("AFC")
ORDER INSTITUTING DISCIPLINARY
PROCEEDINGS, MAKING FINDINGS, AND
IMPOSING SANCTIONS
In the Matter of Wander Rodrigues Teles,
Respondent.
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PCAOB Release No. 105-2017-007
March 20, 2017
By this Order, the Public Company Accounting Oversight Board ("Board" or
"PCAOB") is censuring Wander Rodrigues Teles ("Teles" or "Respondent"); barring
Teles from being an associated person of a registered public accounting firm;
1
and
imposing a civil money penalty in the amount of $10,000 on Teles. The Board is
imposing these sanctions on the basis of its findings that Teles violated PCAOB rules
and standards in connection with the audits of the consolidated financial statements of
Sara Lee Corporation ("Sara Lee") as of and for the fiscal years ended ("FYE") July 3,
2010 and July 2, 2011.
I.
The Board deems it necessary and appropriate, for the protection of investors
and to further the public interest in the preparation of informative, accurate, and
independent audit reports, that disciplinary proceedings be, and hereby are, instituted
pursuant to Section 105(c) of the Sarbanes-Oxley Act of 2002, as amended ("Act"), and
PCAOB Rule 5200(a)(1) against Respondent.
II.
In anticipation of the institution of these proceedings, and pursuant to PCAOB
Rule 5205, Respondent has submitted an Offer of Settlement ("Offer") that the Board
has determined to accept. Solely for purposes of these proceedings and any other
proceedings brought by or on behalf of the Board, or to which the Board is a party, and
without admitting or denying the findings herein, except as to the Board's jurisdiction
over him and the subject matter of these proceedings, which are admitted, Respondent
1
Teles may file a petition for Board consent to associate with a registered
public accounting firm after two (2) years from the date of this Order.
1666 K Street, N.W.
Washington, DC 20006
Telephone: (202) 207-9100
Facsimile: (202) 862-0757
www.pcaobus.org
ORDER
PCAOB Release No. 105-2017-007
March 20, 2017
Page 2
consents to entry of this Order Instituting Disciplinary Proceedings, Making Findings,
and Imposing Sanctions ("Order") as set forth below.
2
III.
On the basis of Respondent's Offer, the Board finds
3
that:
A. Respondent
1. Teles, 56, of Sao Paulo, Brazil, is an accountant licensed by the Conselho
Regional De Contabilidade for the Federal District of Brazil (license No. DF-005919/O-
3). From July 1992 to June 2014, he was a partner of the Brazil-based firm
PricewaterhouseCoopers Auditores Independentes ("PwC-Brazil"), which is registered
with the Board.
4
Teles was the lead partner for PwC-Brazil's audit work in connection
with the audits of Sara Lee's FYE 2007 through FYE 2011 consolidated financial
statements. U.S.-based PricewaterhouseCoopers LLP ("PwC-US") prepared and
issued the audit reports on Sara Lee's consolidated financial statements, which were
filed with the U.S. Securities and Exchange Commission. Teles and PwC-Brazil
performed the audit procedures on the special purpose financial information of Sara
Lee's Brazilian subsidiaries, which was prepared for Sara Lee's consolidated financial
statements, for the express purpose of assisting PwC-US's audits. As the lead partner
for PwC-Brazil's audit work, Teles was responsible for supervising the PwC-Brazil
engagement team's audit procedures, and for issuing PwC-Brazil's interoffice reports on
the Brazilian subsidiaries' special purpose financial information. At all relevant times,
2
The findings herein are made pursuant to Respondent's Offer and are not
binding on any other person or entity in this or any other proceeding.
3
The Board finds that Respondent's conduct described in this Order meets
the condition set out in Section 105(c)(5) of the Act, which provides that such sanctions
may be imposed in the event of: (A) intentional or knowing conduct, including reckless
conduct, that results in violation of the applicable statutory, regulatory, or professional
standard; or (B) repeated instances of negligent conduct, each resulting in a violation of
the applicable statutory, regulatory, or professional standard.
4
While a partner of PwC-Brazil, Teles participated in financial statement
audits of issuers (as defined in Section 2(a)(7) of the Act and PCAOB Rule 1001(i)(iii))
in which PwC-Brazil issued the audit report, including issuer audits in which he served
as the engagement partner or engagement quality reviewer. Teles also participated in
issuer audits where PwC-Brazil performed referred work and another audit firm issued
the audit report.
