GlaxoSmithKline Keeps Name of PwC Lead Engagement Partner Under Wraps
Does the PCAOB’s proposal on naming lead audit partners for US listed issuer audits contemplate any exemptions for personal safety? There’s a significant discussion of exemptions in the latest reproposal but, in the end, it doesn’t.
The Board has not included an exception to the disclosure requirement analogous to that in the EU’s Eighth Directive in the reproposed amendments. Further, a requirement to disclose the engagement partner’s name has been in place in certain foreign jurisdictions for quite some time, yet no specific experience brought to the Board’s attention provided persuasive information that personal risks to the engagement partners would increase as a result of these requirements.
GlaxoSmithKline (GSK), audited by PwC, is headquartered in the UK although its shares are listed on the New York Stock Exchange and the London stock exchange. The UK Companies Act governs GSK plc. The Act requires that each and every copy of the auditors’ reports to the company’s shareholders on the Annual Report, and other auditable reports, which are published by or on behalf of the company, must state, where the company’s auditors are a firm, the name of the person who signed them in his or her own name as senior statutory auditor in relation to the audit, for and on behalf of the auditors.
GSK approved an exemption to the partner naming rule and that means PwC and GSK can keep the name of the lead partner under wraps.
The experience in the EU and the UK, where the naming convention has been in place for a while, is frequently held up as an example of “much ado about nothing” with regard to auditors’ worries about pitchfork-wielding crowds coming after them at their homes in the event of a failure of one of their client companies, like a bank. That doesn’t happen although audit partners are more often mentioned by name in news accounts when bad things happen or they go on to bigger and better things like leading a firm or a regulator after presiding over a disaster like Royal Bank of Scotland or HBOS.
The opposite argument by US regulators proposing the same naming requirement—that naming lead partners will improve quality by deterring negligence and forcing higher standards of independence and professional skepticism because of concerns about one’s professional reputation— is also less than convincing. The UK had as many or more failures, forced acquisitions and nationalizations than the US during the financial crisis yet we continue to see new scandals pointing to auditor negligence emerge there such as Deloitte/MG Rover, EY and Farepack, and the fraud claims against Deloitte client Autonomy by acquirer HP. That’s in spite of the lead audit partners names being public before, during, and after the alleged negligence or fraud occurred.
For many years, according to the company, GSK plc has “been the focus of protests by various animal protection groups, some of which have engaged in aggressive, abusive and hostile acts.” GSK has taken advantage of an exemption, perhaps based on a request from PwC, that allows the company to leave the engagement partner’s name off its public reports because someone thinks naming the partner might “create, or be likely to create, a serious risk that he or she or any other person would be subject to violence or intimidation.”
So, in its 20-F filing with the SEC and all other public filings, GSK’s auditor’s opinion includes this additional disclaimer before the signature:
We have reported separately on the Group financial statements of GlaxoSmithKline plc for the year ended 31 December 2012. The company has passed a resolution in accordance with section 506 of the Companies Act 2006 that the senior statutory auditor’s name should not be stated.
PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
5 March 2013
How convenient is that? Even in the UK, where it is required by law, the name of the PwC lead partner for the GSK audit is withheld because he or she is afraid of protesters. Or maybe he/she fears getting thrown in a Chinese jail even more? GSK, and its auditor PwC, are under quite a bit of scrutiny as a result of GSK’s potentially corrupt and illegal activities in China. I wrote about PwC’s problems with the GSK bribery allegations on the Chicago Booth Capital Ideas blog:
Another situation where a potential auditor exit would have a big impact is highlighted by the recent bribery accusations against top-ten global pharmaceutical company GlaxoSmithKline in China. GSK has an active internal audit program and conducted a 4-month investigation of the bribery claims in China earlier this year as a result of whistleblower reports. But GSK, and auditor PricewaterhouseCoopers, are seemingly gobsmacked by extensive Chinese law enforcement accusations that local executives used travel agencies to channel bribes to doctors and government officials.
PwC also audits Sanofi (jointly with EY), Novartis AG, and Merck. BusinessWeek says these companies also used the same travel agency under investigation by Chinese authorities in the GlaxoSmithKline bribery and corruption case….
