements are free of material misstatement. Audit opinions are
typically supported by performing a
number of different audit tests, often
using sampling techniques. Significant
judgment is required to determine
which type of test to perform, how
much to test, and what our conclusions
should be for each of the tests. If the
PCAOB concludes that any one of those
tests was not performed with sufficient
robustness and that more or different
tests should have been performed, the
PCAOB includes that instance in Part 1
of its report.
Whenever such an instance has been
identified, we performed additional
procedures, as deemed appropriate,
to determine whether our previous
conclusions should be revised. In nearly
all cases, when we performed those
additional procedures, they resulted in
no changes to the financial statements,
and we were able to reaffirm that the
financial statements are free of material
misstatement and could continue to be
relied upon.
As with our internal inspections
process, we study the instances where
the PCAOB’s inspectors concluded that
there is not enough evidence to support
the audit opinion and we evaluate
their potential underlying causes. In

3 Our latest peer review will be completed by Grant Thornton LLP by December 2012.


29

many cases we agree with the PCAOB
inspectors’ assessment of our work. In
certain cases, however, we do not agree
with their assessment. There is a high
degree of judgment required, both on
the part of the PCAOB’s inspectors to
reach their conclusions and by us in
evaluating their conclusions. In each
instance, however, we assess potential
underlying causes of the findings and
consider what firm actions are appropriate to take to enhance the consistency of our audit quality.
Part 1 of our most recent PCAOB report
(its 2010 report dated November 8,
2011, covering inspections of selected
2009 audits) noted the need for us to
improve the consistency of our execution in (i) designing and performing
substantive analytical procedures, (ii)
auditing internal control over financial
reporting and testing those controls in
a financial statement audit, (iii) determining our audit scope for companies
with multiple locations, (iv) testing
measurements and disclosures of the
fair value of financial instruments,
(v) testing management’s estimates
and fair value measurements of items
other than financial instruments, and
(vi) determining materiality levels for
testing pension plan assets.
Part 2 of a PCAOB report contains the
PCAOB’s criticisms of a firm’s system of
quality control and reflects its review
of certain of a firm’s practices, policies, and processes related to audit
quality. In reviewing these, the PCAOB
considers its engagement-specific
findings identified in Part 1. Thus, its
Part 2 comments often address a firm’s
practices, policies, and processes in the
context of its specific Part 1 findings.

30

The PCAOB Part 2 review generally
includes the following:
(i) Management structure and
processes, including the tone at
the top
(ii) Practices for partner management, including allocation of
partner resources and partner
evaluation, compensation, admission, and disciplinary actions
(iii) Policies and procedures for
considering and addressing the
risks involved in accepting and
retaining clients, including the
application of a firm’s risk-rating
system
(iv) Processes related to a firm’s use
of audit work that a firm’s foreign
affiliates perform on the foreign
operations of a firm’s US issuer
audit clients
(v) A firm’s processes for monitoring
audit performance, including
processes for identifying and
assessing indicators of deficiencies
in audit performance and independence policies and procedures
and processes for responding to
weaknesses in quality control
Under the Sarbanes-Oxley Act of
2002, no portion of Part 2 can be made
public by the PCAOB if, in its opinion,
a firm has remediated, to the PCAOB’s
satisfaction, the quality control matters
described in Part 2 within twelve
months after Part 2 is issued to the firm.
For PwC, the earliest inspection years
for which the PCAOB is in the process
of making this determination are 2008
and 2009 (covering audits of 2007 and
2008, respectively).