ORDER
PCAOB Release No. 105-2017-007
March 20, 2017
Page 3
Teles was an associated person of a registered public accounting firm as that term is
defined in Section 2(a)(9) of the Act and PCAOB Rule 1001(p)(i).
B. Issuer
2. Sara Lee was, at all relevant times, a Maryland corporation headquartered
in Illinois. Sara Lee's common stock was registered with the Commission under Section
12(b) of the Securities Exchange Act of 1934 ("Exchange Act"), and was quoted on the
Chicago Stock Exchange, New York Stock Exchange, and the London Stock Exchange.
At all relevant times, Sara Lee was an issuer, as defined in Section 2(a)(7) of the Act
and PCAOB Rule 1001(i)(iii). The company's public filings disclosed that it was a global
manufacturer and marketer of consumer products, focused primarily on the meats,
bakery, and beverage product categories.
3. Sara Lee Cafés do Brasil Ltda. ("SLCB") was, at all relevant times, a
Brazilian subsidiary of Sara Lee. SLCB was a producer of roasted coffee and coffee-
related consumer goods, which it primarily sold to wholesalers, retailers and retail
customers in Brazil.
C. Summary
4. This matter concerns Teles's repeated violations of PCAOB rules and
standards
5
as the lead partner for the audit procedures that PwC-Brazil performed
under his supervision on SLCB's FYE 2010 and FYE 2011 special purpose financial
information. Teles, an experienced audit partner, violated PCAOB rules and standards
in connection with PwC-Brazil's testing of SLCB's net accounts receivable ("Net A/R"),
5
All references to PCAOB rules and standards are to the versions of those
rules and standards in effect at the time of the relevant audits. As of December 31,
2016, the PCAOB reorganized its rules and auditing standards using a topical
structure and a single, integrated numbering system. See Reorganization of
PCAOB Auditing Standards and Related Amendments to PCAOB Standards and Rules,
PCAOB Release No. 2015-002 (Mar. 31, 2015); see also PCAOB Auditing
Standards Reorganized and Pre Reorganized Numbering (January 2016),
https://pcaobus.org/Standards/Auditing/Documents/PrintableReferenceTable.pdf.
ORDER
PCAOB Release No. 105-2017-007
March 20, 2017
Page 4
net revenues, and trade promotions accounts, which were identified as areas having
increased risks of material misstatement, including a risk of fraud.
6
5. Teles knew of red flags suggesting that SLCB's reported Net A/R and net
revenues may have been materially overstated, and that its reported trade promotion
accounts may have been materially understated, due to SLCB (1) failing to record trade
promotions, or (2) failing to record adequate reserves for receivables for which
collection was not probable. Teles, however, failed to respond to those red flags and
the increased risks with appropriate due professional care and professional skepticism,
and failed to obtain sufficient competent evidence concerning those accounts.
6. During both the FY 2010 and FY 2011 Sara Lee audits, Teles knew that a
material portion of SLCB's accounts receivable balance was overdue and disputed by
customers. As recorded in SLCB's accounting records, approximately 87 million
Brazilian reais ("R$") of SLCB's A/R were overdue at both FYE 2010 and FYE 2011
(40% and 36% of those balances, respectively), including approximately R$20 million in
receivables more than 90 days overdue (10% and 8% of SLCB's reported A/R balance
at FYE 2010 and FYE 2011, respectively). Teles was aware that many of the
customers' disputes involved claims that SLCB had failed to recognize trade promotion
obligations that should have offset the accounts receivable. Teles also knew that, with
very few exceptions, SLCB had not accrued A/R Reserves or trade promotion liabilities
to offset the disputed amounts.
7. Teles further knew that SLCB management was re-aging overdue
receivables by extending their due dates in SLCB's accounting system. Teles
understood that the re-aging of receivables could cause overdue receivables to appear
current. Teles therefore knew, or should have known, that an even larger portion of
SLCB's receivables was likely overdue than what was shown in SLCB's accounting
records. He further understood that the re-aging could cause SLCB to underestimate its
A/R Reserves and thereby cause an overstatement of SLCB's reported Net A/R.
