PCAOB Fines PwC $2.75M For Quality Control Lapses

The Public Company Accounting Oversight Board (PCAOB) has dropped the hammer on PwC Israel, striking the firm with a $2.75 million fine for widespread training exam misconduct. Turns out, for five years straight from 2017 to 2022, hundreds of employees at Kesselman & Kesselman CPAs (PwC Israel) were caught with their hands in the proverbial cookie jar, sharing answers on mandatory internal training exams.

The Price of Cutting Corners

This wasn’t just a case of a few rogue accountants passing notes in the back of the classroom. According to the PCAOB, hundreds of PwC Israel employees were involved in sharing or receiving answers on internal exams meant to test their knowledge of U.S. auditing standards, professional ethics, and independence rules. Despite having a code of conduct that broadly required integrity, the firm had no explicit policy banning answer-sharing on training tests. The result? Years of unchecked misconduct only came to light in 2022, thanks to a whistleblower.

“Integrity is fundamental to effective auditing,” said Robert Rice, Director of PCAOB’s Division of Enforcement and Investigations. “Investors must be able to trust that auditors will act with integrity when performing their professional duties.” The PCAOB’s decision to fine PwC Israel comes as part of a broader crackdown on Big Four firms over quality control failures. Since 2021, the regulator has sanctioned 10 different firms for similar training exam misconduct, including PwC branches in China, as well as KPMG Netherlands and Deloitte Indonesia and Philippines.

How the Scandal Unfolded

The scandal at PwC Israel was first reported to the PCAOB in 2022, three months after the board had already requested information about improper answer-sharing. Faced with mounting evidence, PwC Israel launched an internal investigation led by an external law firm, which confirmed the extent of the issue. The PCAOB then conducted its own probe, reviewing the firm’s quality control procedures and personnel management practices. The investigation was led by David Florenzo, Thomas McCann, and Tiffany Johnson, under the supervision of William Ryan and John Abell. Their findings? Significant deficiencies in PwC Israel’s controls allowed the misconduct to fly under the radar for five years. 

Damage Control Mode Activated

While not admitting or denying the PCAOB’s findings, PwC Israel has agreed to:

• Pay the $2.75 million fine
• Revamp its internal quality control policies
• Report back to the PCAOB within 150 days on the steps taken to prevent future policy violations

The firm’s spokesperson acknowledged the missteps, stating: “When we do not meet the high standards, we set for ourselves, even outside any particular client work, we take action to learn the lessons and do better.” PwC Israel’s legal counsel has not publicly commented on the case.

Comparing Scandals

Compared to other infamous accounting scandals, think Enron, WorldCom, or Lehman Brothers, the PwC Israel case isn’t about financial fraud. No investor money was lost, no balance sheets were doctored, and no corporate giants collapsed overnight. But that doesn’t mean this isn’t a big deal. Auditors are the financial world’s last line of defense, ensuring companies play by the rules. If those responsible for maintaining ethical standards can’t follow them internally, trust in the entire profession takes a hit. And let’s not forget this isn’t an isolated case. Other Big Four firms have been caught up in training exam misconduct, including:

• KPMG Netherlands - Fined $25 million in April 2024
• Deloitte Indonesia & Philippines - Penalized $2 million for exam misconduct
• Ernst & Young (EY) - Hit with a record $100 million fine in 2022 by the SEC for the same

PCAOB’s Enforcement Surge

The PCAOB has been ramping up enforcement efforts under President Biden, with monetary penalties six times higher than during the first Trump administration. A recent report by Cornerstone Research found that enforcement actions peaked at 51 cases in 2023, the highest since 2017. Under Biden, total PCAOB penalties reached $67.8 million, compared to just $10.1 million during Trump’s first term. However, with Donald Trump’s second presidential term underway, there are questions about whether the PCAOB’s aggressive stance will continue. Historically, PCAOB enforcement dropped sharply during Trump’s first administration, with audit actions falling from 43 cases in 2017 to just 12 in 2021.

Jean-Philippe Poissant, a principal at Cornerstone Research, noted that regulatory trends could shift again: “We don’t really know all the underlying factors and all the drivers of these trends, but the data shows almost the inverse…a valley at the end of the first Trump administration.” Meanwhile, Russell Molter, another principal at the firm, highlighted ongoing uncertainty over the PCAOB’s future, particularly whether it might be folded into the SEC.

What Happens Next?

While the $2.75 million fine may not be a financial burden for a global powerhouse like PwC, the reputational damage is far more significant. In an industry where trust and ethics are non-negotiable, this incident raises serious questions about accountability in professional learning and development especially within one of the Big Four firms. For a firm that audits the world’s largest corporations, PwC is expected to set the standard in ethical practices. Training programs are not just checkboxes, they are meant to uphold professional integrity, ensure compliance, and reinforce ethical decision-making. When those responsible for ensuring compliance fail their internal tests, it sends a troubling message to the entire profession. This case serves as a wake-up call for accounting and finance professionals. The real lesson here? Continuous learning and professional development must go beyond just passing tests, it must be about upholding ethical standards at every level. Stay informed. Stay ahead. Stay winning. Subscribe for expert insights now!