Many of the observations noted by the
PCAOB in Part 2 of its reports address
policies and practices that, in our view,
deal with some of the most complex
areas of an audit.
Our actions relating to those areas
have included providing our audit
professionals with enhanced audit
tools, training, and additional technical guidance to promote more consistent audit execution. These focused on
areas such as auditing management’s
estimates and fair value measurements, scoping multi-location audits,
designing and performing substantive
analytical procedures, performing
risk assessments, testing internal
control over financial reporting, and
determining the sufficiency of audit
evidence. We have also focused on
enhancing the review, supervision,
and inspection of our audits.
We have continued to emphasize to our
people the importance of exercising
objectivity and professional skepticism,
and maintaining our independence.
This occurred through messages from
firm leaders, and in various learning
environments, such as formal classroom and virtual training, on-the-job
coaching, and discussions in industry
and market meetings.
We believe that the enhancements to
our audit training, the additional tools
and guidance we’ve provided, and
the consistent communications from
firm leaders about quality have been
important contributors to enhancing
audit quality. But we haven’t stopped
there. In line with our continuous
improvement focus, we are also

assessing how we can strengthen our
controls over the application of our
audit policies and procedures in order
to further enhance audit quality on a
consistent basis. Actions may include
new compliance requirements, additional monitoring of the application
of certain audit policies and practices,
and further alignment of our rewards
system with our quality objectives.

Additional audit quality
indicators
In addition to post-completion inspections, we believe there are other ways to
measure audit quality. We encouraged
the Center for Audit Quality to consider
ways to supplement inspections as a
measure of audit quality by using other
audit quality indicators. We are working
with members of the Center for Audit
Quality to develop such indicators.


31

We are fully engaged in
discussing and developing ideas
to improve audit quality within
the profession and promote
greater investor protection.

32

Contributing to audit quality in the marketplace

Our focus on audit quality includes being actively involved in developing
the profession’s perspectives on the events and trends in the audit,
financial reporting, regulatory, and business environments. We are
fully engaged in discussing and developing ideas to improve audit
quality within the profession and promote the reliability of financial
reporting and greater investor protection.

Professional and regulatory
The regulatory environment remains
fluid in the United States and abroad.
Regulators and policymakers continue
to consider what more can be done to
promote greater investor protection.
We believe that it is important for us
to be involved in these discussions.
These broader efforts, combined with
our own audit quality initiatives,
will promote higher-quality financial
reporting for investors.
Our role in the capital markets provides
us with a unique perspective of companies’ businesses and their financial
reporting. We also have significant
insight into the thinking of other
stakeholders in the capital markets—
regulators, investors, standard setters,
policymakers, academics, and others—
about financial reporting. We use this
knowledge to inform our thinking
and, within the bounds of appropriate
confidentiality restrictions, share that
knowledge through participation
in debates and discussions aimed at
improving audit and financial reporting
quality. We will continue to leverage
this type of information to help us
challenge conventional thinking. Some
ways in which we are contributing to
the discussions are highlighted below.
An important activity aimed at
improving audit quality is the operation of the Center for Audit Quality. As

evidence of how important its work is
in promoting greater audit quality, the
Center for Audit Quality’s governing
board includes the chief executive
officers of the largest auditing firms
(the board is currently chaired by
our firm’s Senior Partner). Our firm
is involved in a number of activities
at the Center for Audit Quality. These
include participation in multiple
workshops and public discussions
on emerging auditing issues. Among
those issues are the auditor’s role,
auditor reporting, and increasing audit
quality through enhancing auditor
independence, objectivity, and professional skepticism.
Through our various publications,
we seek to educate stakeholders on
issues that could impact audit quality.
We also proactively meet with policymakers, regulators, and standardsetters to share our perspectives.
And, we respond to various proposals
by submitting comment letters and
participating in public meetings.

To learn more about our
perspectives on topics important
to the capital markets, please
refer to the following resources:
• 10Minutes on Effective
Audit Committees
• Point of view: Mandatory
Audit Firm Rotation
• Point of view: Emphasis
Paragraphs
• Point of view: Assurance
on Other Information
• Point of view: Auditor’s
Discussion and Analysis
• Written Testimony of
Bob Moritz, US Chairman
and Senior Partner, before
the PCAOB, March 21, 2012

We believe reforms implemented
over the last decade as a result of the
Sarbanes-Oxley Act of 2002 have been
successful in enhancing audit quality
and should be built upon. We have
provided our perspectives on regulatory proposals that we believe enhance
audit quality, such as the increased
use of emphasis paragraphs in audit