8. In light of the information that Teles had and the risks associated with
SLCB's Net A/R, net revenues, and trade promotion accounts, Teles failed to exercise
due professional care and professional skepticism, and failed to obtain sufficient
6
Net A/R consisted of SLCB's gross accounts receivable less reserves for
doubtful accounts and sales returns and allowances ("A/R Reserves"). Net revenues
consisted of SLCB's gross sales less sales returns and trade promotion costs. SLCB
also reported a liability for trade promotions. Trade promotion liabilities were typically
satisfied by SLCB crediting the customers' A/R balances.
ORDER
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March 20, 2017
Page 5
competent audit evidence, with regard to those accounts. Among other things, Teles
repeatedly failed to address the impact of management's re-aging of SLCB's overdue
receivables when planning the audit procedures and evaluating the audit evidence. As
a result, Teles and his engagement team improperly relied on SLCB's re-aged A/R data
as audit evidence, and failed to obtain other sufficient competent evidence to support
Net A/R. Teles also unreasonably assessed the audit risk for trade promotions as
"normal" in both audits, contrary to instructions he received for the audits and despite
internal control deficiencies at SLCB related to trade promotions. As a result, Teles
failed to plan or perform sufficient procedures to respond to the risk of material
misstatement from unrecorded trade promotions indicated by the substantial customer
disputes.
9. Teles's violations impaired his and the engagement team's ability to detect
material misstatements due to error or fraud in SLCB's financial information. As a result
of his violations, Teles improperly authorized PwC-Brazil's issuance of interoffice reports
on SLCB's special purpose financial information for FY 2010 and FY 2011.
10. In 2012, Sara Lee disclosed that an internal investigation had identified
intentional overrides of certain internal controls as well as extensive cross-functional
collusion by management of SLCB, resulting in improper revenue recognition and
overstatement of accounts receivable due to the failure to write-off uncollectable
customer discounts, among other things. As a result of the internal investigation, which
included findings indicating fraud, Sara Lee restated its FY 2010 and FY 2011 financial
statements and concluded a material weakness existed in internal control over financial
reporting as of June 30, 2012. The restatements reflected that, based on the internal
investigation, SLCB's Net A/R, as originally reported, was overstated by approximately
R$151 million (or 246%) at FYE 2010, and R$170 million (or 263%) at FYE 2011, and
that SLCB's total assets, as originally reported, were also overstated by approximately
R$102 million (or 14%) and R$121 million (or 15%) at FYE 2010 and FYE 2011,
respectively.
D. Background
1. Structure of the Audit
11. PwC-US is a public accounting firm, organized as a Delaware limited
liability partnership, and is headquartered in New York, NY. PwC-US is a member of
PwC Global network ("PwC Global"), which comprises firms that are members of, or
have other connections to, PricewaterhouseCoopers International Ltd. PwC-US is
registered with the Board pursuant to Section 102 of the Act and PCAOB rules.
ORDER
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March 20, 2017
Page 6
12. PwC-US served as the independent auditor of Sara Lee's FY 2010 and FY
2011 consolidated financial statements, and issued unqualified audit reports on those
financial statements, and on the effectiveness of Sara Lee's internal controls over
financial reporting as of those fiscal year ends. In both of those audits, PwC-US relied
upon affiliates in the PwC Global network to perform audit procedures concerning
specific Sara Lee subsidiaries around the globe. To do so, PwC-US utilized
Netherlands-based PricewaterhouseCoopers Accountants N.V. ("PwC-NL") to
coordinate and report on the audit procedures performed on Sara Lee's international
operations.
13. For both the FY 2010 and FY 2011 audits, PwC-NL instructed PwC-Brazil
to perform what it described as an "integrated audit" of SLCB's special purpose financial
information, which included both a balance sheet and income statement, using a
planning/performance materiality of 2.25 million Euros (approximately R$5 million).
PwC-NL further instructed PwC-Brazil to perform its audit work in accordance with
PCAOB standards, and to opine on whether SLCB's financial information was presented
in accordance with Sara Lee Corporation's Finance Policy Manual ("Sara Lee policies"),
which the instructions stated, Sara Lee had "developed . . . in accordance with U.S.
GAAP."
