Committed to quality

Global Annual Review 2020

Our approach to delivering quality services across all our operations and network

Focus on quality…

The quality of the work we do is a top priority for PwC and quite rightly a baseline expectation from all our stakeholders. But what do we mean by quality? Historically, it meant compliance and meeting the standards set before us. However, that's a given. It’s much more than just complying with policies and regulations. With stakeholder expectations continuing to rise and evolve, a relentless focus on quality has never been more important.  At PwC, we strive to consistently meet the expectations of our stakeholders and comply with all applicable standards and policies.

We are building a culture across a network of 284,000 people that emphasises that quality is the responsibility of everyone at PwC. This begins with tone at the top and creating an environment of quality and high performance. Over the last year, we have been focused on fostering the right tone at the top at all our member firms across the world, while at the same time seeking to drive a quality mindset that extends beyond compliance.

...right across all our businesses

Each member firm is required to have in place a system of quality management (SoQM); to annually complete a quality management system performance assessment; and to communicate the results of these assessments to network leadership. These results are then discussed in detail with the leadership of each member firm and if they are not at the level expected, a remediation plan is agreed with local leadership taking personal responsibility for its successful implementation. During FY20, the Network Leadership Team continued to make driving quality improvement a key priority with specific actions agreed, for example improving the consistency of usage of quality indicators in our Strategy Council member firms. 

It is very important that we are transparent about both the efforts that we are making to enhance quality, and also the results and the impact that these efforts are having. 

We welcome the increased public focus on audit quality, and the dialogue about how auditors, preparers and investors can work collaboratively to increase the confidence in financial reporting. We have actively contributed to this debate with audit committees, boards and regulators worldwide and we continue to publish our overall network internal inspection results for audit engagements. We are eager to keep engaging with others to share, listen and learn – while continuing to invest in enhancing the quality of every audit we undertake.

The quality of our work across the full range of our services, including Tax and Advisory, is equally important and it has been a key focus for us, both in terms of how best to test, measure and enhance quality, but also prioritising the levels of investment we need to make to achieve expected levels of quality.

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At PwC, our Tax & Legal Services are underpinned by our PwC Purpose and Values and a focus on the principles contained within our PwC Global Tax Code of Conduct. As of 30 June 2020, Tax Policy Panels had been established in 32 territories (2019: 31), including all of our Strategy Council member firms. A Tax Policy Panel  comprises senior partners and subject matter experts who determine whether a potential tax project or advice position fits with our brand values and our commitments in the Global Tax Code of Conduct. During FY20 over 340 matters were considered and discussed by our Tax Policy Panels (FY19: over 330).

Ensuring we deliver the outcomes demanded by clients in a way that gives them the right experience is an important consideration for our Advisory teams. We are proactive in thinking about new challenges to the quality of our delivery; for example as we increasingly use and deploy world-class technologies and automations, a key focus has been on identifying, managing and mitigating the risk associated with technology-enabled transformation. We regularly perform ‘in flight’ reviews of the most significant projects at our Strategy Council member firms to check on progress against objectives and successful and timely delivery so that we may make any necessary changes and adjustments. In FY20, over 400 (FY19: 200) in flight reviews were undertaken on projects. Our Advisory business has also increased focus on driving quality through standardisation, using consistent methodologies and delivery models across the network.

Specific focus on audit quality

Delivering quality audits is core to our purpose, and all of our member firms across the world are committed to providing high quality audits. When our work falls below the standards that we expect and that are set by the regulators, we should rightly be criticised. We take any instance of a sub-standard audit very seriously and we work hard to analyse the root cause of the issue, learn the lessons and take the opportunity to enhance the quality of future audits. Our member firms also reflect quality in the evaluation, reward and accountability of the relevant Assurance partners and leadership teams.