33

We are supportive of a more robust
dialogue between auditors and audit
committees. We believe oversight of
auditors by audit committees is one
of the keys to promoting greater audit
quality. We are actively involved
with audit committees to help them
stay updated on developments and
trends, and to share leading practices
that enhance audit and financial
reporting quality.

reports. We have also shared our point
of view on potential changes that
we do not believe will increase audit
quality, such as mandatory audit firm
rotation and the auditor’s issuance of
an “auditor’s discussion and analysis.”
Some other examples of changes
we support include increasing audit
committee monitoring of the auditor’s
objectivity and skepticism, further
training for auditors in exercising
professional skepticism, and requiring
firms to publish more information
describing their systems of quality
control. We also support promoting
consistent communications between
an audit firm and an audit committee
about regulatory inspection results,
increasing disclosures by companies
when an audit committee changes
audit firms, and involving the audit
committee in the selection of the lead
audit partner.
We have established principles that
guide our thinking in determining
which proposals and ideas are worth

34

pursuing. Those principles are that
any changes should (i) enhance audit
quality and the reliability of financial reporting, (ii) enhance the roles
of, and effectiveness of interactions
between, audit committees, management, and auditors, (iii) promote audit
reports that are comparable between
companies, and (iv) maintain management as the source of information
about the company.

Audit committees
The Sarbanes-Oxley Act of 2002 made
the audit committee responsible for
overseeing a public company’s financial reporting process and its auditor.
It required audit committees to have
independent members, enhance
their financial expertise, and expand
required communications with auditors. These changes enhanced the
dialogue between auditors and audit
committees, and empowered audit
committees to more effectively carry
out their responsibilities.

Our Center for Board Governance
(the “Center”) is one of the largest
corporate governance practices of any
audit firm. It comprises partners and
other governance specialists who bring
unsurpassed experience to boards
and audit committees on accounting,
auditing, financial reporting, and
other governance issues. Through the
Center, we assist audit committees to
more effectively meet the challenges
of their oversight role. Importantly, we
encourage audit committees to actively
oversee our audit work, evaluate
our performance, and challenge our
judgments. And, we provide guidance
to audit committees to help them in
conducting their oversight activities.
We also brief audit committees on
significant corporate governance
and financial reporting developments through a series of recurring
publications, including a monthly
and quarterly newsletter and annual
compilations of leading practices
for audit committees, which can be
accessed on our Center for Board
Governance website. We host seminars, roundtables, and quarterly
webcasts to engage audit committees
in dialogues about key developments.
And, we meet with audit committees
one-on-one to share our insights and

help them understand the complex
regulatory and business environment
and best practices.

continue, including one-on-one
meetings between assurance
leadership and key investor advocates.

For the most part, the Center does
not engage in revenue-generating
activities. Our governance practice
is illustrative of our commitment to
contribute to increased audit and
financial reporting quality for the
benefit of the capital markets.

We are also keeping our finger on the
pulse of developments in corporate
reporting. For example, some stakeholders are asking for sustainability
reports that provide information
beyond today’s financial reporting
model. Taking this concept even
further, “integrated reporting,” which
would involve reporting financial and
non-financial information in one report,
is beginning to be discussed more
frequently in some parts of the world.

Investing community
As the needs and expectations of the
capital markets evolve, we believe it
is important for us to engage with the
investing community. An effective
outreach process involving investors
will result in improved relationships
with the investing community that will
benefit the firm, the profession, and
the broader capital markets.
We believe that through enhanced
communications with investors, we
can obtain firsthand knowledge of
the financial reporting matters that
are important to them and better
understand their perspectives. We will
leverage what we learn as we consider
further enhancements to our audit
processes. We also believe we can
share with investors our perspectives
on the profession’s role in the financial
reporting system during these interactions and what it takes to perform a
high-quality audit.
We periodically obtain the investing
community’s views of our profession
and its value to the capital markets
through surveys, participation on
advisory committees, and other
forums. These interactions will

As these concepts continue to evolve,
we will participate in the dialogue
and provide our perspective. We
will continue to support efforts that
could present an opportunity for
improved corporate reporting and
benefit the investing community.
To that end, consistent with market
demands, we are making investments
in our Sustainable Business Solutions
practice, and other areas to address
needs as they arise. We also continue
to educate companies and the wider
business community on corporate
reporting trends and developments.