14. As the lead partner for PwC-Brazil's audit work, Teles authorized the
issuance of PwC-Brazil's interoffice reports on SLCB's special purpose financial
information for both the FY 2010 and FY 2011 audits (the "Interoffice Reports"). The FY
2010 and FY 2011 Interoffice Reports, dated August 5, 2010, and August 2, 2011,
respectively, stated that PwC-Brazil had audited SLCB's special purpose financial
information in accordance with PCAOB auditing standards. Except for certain
qualifications that are not relevant to this Order, both Interoffice Reports stated that
SLCB's special purpose financial information "has been prepared to give the information
required to be shown in accordance with the policies and instructions contained in [Sara
Lee's policies]."
15. Teles understood that PwC-NL would rely upon PwC-Brazil's Interoffice
Reports to issue its own interoffice reports on consolidated special purpose financial
information of Sara Lee's international subsidiaries. Teles further understood that PwC-
US would rely upon PwC-NL's interoffice reports in preparing and issuing its audit
reports on Sara Lee's consolidated financial statements. And, in fact, PwC-US issued
unqualified audit reports on Sara Lee's FY 2010 and FY 2011 financial statements
based, in part, on PwC-Brazil's Interoffice Reports.
ORDER
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March 20, 2017
Page 7
2. SLCB's Revenue Recognition, Trade Promotions and
Accounts Receivable
16. SLCB earned revenue from the sale of coffee. Customers were primarily
large distributors and grocery chains. SLCB provided a variety of sales incentives to its
customers, including discounts, promotional credits and other consideration ("trade
promotions"). "Key account" customers had written agreements with SLCB,
7
which
granted them certain trade promotions. Additionally, salespersons were able to offer
temporary trade promotions to both key and non-key account customers.
17. Consistent with U.S. GAAP,
8
Sara Lee policies required that SLCB report
its revenues net of its estimated trade promotion costs. SLCB was to record the sale
price before any discounts or rebates as gross sales and record the cost of any related
trade promotions in contra-revenue accounts.
18. For trade promotions that a customer was immediately entitled to receive
as a discount, SLCB was to record accounts receivable net of the trade promotions.
For trade promotions that could not be immediately applied to the customer account
(e.g., promotions payable on a future date), SLCB was to record accounts receivable
based on the gross sale price, while also recording a liability to recognize its obligation
to provide the trade promotions. When SLCB's customer became entitled to receive the
trade promotions, SLCB would reduce the liability either by paying the customer or
offsetting the liability against the accounts receivable.
19. Teles understood that, when an SLCB customer believed it was entitled to
a trade promotion, it was common for the customer to take a "self-deduction" to claim
the anticipated trade promotion—i.e., the customer would pay the net amount owed
after the anticipated trade promotion, rather than paying the gross sales price and
waiting for reimbursement. Teles further understood that it was an accepted practice for
SLCB customers to use self-deductions to claim the benefit of an agreed-upon trade
promotion that had not been reflected in the invoiced amount. Sara Lee policies
recognized that customers would claim trade promotions through self-deductions. In
such scenarios, assuming that SLCB had properly recorded the trade promotion liability
at the time of sale, SLCB was expected to reduce the trade promotion liability
established for that sale by the unpaid portion of the gross sales price.
7
In contrast to key accounts, non-key accounts were typically smaller
accounts for which there were no written master agreements.
8
See FASB Accounting Standards Codification ("ASC") 605-50, Revenue
Recognition – Customer Payments and Incentives.
ORDER
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March 20, 2017
Page 8
20. Teles knew that customers also took self-deductions when no specific
trade promotion liability had been recorded. This would occur, for example, if a
salesperson had agreed to a discount at the time of sale, but SLCB failed to record it.
Self-deductions taken when no specific trade promotion liability had been recorded, until
resolved, remained a part of SLCB's receivables balance.
21. Teles was aware that many self-deductions were essentially disputed
receivables, and raised a risk of non-collectablility. Self-deductions presented a risk
that SLCB might not have recorded all of its trade promotions. If SLCB failed to record
all of the costs of its trade promotions, its net revenues would be overstated. In
addition, accounts receivable would be overstated or the trade promotion liability would
be understated.
