The recent downfall of Credit Suisse has brought attention to a concerning trend in the auditing industry, specifically regarding the role of PricewaterhouseCoopers (PWC).
Despite losing the audit mandate for Credit Suisse to Ernst & Young (EY) after the merger with UBS, PWC has experienced a significant increase in its audit fees from the troubled bank. Since taking over the audit from KPMG in 2019, PWC's fees have surged by 84%, reaching CHF 92 million in 2022, compared to CHF 50 million in 2018. This sharp rise raises questions about the effectiveness and independence of auditors during financial turmoil.
The increase in audit fees at Credit Suisse contrasts with the more modest increases seen at UBS and other large Swiss companies, where audit costs rose by only 10% and 6% respectively. PWC has not provided reasons for this substantial growth in fees, citing professional and auditing secrecy. This lack of transparency is concerning given the scrutiny surrounding Credit Suisse's accounting practices, which have been criticized for their questionable methods in reporting profits and losses.
The Financial Market Authority (FINMA) has expressed concerns about the independence of auditing firms, particularly in light of the Credit Suisse debacle. FINMA has called for systemic change to enhance auditor independence, noting that current practices create a dependency on large clients. This dependency can lead to a lack of critical oversight, as auditors may fear losing lucrative contracts if they raise concerns about their clients' financial practices.
FINMA's media spokesperson, Serkan Isik, has highlighted that auditors are currently mandated by the entities they supervise, rather than by the regulatory body itself. This arrangement is seen as a significant shortcoming, as it compromises the auditors' ability to maintain an objective stance. The authority is exploring the possibility of direct mandates for supervisory audit firms, which could potentially strengthen their independence and improve their critical approach to auditing.
The investigation into Credit Suisse's financial practices has revealed deficiencies in its internal control systems. The U.S. Securities and Exchange Commission (SEC) had raised critical questions about Credit Suisse's risk assessment processes for over a decade, particularly following the bank's substantial losses linked to the collapse of the hedge fund Archegos. Despite these concerns, PWC's audits failed to provide adequate warnings about the bank's financial health, resulting in a last-minute prohibition on the publication of Credit Suisse's 2022 annual report.
The situation with Credit Suisse highlights a broader issue within the auditing industry: the potential for conflicts of interest arising from the dependence of auditing firms on their major clients. The loss of significant contracts, as seen with KPMG's loss of both Credit Suisse and Nestlé mandates, can have severe financial consequences for auditing firms. In 2020, KPMG's turnover dropped by half, while PWC and EY saw substantial increases in their revenues, raising questions about the pressures auditors face to maintain favorable relationships with their clients.
This dynamic can lead to a culture of complacency among auditors, who may prioritize client retention over rigorous scrutiny of financial practices. The lack of critical feedback from auditors, as evidenced by PWC's failure to address known issues in Credit Suisse's accounting until the very end, poses risks not only to the firms being audited but also to the broader financial system. The repercussions of such failures can be far-reaching, affecting investor confidence and market stability.
As the financial landscape continues to evolve, there is a growing need for robust regulatory frameworks that ensure auditor independence. The ongoing discussions within FINMA regarding direct mandates for auditors reflect a recognition of the need for reform in the auditing sector. By addressing the inherent conflicts of interest that arise from the current system, regulators aim to foster a more transparent and accountable auditing environment.
The Credit Suisse saga serves as a cautionary tale for the financial industry, emphasizing the critical importance of independent oversight in maintaining the integrity of financial reporting. The implications for auditing practices and regulatory frameworks will be closely monitored by stakeholders across the financial spectrum as the fallout from this crisis continues to unfold.