Academia
Recognizing the importance to audit
quality of a strong pipeline of qualified
and well-prepared individuals entering
the profession, we devote significant
efforts to engaging with academia.
Our approach includes providing grant
programs to help support a university’s
curriculum, interacting with professors and individuals interested in
teaching and/or attaining a PhD, and

interacting with students to provide
internship opportunities and convey
the relevance of the profession and the
value we bring to the capital markets.
Our assurance practice leaders,
partners, and other professionals
collectively spend thousands of hours
on campuses and in other venues each
year speaking to business professors
and students and participating in their
classroom and other activities.
With many predicting a need to
increase the supply of accounting
professors, we have also taken actions
to fund various programs to create
more opportunities for professionals
to join the ranks of professors in
colleges and universities. We have
made a significant contribution in the
Accounting Doctoral Scholar program,
a collaborative effort of the AICPA
Foundation, public accounting firms,
and state CPA societies, to increase
the number of academically qualified
faculty. This eight-year commitment
(through 2015) funds stipends for
individuals with public accounting
experience to pursue a PhD in
accounting. The goal is to produce
approximately 120 new PhDs.
We have also created a program
designed to transition retiring PwC
partners into the academic world.
The PwC Bridge program provides
various training and reference materials to those preparing to teach. Our
partners, who have many years of real
world experience, can bring a unique
perspective and skill set to the classroom to enhance the learning experience of the next generation of audit
professionals and leaders.


35

Our commitments

We appreciate the privileged role we have in the capital markets, and
understand the importance of performing audits that provide investors
with confidence in the financial statements of the companies we audit.
Our goals are to foster a sustainable culture of audit quality within our
firm and consistently achieve our audit quality objectives. To meet
these goals in the dynamic business environment in which we operate,
we strive to continuously improve at all levels of our firm. This includes
in our processes, our audit methodology, and the individual
audits we perform.
Meeting these goals will require that we continue to make significant
investments in our assurance business. We must also demonstrate a
willingness to change as a firm and to facilitate change in our profession
in order for the profession to remain relevant.
We will make the needed investments to continuously improve our audit
quality. We also will listen to investors, engage in debates on matters
impacting investor confidence in financial reporting and our profession,
and thoughtfully come to our own perspective on the most productive
changes the profession can make to improve audit quality and provide
more value to investors.
These are our continuing commitments. Stakeholders in the capital
markets should expect nothing less.


37

We recognize the desire for more
audit firm transparency. Our
2012 Transparency Report provides
an additional view into our
structure, systems, and practices
that promote audit quality.

38

Transparency report

In today’s complex and continuously evolving business environment,
investors, regulators, audit committees and other capital market
participants are seeking more transparency from those involved
in the financial reporting system. This desire for increased transparency
has heightened during the past several years and extends to audit
firms as people seek greater insight into how a firm’s management
and operations are structured to support the performance of highquality audits.
Our 2012 Transparency Report follows. In it, we describe our
legal and governance structures, internal quality control system,
independence and continuing education practices, and the global
network of PwC firms, of which we are a member. We also share
summary financial information.
The information contained in the report, together with a list of the
public companies we audit4, is generally consistent with
the information that the Center for Audit Quality recommends be
included in an audit firm’s transparency report. The information
also presents the required disclosures of “third country” audit firms
stipulated in Article 45(5)(e) of the European Union’s Directive on
Statutory Audit 2006/43/EC (the “8th Directive”).
We recognize and embrace our responsibility to create and maintain
confidence in the quality of the audit. The report that follows provides
an additional view into our structure, systems, and other practices that
underpin our high-performing culture that promotes audit quality.

