Interesting Disclosures During TBW v. PwC Pre-Trial Period

In a previous post I summarized the events leading up to the TBW Plan Trustee v. PwC case that went to trial in early August and ended mid-trial in a confidential settlement.

In a future post I plan to document some of the interesting testimony during the trial regarding PwC’s planned defense and its partners’ and staff’s understanding of an auditor’s public duty, of the firm’s independence obligations,  and its duty to address the risk of fraud in an audit.

Right now I’d like to take an opportunity to document some interesting information about how the financial side of the firms, in this case PwC, works.

Because the TBW v. PwC case went to trial, and a verdict could have included an assessment of punitive damages, we witnessed a highly illuminating series of motions and partial disclosures about PwC’s finances and how they manage them. This kind of information has not been made public by any Big 4 firm in a potential “tipping point” case for at least thirty years.

The last time it was even discussed in public by regulators was on March 13, 2008, when the US Treasury Advisory Committee on the Auditing Profession (ACAP), co-chaired by former SEC Chairman Arthur Levitt, Jr. and former SEC Chief Accountant Don Nicolaisen, met to discuss the preliminary recommendations of its subcommittees on human capital, [audit] firm structure and finances, and concentration and competition.

There was one other notable time shortly before that.

During an interview by the Wall Street Journal in March of 2007, pre-crisis, then PwC U.S. Chairman Dennis Nally disclosed some limited US financial information, even some on a per partner basis, but said further disclosures would be dependent on whether the firms received legislative relief from liability. The “conversation” he was referring to was the US Treasury ACAP meetings.

WSJ: It’s tough to assess the risk facing the firms because as private partnerships there’s no financial information available. At what point do the firms have to say here are our financial statements, just like public companies do?

Mr. Nally: I would think, dependent upon where all of this conversation goes, if there is to be some form of [liability] relief there obviously would have to be more transparency around that.

When TBW’s attorney attempted to get this same WSJ article introduced in the trial so that Nally’s additional comments about the auditors’ duty to detect fraud could be used to impeach its partners testimony to the contrary, PwC’s attorneys objected. The judge agreed that the statements to a newspaper by the US Chairman of the firm during the peak of the TBW/Colonial fraud were merely hearsay and not necessarily representative of firm policy or accounting standards.


PwC requested a protective order for the financial information it provided to the TBW Plan Trustee, as plaintiff, in connection with that plaintiff’s claim for potential punitive damages if it should win the case.

The TBW Plan Trustee was interested in how much profit was distributed to every individual partner and PwC responded that it had already provided the number in aggregate for 2013, 2014 and 2015, since no individual partner was a party to the litigation.

TBW, the plaintiff, had also sought to know how much money PwC could borrow to pay a punitive damage award, in addition to the firm’s net worth. PwC argued that Florida law, where the case was heard in state court, limited determinations of punitive damages to an ability to pay based solely on net worth.

In the original request for a protective order for this information, PwC included an affidavit from its Treasurer,  Robert File. File talks about some of the inner financial workings of PwC, which like the other three global firms, are private partnerships.  These issues are rarely discussed by the firms  or anyone else, except this blog.  As a result, many readers have doubted any statements I’ve made in the past on the issues.

PwC told the Florida court that it would be “prejudiced by the disclosure of information regarding its lines of credit” because it is commercially sensitive information. “PwC would be irreparably harmed” if the existence and amount of these credit lines was made public, said File.

It’s important to remember that public accounting firms’ choices for banking relationships are strictly constrained by auditor independence rules which prohibit any credit arrangement or business alliance with an audit client. So if PwC audits JP Morgan and Bank of America, for example, it can’t do any of its banking business with JP Morgan or Bank of America and its audit partners can’t have mortgages or checking accounts there.

Financial information is not routinely distributed to clients, prospective clients or anyone else because it is commercially and personally sensitive to the firm and its partners. File says it is PwC’s policy to “strictly refrain” from disclosing financial information to any outside parties, and regulators such as the SEC or PCAOB are not mentioned as an exception. The firms lenders, creditors, and sureties are an exception but on a limited basis and with non-disclosure agreements in place.

Quarterly and annual financial information, File says in the affidavit, is never disclosed to the public at large except in rare instances when strict non-disclosure agreements are in place.

PwC’s financial information is not prepared according to Generally Accepted Accounting Principles, says File in the affidavit.

The firm’s financial information is also strictly controlled within PwC and only partners and key admin staff can view limited information on a quarterly basis via a secure electronic portal but can not print, copy or forward it.

PwC also argued in the TBW court filing that its tax returns would be useless to TBW in determining PwC’s net worth or ability to pay punitive damages. That because the majority of its annual income is distributed to partners each year, says Fine, and reflected on their individual tax returns (which are prepared by the firm) and not in the firm’s overall return.