To help our member firms deliver consistent high quality audits, PwC has established clear objectives around audit quality and provides support to help those firms meet these objectives. Our member firms can only deliver quality audit services if they have access to the necessary capabilities – both in terms of people and technology. That’s why our quality objectives focus on having the right capabilities – both at a member firm level and across our network – and on using these capabilities to meet our own standards and applicable professional requirements. These capabilities can only be developed under the right leadership and quality culture, promoting the right values.

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“Delivering quality audits is core to our purpose and in the uncertain and turbulent times of the COVID-19 pandemic has become more important than ever.”

James Chalmers Global Assurance Leader, PwC

Our response to COVID-19 

The COVID-19 pandemic has had an unprecedented impact on our clients and our people, as well as global and local economies and broader society. 

At PwC, in addition to safeguarding the health, safety and well-being of our people, we have remained focused on working together as a network, with our clients and other stakeholders to continue to deliver audit quality. 

From the early stages of the pandemic we put a team in place to monitor developments globally and to highlight areas of critical importance to support execution of quality audits. We developed specific guidance on the impact of COVID-19 for our audit leaders around the world covering critical aspects of audit quality including regulatory and standard setting updates, audit reporting, methodology, accounting and learning and education - giving our teams the means to consider the unique circumstances in play and to respond accordingly. 

Meeting challenges

As a result of the COVID-19 pandemic we faced a number of new challenges in our audits. To support our audit teams in dealing with these challenges, we’ve issued guidance, for example with respect to physical inventory counts and auditor reporting on COVID-19, and encouraged use, where necessary, of specialists to support audit teams on impairment and going concern analysis.   

A member firm’s system of quality management provided the framework to identify, assess and respond to the risks arising from the pandemic and we shared experiences and examples from across our network as the pandemic progressed to provide continuous and real-time learning and to respond to developing and evolving risks and challenges.

Using technology

Our audit technology infrastructure and tools have been in place for a number of years and enabled our people to continue to carry out their work despite the significant change in our physical work environment.

The impact of COVID-19 continues to evolve. We are continuing to assess and respond to potential risks in our audits.

Integrated and aligned in the right way

The audit quality objectives focus on having the right people, supported by effective methodologies, processes, and technology, appropriately directed and supervised. These represent the capabilities that we believe are relevant to achieving and sustaining audit quality. To help our member firms achieve these objectives, we also have a number of dedicated functions within the PwC network that develop practical tools, guidance and systems to support audit quality. We’ve integrated and aligned these elements to create a comprehensive and interconnected quality management framework, Quality Management for Service Excellence (QMSE), that each member firm implements and tailors to reflect their individual circumstances. 

Where appropriate and necessary, our audit teams are able to draw on expertise from parts of the firm outside the assurance practice. Audit – especially in today’s data-rich world – requires analysis and judgement on vast amounts of increasingly diverse information. Deep understanding of technologies like data analytics as well as capabilities around the valuation of physical assets and complex financial instruments, actuarial calculations, treasury operations, tax compliance, and many other areas can all be vital. Being able to bring these skills to bear on audit work helps strengthen audit quality and the trustworthiness of information used by the users of financial statements.

To avoid the risk of potential independence conflicts, PwC firms have applied global ethical guidelines that tightly limit the non-audit services they are willing to provide to audit clients. These have the effect of prohibiting auditors from acting in a management capacity or as an advocate for an audit client, and from auditing any work that they’ve done themselves. 

These guidelines are reinforced by regulatory restrictions on the services the firms can sell to audit clients. These restrictions vary by country – but may include a complete ban on selling some services, and caps on the revenue that can be generated from others as a proportion of audit fees. In addition to these restrictions some member firms have further limited the services they provide to certain clients in response to local concerns.

Delivering quality

Central to the QMSE framework is the recognition that quality management needs to be embedded in everything we do as individuals, teams, and firms. To support consistency and guide member firms, the quality objectives are supported by designated key activities which are considered necessary to achieve the quality objectives, focused mainly on building a quality infrastructure and organisation. Each member firm supplements these key activities to respond to risks that they have identified as relevant for their operating environment and client base.