3. Teles's Knowledge of the Risks and Red Flags
22. Before beginning work on the FY 2010 and FY 2011 audits, Teles became
aware of several risks and red flags that should have caused him to heighten his
professional skepticism with respect to SLCB's Net A/R, net revenues, and trade
promotions. Teles and his engagement team recognized these risks, and documented
a "critical matter" for Net A/R in both years.
9
a. Teles Understood that SLCB was Experiencing
Significant Levels of Overdue Receivables
23. At the time of the FY 2010 and FY 2011 audits, Teles knew that SLCB's
receivables more than 90 days overdue were significant. SLCB's records indicated that
there had been an eleven-fold increase in SLCB's accounts receivable recorded as
more than 90 days overdue at FYE 2009. SLCB's records did not indicate significant
improvement in the aging of SLCB's receivables at either FYE 2010 or FYE 2011 when
compared to FYE 2009.
9
A "critical matter," sometimes referred to as a "significant matter," was a
defined term in PwC-Brazil's internal guidance. That term referred to significant findings
or issues that were important to the procedures performed, evidence obtained, or
conclusions reached, within the meaning of Auditing Standard No. 3, Audit
Documentation, ¶ 12. Under PwC-Brazil policy, Teles was required to be involved in the
resolution of critical matters and to review the documentation of the critical matters.
ORDER
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March 20, 2017
Page 9
b. Teles Understood that Significant Overdue Accounts
Receivable Were Disputed
24. During the FY 2010 and FY 2011 audits, SLCB management informed
Teles that a significant portion of the A/R more than 90 days past due were the result of
customers taking self-deductions. Teles understood from his discussions with SLCB
management that the customers were taking self-deductions to dispute their obligation
to pay the remaining balances, claiming that SLCB owed them trade promotion credits.
Management also represented to Teles that the overdue receivables had increased in
conjunction with a global financial crisis.
c. Teles Understood that SLCB Was Re-Aging Overdue
Accounts Receivable
25. Teles understood that SLCB's accounts receivable, as reflected in SLCB's
records, had been re-aged. Before issuing the FY 2010 Interoffice Report, Teles
learned from management that SLCB had extended due dates on some of its
receivables (including self-deductions) that were the subject of disputes by SLCB's
customers.
26. Teles understood that, when SLCB extended due dates, SLCB revised the
due dates for the overdue receivables in its A/R subledger, the basis for which Teles did
not test.
10
Teles also understood that changes to the due dates of receivables in the
A/R subledger would cause the receivables to appear less overdue, and possibly
current. As a result, Teles knew, or should have known, that any analyses of the A/R
aging prepared from the A/R subledger would depict the receivables as less-aged than
they really were.
d. SLCB Had Identified Internal Control Deficiencies
Concerning Net A/R, Net Revenues and Trade Promotion
Accounts
27. Teles knew, or should have known, that the Sara Lee internal audit
function ("Internal Audit") had identified internal control deficiencies related to SLCB's
Net A/R, net revenues and trade promotion accounts. During the FY 2009 audit, Teles
received access to an internal audit report ("2009 IA Report") that indicated that there
had been several deficiencies in SLCB's internal controls, which could cause
misstatements in SLCB's Net A/R, net revenues and trade promotion accounts.
10
Management represented to Teles that it had extended due dates based
on negotiations with SLCB's customers.
ORDER
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Although SLCB purported to have taken steps to address those deficiencies, Teles
received access to another IA Report in mid-FY 2010 ("2010 IA Report"), which noted
several similar deficiencies.
11
e. Teles Understood that there Were Audit Risks, Including
a Risk of Material Misstatement Due to Fraud,
Associated with SLCB's Net A/R, Net Revenues and
Trade Promotions
28. For both the FY 2010 and FY 2011 audits, PwC-NL advised Teles and his
PwC-Brazil engagement team that there were increased audit risks relating to Net A/R,
net revenues and trade promotions. In addition, in both years, Teles understood that
there were risks of material misstatement due to fraud related to those accounts.
Among other things, the disputes between SLCB and its customers raised a major
concern for Teles about whether the recorded accounts receivable balance was
accurate. That concern was documented, in part, in the FY 2010 and FY 2011 "critical
matter" work papers.
