| University | Kaplan University (KU) |
| Subject | BAAFM23 Auditing |
Task – A critique of ChatGPT’s response
1. Read the following extract of an article
Adapted from: SEC Charges PwC LLP With Violating Auditor Independence Rules and Engaging in Improper Professional Conduct
Extract:
Washington D.C., Sept. 23, 2019 —
The Securities and Exchange Commission today charged accounting firm PricewaterhouseCoopers LLP with improper professional conduct in connection with 19 engagements on behalf of 15 SEC-registered issuers and violating auditor independence rules in connection with engagements for one issuer where the firm performed prohibited non-audit services. The SEC also charged PwC partner Brandon Sprankle with causing the firm’s independence violations. Both respondents have agreed to settle the charges and PwC will pay over $7.9 million in monetary relief.
The SEC’s order finds that PwC violated the SEC’s auditor independence rules by performing prohibited non-audit services during an audit engagement, including exercising decision-making authority in the design and implementation of software relating to an audit client’s financial reporting, and engaging in management functions. In connection with performing non-audit services for 15 SEC-registered audit clients, the order states that PwC violated Public Company Accounting Oversight Board (PCAOB) Rule 3525, which requires an auditor to describe in writing to the audit committee the scope of work, discuss with the audit committee the potential effects of the work on independence, and document the substance of the independence discussion.
2. ChatGPT Prompt
“In the context of the above article, identify and explain the threats to independence faced by the auditors that could have compromised their objectivity and professional skepticism.”
3. ChatGPT’s Response
Here are some of the key threats to independence that the auditors may have faced:
In the context of the SEC’s charges against PricewaterhouseCoopers LLP (PwC) and its partner Brandon Sprankle, the following threats to auditor independence that could have compromised their objectivity and professional skepticism were identified:
(a) Self-Review Threat
PwC provided prohibited non-audit services, including decision-making authority in designing and implementing software related to the audit client’s financial reporting. This created a self-review threat, as PwC was effectively auditing its own work. Auditors must maintain independence by avoiding situations where they may need to review and audit their own services or judgments. The SEC stated that this activity compromised PwC’s independence, as the firm engaged in management functions, impairing their ability to exercise unbiased judgment during the audit.
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(b) Management Participation Threat
PwC’s involvement in management functions, including decision-making authority over financial reporting systems for their audit clients, resulted in a management participation threat. Auditors are prohibited from assuming managerial responsibilities because it conflicts with their role as independent assessors of financial statements. By engaging in these activities, PwC essentially became part of the client’s management, making it difficult for them to maintain impartiality and objective judgment in the audit.
(c) Familiarity Threat
The long-standing relationship with multiple audit clients, along with the failure to properly disclose non-audit services to audit committees, could have led to a familiarity threat. Familiarity threats arise when auditors develop too close a relationship with their clients, potentially impairing their objectivity. This is exacerbated by the fact that PwC failed to have appropriate quality controls in place to monitor independence, suggesting the auditors may have become too comfortable with their clients and overlooked important independence considerations.
(d) Advocacy Threat
PwC’s actions, particularly in taking on decision-making roles and providing non-audit services, could also pose an advocacy threat. By engaging in management functions or providing significant non-audit services, the firm might have had an incentive to promote the client’s interests, rather than maintaining an independent, unbiased position during the audit. The SEC highlighted that PwC’s failure to properly communicate the scope and effects of their non-audit services to the audit committee deprived these committees of essential information to assess independence, potentially leading to a scenario where PwC could have been seen as advocating for its clients’ positions.
(e) Compliance and Regulatory Threat
The SEC also noted that PwC violated Public Company Accounting Oversight Board (PCAOB) Rule 3525 by not providing adequate written documentation or discussing the potential effects of non-audit services on independence with audit committees. This failure in communication poses a compliance threat, as it undermined the audit committees’ ability to assess PwC’s independence. Furthermore, PwC’s lack of robust quality controls to ensure that non-audit services were permissible under independence rules directly contravened regulatory requirements, leading to improper professional conduct.
Conclusion
These independence threats highlight how PwC’s actions, specifically performing non-audit services, engaging in management functions, and failing to properly communicate with audit committees, could have compromised their objectivity and professional skepticism. These issues reflect significant breakdowns in PwC’s internal controls related to maintaining auditor independence.