Values, judgments and professional scepticism

Performing quality audits requires more than just the right processes. The auditor’s role is to reach a professional judgment based on reasonable assurance as to whether the financial statements prepared by the entity’s management are free of material misstatements and present a fair picture of the entity’s financial performance and position.  To carry out this assessment effectively, the auditor needs to use all the capabilities that have been built up in line with our quality objectives. These include professional scepticism, specialist skills and judgment – all supported by state-of-the-art technology. PwC’s values guide the auditors in making their assessments, in applying ethical behaviour and building a strong culture. Some member firms have started initiatives to look into how they can further strengthen their culture and drive the behaviours that underpin quality. These pilots cover topics around how auditors can challenge each other and clients more effectively and how audit teams can use feedback to facilitate continuous learning. 

Highly-skilled professionals

We aim to recruit, train, develop and retain the best and the brightest staff who share in PwC’s strong sense of responsibility for delivering high-quality services. PwC provides access to a curriculum of formal learning and technical courses to prepare staff and partners for the delivery of quality assurance services. During the year, we have maintained a focus on providing PwC’s audit practitioners with the opportunity to sharpen their professional judgment, scepticism, technical and professional skills. The audit curriculum is available to the member firm in a modular format, allowing PwC member firms to select when they will deliver different portions of the curriculum and augment with locally developed training based on local needs. The materials have a variety of designs and formats which all follow consistent principles:

  • Focus on practical application

  • Simulate on-the-job experiences

  • Make use of technology in the classroom / virtual classroom where appropriate

Our audit engagements are staffed based on expertise, capabilities and years of experience. Engagement leaders determine the extent of direction, supervision and review of junior staff. In order to learn and further develop their skills, team members obtain feedback on their overall performance, including factors related to audit quality such as technical knowledge, auditing skills and professional scepticism. Audit quality is an important factor in performance evaluation and career progression decisions for both our partners and staff.

Enabled by technology

New technologies are transforming the way audits are performed, resulting in improvements  in quality, insight and user experience for audit professionals and clients. 

  • Aura Platinum – our cloud-based enterprise resource planning system for the audit – is at the heart of how we build and execute the audit plan, and drives global quality and consistency. It lays the foundation for future digitisation and automation and now has 100,000 users across the PwC network

  • Connect Suite – our suite of collaboration tools which has 700,000 users – helps us to efficiently collaborate and exchange information with our clients and group audit teams across the network

  • PwC Extract – our data extraction tool – enables teams to gather and manage client data. It allows teams to connect to client systems, acquire data in a secure way and store data safely

  • Halo for Journals – our data analytics tool – provides deeper insights to clients through built-in visualisations and allows engagement teams to spend less time performing manual processes and more time understanding transactions. It enhances quality by helping to identify unusual items and potential risks. Halo is currently used for 13,000 audit clients, and in FY20, it analysed 580 billion “general ledger” lines

In the future, we believe that a step-change in audit quality will be achieved through a new partnership between people and technology. We are investing heavily in advanced digital skills and AI-powered tools that are transforming the way people and tech work together. AI and automation have the potential to enhance audit work with exceptional speed and accuracy, eliminating human bias and error, and augmenting human judgement. Our auditors will work with intelligent machines to test billions of transactions in seconds, spot patterns and trends in data, and detect anomalies and exceptions. 

We are building AI Auditor, a suite of AI-powered applications designed to enhance audit quality and insight. Our first application, GL.ai, detects anomalies in a company's general ledger with a focus on fraud and error. Cash.ai is our second application. It automatically performs the testing of cash balances automating at least 80% of the audit of cash, improving quality through the consistent application of our methodology. 

Our extensive pilots of these tools have delivered demonstrable quality improvements as well as improving the experience for our teams. The development of the next two applications is underway – automating the testing of Accounts Payable and Accounts Receivable - and we will continue to invest in these tools and developing the skills of our people to maximise and accelerate the benefits across the entire audit.