29. In both years, PwC-NL's audit instructions indicated that it was unlikely that
evidence from controls and substantive analytical procedures alone would be sufficient
to address the risks identified for revenue and trade promotions, and that tests of details
were typically necessary to address such risks.
E. Applicable PCAOB Standards During the FY 2010 and FY 2011 Audits
30. In connection with the preparation or issuance of an audit report, PCAOB
rules require that registered public accounting firms and their associated persons
comply with applicable auditing and related professional practice standards.
12
As the
lead partner for PwC-Brazil's audit work on SLCB's special purpose financial
information, Teles had an obligation under PCAOB standards to supervise the audit and
11
The 2010 IA Report indicated that the deficiencies were "important
strategic, financial, compliance or operational issue[s] for the operating company." It
also indicated that "[t]he related risk[s] ha[ve] mitigating controls in place and/or the
likelihood of having a significant effect on the operating company is small."
12
See PCAOB Rule 3100, Compliance with Auditing and Related
Professional Practice Standards; PCAOB Rule 3200T, Interim Auditing Standards.
ORDER
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to obtain "sufficient competent evidential matter."
13
To be competent, audit evidence
must be both valid and relevant.
14
31. Teles was required to plan PwC-Brazil's audit procedures based on
assessments of both audit risk and materiality.
15
Although an audit client's internal
controls could impact the assessment of audit risk, a determination that audit risk was
lower due to the client's internal controls was required to be based on an assessment of
both those controls' design and effectiveness.
16
Additionally, Teles and his engagement
team needed to perform substantive tests for all relevant assertions related to all
significant accounts, regardless of assessed level of control risk.
17
32. Teles was required to perform his work with due professional care, which,
in turn, required him to exercise professional skepticism.
18
Teles also was required "to
be thorough in his . . . search for evidential matter," to be "unbiased in its evaluation,"
and to consider relevant evidential matter regardless of whether it appeared to
corroborate or to contradict the assertions in SLCB's financial information.
19
Teles
could not be satisfied with less-than-persuasive evidence because of a belief that
management was honest.
20
33. Teles should have conducted PwC-Brazil's audit procedures "with a
mindset that recognizes the possibility that a material misstatement due to fraud could
be present, regardless of any past experience with the entity and regardless of [his]
belief about management's honesty and integrity."
21
To ensure that the risks of material
misstatement due to fraud were appropriately identified and assessed, Teles was
required to consider how and where SLCB's financial information might be susceptible
13
See AU § 311, Planning and Supervision; AU § 326.22, Evidential Matter.
14
See AU § 326.21.
15
See AU § 312, Audit Risk and Materiality in Conducting an Audit.
16
See AU §§ 319.03, .66, .80-.81, .86, Consideration of Internal Control in a
Financial Statement Audit.
17
See AU § 319.107.
18
See AU §§ 230.02, .07, Due Professional Care in the Performance of
Work.
19
See AU § 326.25.
20
See AU § 316.13, Consideration of Fraud in a Financial Statement Audit.
21
See AU § 316.13.
ORDER
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to material misstatement due to fraud, and how management could perpetrate and
conceal fraudulent financial reporting.
22
To do so, Teles should have considered
whether there were accounts or classes of transactions that may have been susceptible
to manipulation by management.
23
In particular, PCAOB standards instructed that
Teles should have presumed a risk of material misstatement due to fraud relating to
revenue recognition,
24
and PCAOB standards also warned that "[f]raudulent financial
reporting often is accomplished through intentional misstatements of accounting
estimates."
25
Teles also should have considered whether there were "fraud risk factors"
present,
26
including deficiencies in internal controls that increased the opportunity for
fraud.
27
34. Teles was also responsible for ensuring that the procedures performed by
the engagement team adequately addressed the identified risks of material
misstatement due to fraud.
28
The response to risks of material misstatement due to
fraud should have included application of professional skepticism in gathering and
evaluating audit evidence, including critical assessment of the competency and
sufficiency of the audit evidence.
29
PCAOB standards required Teles to thoroughly
probe the issues of potential fraud, and acquire additional evidence as necessary,
rather than rationalize or dismiss information or other conditions that indicated a
material misstatement due to fraud may have occurred.
30
35. As detailed, below, Teles violated these and other PCAOB standards in
both the FY 2010 and FY 2011 audits.