One thing we do know is that GSK and the global pharmas are not the only PwC China clients facing US and China Foreign Corrupt Practice Act-type allegations. PwC audit client JP Morgan was on the front page of the New York Times back in November for its “friends and family” program to hire progeny of the politically powerful in China.
PwC’s man on the street in Beijing, Brian McGinley, is the designated crime fighter of foreign corruption. He’s supposed to be keeping the firm’s clients out of trouble.
Brian McGinley is a partner in the Forensic Services practice with PwC Beijing. He advises on fraud, corruption and commercial disputes matters. Brian joined PwC United Kingdom in 1998, was in Hong Kong from 2003 and has been in Beijing since 2007…Brian has a focus on the pharmaceutical industry in China. He also has significant experience with retail, automotive and technology industries, working for a range of corporate clients, regulators and government bodies throughout Europe, USA, Latin America and Asia.
Gee, not so much lately.
The benefits of naming lead partners are negligible to non-existent. The risks of naming lead partners (imagine one angry nut case tracking down one partner and their family) are remote, but catastrophic. Risks outweigh the benefits; easy decision.
@Jeff M
Even in US partners usually show up at annual meetings. Have you ever heard of an “angry nut case” asking any one of them a question let alone storming the stage to shiv one? It’s called “public” accounting for a reason. The firms are supposed to be serving the public and capital markets in general. Hiding like little girls doesn’t give me great confidence they have the cojones to stand up to management when needed.
Stupid question – with all of the informational available to an investor about a public company, do you honestly believe that publishing a name is important? Do you actually believe that an investor will buy a stock after they read the name of audit partner?
@TomH
It’s not a stupid question. Yes, I think access to the names of the whole audit engagement leadership team is important, before something happens. I think I have given plenty of examples where the firms keep sanctioned or problematic partners involved in audits and managing audits that later have problems. I don’t think the audit engagement leadership team should be immune from scrutiny of their credentials, experience and sanctions/disciplinary history. If the regulators think that names and track records of individual partners are important for assessing the risk of a particular engagement then investors should too.
@ Francine
Sorry, can’t take you seriously when you refer to audit partners as “little girls” with no “cojones”, after throwing out the red herring “shiv” question. I thought we were having a serious dialogue. I was wrong; you’re simply blogging your agenda and are not interested in differing points of view.
@Jeff M
Sorry I can;t take your remark that seriously when argue it using the “extreme nut” case. If I were not interested in different points of view I wouldn’t entertain them. But I don’t have to agree with them and I don’t have to be, on my own site, always so serious in order to make a serious point.
It’s possible you’d be taken more seriously if you stayed awy from the sophomoric name calling.
@Jeff M
I’m not much worried about what you seem to be worried about for me.
I agree.
I would consider the chance of an ‘extreme nut case’ tracking down an audit partner to be much more remote than the chance that there is some benefit to naming partners in reports, certainly in terms of accountability.
When I hear their arguments, the people who claim there is no benefit to naming partners indirectly make the case that there is no benefit to a Big Four audit, period.
This is an interesting example. Here in the UK, animal rights groups very specifically target lists of people associated with GsK and other pharma groups for low level harassment. Two friends of mine in pharma, not at all in management positions, one a building secretary, one a researcher, have had red paint thrown on their clothes and their car scratched respectively. So, we’re actually not talking about a low chance of a serious attack, but a pretty high chance, almost a likelihood of a continuing campaign of individually minor attacks that could add up to a seriously worse quality of life. While I’m all behind seeing auditor names on accounts, if there is going to be an exception, this is a good one.
Interesting Nigel. Thanks for that on-the-ground insight.
Nigel, I wouldn’t call red paint being thrown on one’s person or having a car damaged low-level harassment if that person was targeted because they work for a specific employer. However, if low level people in pharma were being targeted, I would expect to see whole parking lots and entire facilities targeted. Two people in the whole UK had problems? That could just as easily be random, unless authorities have uncovered target lists. Just my opinion.