PwC: We followed the rules

For a firm that is unaccustomed to being in the public spotlight, the last month has been a torrid time for PwC, T&T’s largest professional services firm.

In sometimes blistering cross-examination, attorneys at the commission of enquiry into the collapse of the CL Financial empire subjected the firm’s senior management to question after question seeking to establish their culpability in the disintegration of what was once T&T’s largest and most global conglomerate.

It was suggested by attorneys at the commission that PwC had “cooked the books,” that its external auditors were not curious enough about land valuations and related-party transactions and that it gave CL Financial the going-concern seal of approval less than three months before the group collapsed.

As far as PwC spokesman Sean Ramirez is concerned, the firm conducted its work at CL Financial in accordance with the relevant professional standards and based on their best judgment of the financial information provided by CL Financial. 

Questioned before the commission of enquiry on February 27, during cross-examination on the fact that much of Clico’s investment portfolio was held in assets with long-term returns, PwC’s director of insurance services Dwayne Rodriguez-Seijas suggested that Clico’s $11 billion in equities on its balance sheet—including shares in Republic Bank and Methanol Holdings—at the end of 2007 were assets that could have been liquidated in a hurry. 

In an interview on Monday at PwC’s St Clair offices, Ramirez was asked whether he saw the gap in logic in that testimony. In a typical response, he said: “I would prefer not to comment on matters before the commission as the work is still ongoing. But what I can comment on is that as auditors, our role does not extend to assessing the potential successes or failures of business transactions or ventures that an entity gets involved with. That is clearly the role of management following the strategic direction set by their board, which also monitors the execution of that strategy.

“We audit historical financial statements, prepared by management, and we express an opinion on whether those financial statements reflect in all material respects compliance with the appropriate framework.

“We did our job in accordance with those standards and issued the appropriate opinions.”

Responding to a question on related-party transactions—which, in Clico’s case, led to the diversion of substantial funds, estimated at more than $1 billion, to its parent company, CL Financial—Ramirez said that inter-company transactions are not unusual.

“Having raised the point, from an accounting point of view, there is a standard that relating to related parties which requires appropriate disclosure to be made in the financial statements, so that the readers get a sense of the level of related-party transactions that exist,” said Ramirez. 

He said was not able to comment on the details of the transfers by Clico, a regulated insurance company, to its non-regulated parent company. 

Ramirez, who is PwC’s territory assurance leader for banking and capital markets, said managements of companies have a responsibility to prepare financial statements, to ensure there are adequate controls in place and to provide the auditor with relevant information about the company.

Red flags

In theory, auditors can raise red flags by modifying their audit opinions if companies do not live up to these responsibilities.

With regard to adequate controls, Ramirez said in cases in which an auditor is unable to rely on the controls provided by the company, the auditor gets into more details of the transactions. If after conducting all the work possible, the auditor still has not acquired the appropriate comfort, it can choose to modify the audit opinion of the financial statements.

Questioned on why PwC did not modify any of the audits it conducted on CL Financial or its subsidiaries, Ramirez said: “Again, without getting into specifics, I can make two quite relevant points. One is that in many cases within the group, there was a lot of push back by us on areas where we were not satisfied. This is one of the primary reasons the audits took so long to complete.

“The second point is that while our primary purpose is to opine on the financial statements, we also do make observations in the conduct of our work,” in which the deficiencies in internal controls of the company’s financial reporting process observed in the audits are communicated to the board or the audit committee. 

It came out in testimony that the recommendations by PwC to management of CL Financial and its subsidiaries were ignored, sometimes for years.

Ramirez said that the CL Financial empire collapsed in January 2009, not because of mistakes made by the auditor, but as a result of global financial meltdown in 2008, which led to liquidity issues in the group that were aggravated by corporate governance issues and a business model that, in retrospect, was inappropriate.

Yet, PwC completed the 2007 audit of CL Financial mid November 2008, and in less than three months, the group had collapsed. Asked to account for that, Ramirez said the responsibility of auditors is not to provide an opinion on the future, but to make a judgment “using all relevant information available at the time, exhausting all enquiries thought to have been appropriate at the time.”

Responding to a question on how it was possible that no one at PwC was able to discern in November 2008 that CL Financial was not a going concern, Ramirez said: “All I can say is that based on the information that was available, after exhausting the appropriate enquiries, a judgment was made. I can’t speak for what happened after the fact.” 

Reputation tarnished?

Asked whether the reputation of PwC had been tarnished by the testimony before the commission of enquiry, Ramirez said: “We, like our key stakeholders, are very concerned about how things have played out in the public arena. But our employees continue to stand by us; they understand the standards that we have in place and they know how the firm operates to the highest ethical and professional standards. 

“Some of our clients have reached out to us. They stand fully behind us in what we do. They understand the value we provide and the integrity with which we operate. But they, too, see what happens in the public and ask questions. Essentially they say that’s not you they are talking about. We have never had a board suggest to us that we are not being rigourous enough, In fact it is the opposite.”

Responding to a question on the possibility that sole commissioner Sir Anthony Colman may make adverse comments about PwC in his final report, Ramirez said while he could not say what would happen in the future, the firm was concerned about reputational risk.

At one point, CL Financial accounted for 14 per cent of PWC’s revenue, according to testimony provided by Colin Wharfe, the senior partner at the professional services firm. PwC no longer does audit work for CL Financial, Clico, Angostura or HCL, the real estate subsidiary, and lost the unrelated RBTT audit in 2009, when Canadian banking behemoth RBC transferred the audit business to DeLoitte after acquiring the local banking group.

On the issue of whether PwC’s business has dried up as a result of all of the events surrounding the collapse of CL Financial, Ramirez said: “We have not seen that at all. We continue to win new work and retain work across all spheres of our services. By and large, we still have a very significant audit portfolio when compared to the rest of the market. We continue to hire. We continue to make new partners. Our pipeline remains strong.”

And he is not concerned that PwC’s local practice could go the way of Arthur Andersen, which was once a global Big Five accounting firm, but was forced to surrender its licences to practise in the United States as a result of the Enron debacle.

“No, that is not in our contemplation. We believe in what we do. We believe that we are complying and have complied with all relevant professional standards and that will bear itself out,” said Ramirez.

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