4 The list of public companies we audit can be accessed on the PCAOB’s website by
searching for the firm’s Form 2, Item 4.1, under “Registration & Reporting,” or using the
following link: https://rasr.pcaobus.org/Forms/FormSummary.aspx?ID=C836DF2E6913E81
2EB1AB7003BE30F56.


39

PricewaterhouseCoopers LLP
2012 Transparency Report

This Transparency Report is published in accordance with the requirement
set forth in Article 45 (5)(e) of the European Union’s Directive on Statutory
Audit 2006/43/EC for our fiscal year ended June 30, 2012. Its contents are
also generally consistent with the information that the Center for Audit Quality
recommends be included in an audit firm’s transparency report.
Throughout this report, the terms “PwC,” “Firm,” “we,” and “our” refer to
PricewaterhouseCoopers LLP, the US member firm of PricewaterhouseCoopers
International Limited (PwCIL).

Legal structure and ownership of the Firm
The Firm is a limited liability partnership established under the laws of the State
of Delaware. All interests in the Firm are held by its partners and principals1, all
of whom are individuals.

The PwC Network
PwC is the brand under which the member firms of PricewaterhouseCoopers
International Limited operate and provide professional services. Together, these
firms form the PwC network. “PwC” is often used to refer either to individual
firms within the PwC network or to several or all of them collectively.
In many parts of the world, accounting firms are required by law to be locally
owned. Although regulatory attitudes on this issue are changing, PwC member
firms do not and cannot currently operate as a corporate multinational. The PwC
network is not a global partnership, a single firm, or a multinational corporation.
For these reasons, the PwC network consists of firms that are separate legal
entities. The firms that comprise the PwC network are committed to working
together to provide quality audits of the financial statements of companies
audited by the member firms and quality service to other entities to which
member firms provide services throughout the world.
Firms in the PwC network are members in, or have other connections to, PwCIL,
which is an English private company limited by guarantee. PwCIL does not
practice accounting, provide auditing or other professional services, or conduct
business with third parties. Rather its purpose is to act as a coordinating entity
for member firms in the PwC network. Focusing on key areas such as strategy,
brand, risk, and quality, the Network Leadership Team and Board of PwCIL
develop and implement policies and initiatives to achieve a common and coordinated approach among individual firms where appropriate.
1 A partner is a certified public accountant (CPA) whereas a principal is not. This document
generally refers to partners and principals collectively as “partners.” Only a CPA may sign
an audit opinion for a client.

40

PwC 2012 Transparency report

Member firms of PwCIL can use the PwC name and the resources and methodologies of the PwC network. Although many of the member firms have legally
registered names that contain “PricewaterhouseCoopers,” there is no ownership
of the firms by PwCIL. In addition, member firms may seek to use the resources
of other member firms and/or secure the provision of professional services by
other member firms. Member firms have agreed to abide by certain common
policies and maintain the standards of the PwC network.
A member firm cannot act as agent of PwCIL or any other member firm, cannot
obligate PwCIL or any other member firm, and is liable only for its own acts or
omissions and not those of PwCIL or any other member firm. Similarly, PwCIL
cannot act as an agent of any member firm, cannot obligate any member firm,
and is liable only for its own acts or omissions.

Governance structure of the Firm
The firm’s Senior Partner serves as
Chairman and Chief Executive Officer
and manages the firm. The Senior
Partner may appoint persons and
committees to assist with firm management and provides the Board of Partners
and Principals, which is PwC’s governing
body, with initiatives for the firm’s
philosophy, policies, and direction.
To assist him in discharging his responsibilities, the Senior Partner has appointed
a Leadership Team, which works with
him in managing the firm. The responsibilities of the Senior Partner and the
Leadership Team include establishing
and determining the effectiveness of
the firm’s system of internal control,
including those relating to the quality
of the firm’s audit services. All of the
members of the Leadership Team are
partners or principals. Changes to the
Leadership Team are determined by the
Senior Partner.