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Internal reviews  

Monitoring carried out by each member firm encompasses a review of completed engagements, Engagement Compliance Reviews (ECRs). They are risk-focused covering, on a periodic basis, individuals in each firm who are authorised to sign audit or non-audit assurance reports. The review assesses whether an engagement was performed in compliance with PwC Audit guidance, applicable professional standards and other applicable engagement-related policies and procedures. In addition, the PwC network undertakes periodic reviews of the systems of quality management of member firms to assess whether the overall quality objective and underlying quality management objectives have been achieved.

Engagement Compliance Reviews 

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Results of our network internal inspections for audit engagements
  2020 2019 2018 2017 2016
Total audit engagement reviews 1,661 1,768 1,890 1,870 1,977
Compliant (%) 82.2% 76.5% 76.0% 72.8% 74.4%
Compliant with Improvement Required (%) 14.0% 18.4% 16.2% 18.4% 18.9%
Total Compliant (%) 96.2% 94.9% 92.2% 91.2% 93.3%
Non-Compliant 63 91 147 164 132
Non-Compliant (%) 3.8% 5.1% 7.8% 8.8% 6.7%

Reviews are led by experienced independent Assurance partners, supported by independent teams of directors, senior managers and other specialists. Review teams receive training to support them in fulfilling their responsibilities, and use a range of checklists and tools developed at the network level when conducting their review procedures.

Between 2016 and 2020, we reviewed a total of 9,166 audits by member firms worldwide, and the results are set out in the table above. 45% of those audits were ‘public interest entities’ (essentially listed and other significant companies) – and amongst these public interest entity audits, 214 were classified as non-compliant over the five years. 

Where an audit is deemed to be non-compliant, we consider what, if any, impact this may have on the financial statements of the entity. For the 2020 inspection cycle, of the 1,661 audits that we reviewed through our own inspection process, 63 (3.8%) were rated as non-compliant, and of those, four require a restatement of the audited organisation’s financial statements and/or for the auditor's report to be withdrawn or reissued, compared with eight that required restatements or for the auditor's report to be withdrawn or reissued from the 2019 inspection cycle. 

We are investing heavily in enhancing audit quality and are committed to continuous improvement, raising the quality bar and setting higher standards for ourselves. We know that we have more to do and that we need to reduce the level of non-compliant audits further. We remain committed to additional investment and actions needed to further enhance quality at both a local firm level and across the PwC network.

Monitoring by audit regulators

In addition to our internal review programme, our member firms are subject to monitoring and inspection by external regulators. Some 55 of these regulators are members of the International Forum of Independent Audit Regulators (IFIAR). In 2015, as an initiative to improve audit quality, nine leading audit regulators represented on IFIAR’s Global Audit Quality Working Group, and the six biggest global audit networks agreed on a target to decrease the proportion of audits of listed public interest entities identified with findings from regulator inspections on an aggregate basis. 

Starting with a baseline result for the six networks of 39% of audits with findings in IFIAR’s 2015 Survey, the target was to reduce that figure by at least 25% over a four year period on an aggregate basis. In January 2020 IFIAR reported a reduction by 21% in the rate of audits with findings over the four year period for the six biggest audit networks collectively. The equivalent figure for PwC for these nine regulators indicates a reduction from 34% in 2015 down to 24% in the 2019 survey published in February 2020, thereby indicating that PwC achieved its element of reduction for the collective IFIAR target.

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A new 25% reduction target has been established with the Global Audit Quality Working Group for the period from 2019 to 2023 with an expanded group of 25 audit regulators. We will monitor our progress against that target for regulatory inspection results over the next four years.

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Mike Davies

Mike Davies

Director, Global Corporate Affairs and Communications, PwC UK

Tel: +44 7803 974136

Email

Andrea Plasschaert

Andrea Plasschaert

Senior manager, Global Corporate Affairs and Communications, PwC Switzerland

Tel: +41 58 79 29 123

Email

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Mike Davies

Director, Global Corporate Affairs and Communications, PwC United Kingdom

Tel: +44 7803 974136

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