4. Provide a critique of items (a) to (e) in ChatGPT’s response
For all items (a) to (e):
- (i) Fact-check each item.
- (ii) Provide supporting evidence to justify if ChatGPT’s response is accurate (factual) or inaccurate for each item (a) to (e).
- (iii) For items that contain factual errors, describe how the response from ChatGPT should be edited.
- (iv) Discuss how ChatGPT’s answer can be improved.
- (v) How have recent changes in regulatory frameworks, such as those introduced by the Public Company Accounting Oversight Board (PCAOB) and the Securities and Exchange Commission (SEC), influenced auditing practices, particularly in ensuring auditor independence and objectivity? Provide examples of how regulatory developments might have impacted the practices of firms like PwC in the given case.
5. Recommended Format
Introduction
State the purpose of this critique. For instance, you are critically evaluating ChatGPT’s response to assess whether it accurately identifies threats to independence in the case and proposing improvements where necessary.
Critique of Items (a) to (e)
For each item (a) to (e) in ChatGPT’s response:
- Evaluate if the response is factual and accurate.
- Justify your critique using research and sources on the case, threats to auditor independence, and applicable auditing standards (e.g., IFAC Code of Ethics).
- Reference all research clearly in your critique.
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Conclusion
Summarize the overall quality of ChatGPT’s response to the question: “In the context of the above article, identify and explain the threats to independence faced by the auditors that could have compromised their objectivity and professional skepticism.”
Include an evaluation of ChatGPT’s accuracy and the improvements it could make.
6. Learning Outcomes Assessed
- Critically appraise the role and responsibility of auditors, both statutory and non-statutory.
- Discuss new developments in auditing, including challenges.
7. Additional Information
Word Count
Your report should be double-spaced and word-processed. The 1,500-word limit includes only the introduction to the conclusion. Any other content (references, cover page, etc.) is excluded from the word count.
Weighting
10% of your overall mark
Submission
Assignments submitted will be subject to Turnitin’s assessment of originality in Moodle. This also seeks to ensure proper citation of references by comparing students’ electronic documents to a variety of online sources and to the Turnitin database.
Marking Grid
| Item | Description | Section Mark |
|---|---|---|
| 1. | Critique of items (a) to (e) from ChatGPT’s response (12 marks each × 5 items) = 60% Discussion of recent developments in regulatory framework = 20% Arguments are presented in a logical structure with an established focus. The critique is supported by valid evidence from research. Accurately identifies potential inaccuracies in the response and the edition proposed is supported by valid evidence from research. |
80% |
| 2. | Use of English Exhibits facility in the use of language, using appropriate vocabulary. |
10% |
| 3. | Presentation and Structure Includes clarity, use of grammar, correct spelling, adherence to referencing convention. |
10% |
| TOTAL MARKS | 100% | |
Please refer to the generic grade criteria applicable to essays, reports and aspects of projects and dissertations.
Guidelines for All Assignments:
- Course members should familiarise themselves with the University’s policy on the late submission of coursework.
- Students are reminded that the definition of plagiarism includes claiming another person’s work as your own; for example, through inadequate references of sources of material used (including internet sources). Direct quotations must be enclosed in quotation marks and referenced. Using other people’s ideas requires a reference even if a direct quote is not included.
- If you want to explore using ChatGPT or other AI tools to assist with your studies, including assessment tasks or research, you should:
- Use AI as a tool to assist and inform you in your initial research, generation of ideas, planning and output development, but not as a replacement for your critical thinking and analysis.
- Ensure that you appropriately cite and reference any text or output generated by AI in your assignment, along with any other sources you use. You should indicate clearly where in your assessment task you have used AI-generated material.
- Understand the AI tool’s limitations and therefore use it in conjunction with other sources to ensure the information you present is credible and reliable. You need to check the accuracy of all information generated by AI tools.
Note: Make sure that any final product (your assessment as submitted) is your own work, and not just copied from an AI generator, in whole or in part. You can use the generated text or output as a prompt to give you inspiration or guidance, as a starting point for example. But the final submitted assessment must be all your work, your creation, and your analysis.
The following statement must be included on the cover page of all assignments submitted:
I declare that all materials included in this essay/report/project/dissertation is the end result of my own work and that due acknowledgement have been given in the bibliography and references to all sources be they printed, electronic or personal.
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