Members of the Leadership Team
Chairman and Senior Partner

Robert Moritz, CPA

Operations Leader & Chief Financial Officer

Michael Burwell, CPA

Chief Administrative Officer and Partner Affairs Leader

John Carter, CPA

Sectors and Markets Leader

William Cobourn Jr., CPA

Strategy Leader

Mitchell Cohen, CPA

Regulatory Affairs and Public Policy Leader

Laura Cox-Kaplan

Clients and Markets Leader

Greg Garrison, CPA

Marketing and Sales Leader

Robert Gittings, CPA

Human Capital Leader

Terri McClements, CPA

Advisory Leader

Dana McIlwain, CPA

Tax Leader

Mark Mendola, CPA

Chief Diversity Officer

Maria Castañón Moats, CPA

Assurance Leader

Tim Ryan, CPA

General Counsel

Diana Weiss


41

Senior Partner election process
The Senior Partner is elected by a partner vote for a four-year term that can be
renewed once. To determine the candidates to stand for election, the Board
of Partners and Principals (the Board) appoints a Senior Partner nominating
committee comprising partners who are not candidates for election as Senior
Partner and who are not “designated members of management.”2 No more than
two members of the Senior Partner nominating committee may be existing
Board members. Absent special circumstances, appointments to the Senior
Partner nominating committee are ratified by a partner vote.
The committee solicits and vets potential candidates, and submits up to three
proposed candidates to the Board for approval, after which the partners vote on
the candidates.
When there is only one candidate, the individual must receive the support of
two-thirds of the partners voting on a headcount basis. When there is more
than one candidate, the winner is decided by a vote of a majority of the partners
voting on a headcount basis. The election is typically supervised by an independent election teller.

Board of Partners and Principals
Authority
The Board is responsible for approving the overall strategic direction of the
Firm. It approves long-range strategies, business plans, and major transactions
that could significantly affect the firm’s business. Its authority also includes the
approval of the firm’s capital policies, the manner in which partners participate
in firm profits, and the admission of partners. It approves the compensation
of the Senior Partner and members of the Leadership Team as a group, after
a review and recommendation by a committee of the Board. All candidates
proposed by the Senior Partner Nominating Committee to stand for election as
Senior Partner must also be approved by the Board.

2 Designated members of management are (i) the Senior Partner, (ii) a partner reporting
directly to the Senior Partner, (iii) the members of PwCIL’s Network Leadership Team, and
(iv) any other person holding a management position in the Firm or with PwCIL determined
on occasion by the Board to be ineligible to serve on the Board.

42

PwC 2012 Transparency report

Composition
Members of the Board are partners of the Firm and are elected for staggered
terms of four years that can be renewed once. The Board is chaired by a Lead
Director, who is elected by members of the Board. The Board has at least 12 and
not more than 18 members in addition to the firm’s Senior Partner. Its current
members are:
Members of the Board of Partners and Principals
Robert Moritz, CPA, Chairman and Senior Partner

Paul Kepple, CPA

John Maxwell, CPA, Lead Director

John Livingstone

Mark Boyer

Riccardo Mancuso, CPA

Brian Cullinan, CPA

John McCaffrey, CPA

John Farina, CPA

Bradley Oltmanns, CPA

Saverio Fato, CPA

Alan Page, CPA

Julie Harmon, CPA

Lawrence Petzing, CPA

Linda Ianieri, CPA

Chris Simmons

James Kaiser, CPA

Board member selection process
The Board appoints a Board nominating committee comprising partners who
are not candidates for election to the Board and who are not “designated
members of management,” as defined above. No more than two members of the
Board nominating committee may be existing Board members. Absent special
circumstances, appointments to the Board nominating committee are ratified
by a partner vote.
The committee solicits and vets potential candidates, and submits a list of
proposed candidates to the Board for approval. After Board approval, that list,
which typically has more candidates than available seats, is submitted to the
partners for a vote. The partner vote is on a head count basis (one partner, one
vote) and typically is supervised by an independent election teller.


43

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