22
See AU §§ 316.14, .34.
23
See AU § 316.39.
24
See AU § 316.41.
25
See AU § 316.63.
26
See AU §§ 316.31-33.
27
See AU § 316.85.
28
See AU § 311.13; AU § 326.25; AU § 316.02, .46, .48(b), .51-.56.
29
See AU § 316.46.
30
See AU § 316.16.
ORDER
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F. Teles Violated PCAOB Rules and Standards
36. Teles violated PCAOB standards during the FY 2010 and FY 2011 audits
because he failed to appropriately plan and supervise PwC-Brazil's audit procedures
with due professional care and professional skepticism. He further failed to ensure that
the engagement team adequately responded to the risks of material misstatement,
including risks of material misstatement due to fraud, and red flags for SLCB's Net A/R,
net revenues and trade promotion accounts. As a result, he failed to obtain sufficient
competent audit evidence.
37. Teles determined that, in light of the risks described above, he should be
directly involved in, and review, the work performed over SLCB's accounts receivable,
and he designated SLCB's Net A/R a "critical matter." Nevertheless, he failed to ensure
that PwC-Brazil adequately responded to the identified risks and red flags related to
SLCB's Net A/R.
31
For audit procedures that his engagement team did perform, he
failed to consider whether the audit evidence obtained to support SLCB's reported Net
A/R was relevant or reliable, in light of SLCB's re-aging of receivables. He also failed to
sufficiently address contradictory evidence obtained by the engagement team
concerning Net A/R.
32
38. Moreover, although Teles was aware of the risks relating to trade
promotions, he inappropriately determined to treat trade promotions as a normal risk.
As a result, he failed to plan or perform procedures beyond control testing and analytical
procedures to address trade promotions. And the procedures that the engagement
team did perform failed to address the risk that all of SLCB's trade promotions were not
recorded.
1. Teles's Failures Concerning SLCB's Net A/R
39. When planning PwC-Brazil's FY 2010 and FY 2011 audit procedures for
SLCB, Teles inappropriately determined to place high reliance on SLCB's internal
controls and analytical procedures, and to reduce the extent of substantive testing for
Net A/R. Besides performing tests of internal controls and analytical procedures, PwC-
Brazil's principal audit procedures for Net A/R in FY 2010 consisted of: (1) attempting to
confirm a sample of receivables and performing alternative procedures for
nonresponses to confirmation requests, (2) reviewing SLCB's A/R aging and A/R
Reserves for doubtful accounts, and (3) reviewing bad debt write-offs. For the FY 2011
31
See AU § 312; AU § 316.
32
See AU § 326.25.
ORDER
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audit, despite the continuing risks surrounding Net A/R, Teles and his engagement team
eliminated the confirmation procedures, including alternative procedures for non-
responses, and review of bad debt write-offs, and relied principally on the review of
SLCB's A/R aging and A/R Reserves.
40. The procedures performed, however, were inadequate to respond to the
risk that SLCB was re-aging and otherwise delaying the write-off or reserving of
uncollectable receivables.
41. Teles failed to identify and address the deficiencies in PwC-Brazil's
planned procedures, their execution, or the evidence that they produced. He failed to
appropriately supervise and review the engagement team's performance of those
procedures. As a result, Teles failed to exercise due professional care and professional
skepticism, and failed to obtain sufficient competent evidence to support that SLCB's
Net A/R existed and was appropriately valued.
a. Teles and His Team Failed to Appropriately Perform
Confirmation and Alternative Procedures on SLCB's
Receivables
FY 2010
42. Under PCAOB standards, it is presumed that an auditor will request
confirmation of accounts receivable,
33
and PwC-NL explicitly requested that PwC-Brazil
confirm accounts receivable for the FY 2010 audit. PwC-Brazil accordingly planned to
perform confirmation procedures for A/R and alternative procedures for nonresponses,
including tracing the receivables to subsequent cash receipts.
34
43. Despite the importance of the confirmation and alternative procedures,
Teles failed to appropriately supervise those procedures, or evaluate their results with
due professional care. PwC-Brazil's confirmation testing and alternative procedures
33
See AU § 330.34, The Confirmation Process.
34
PCAOB standards provide that "[t]he nature of alternative procedures
varies according to the account and assertion in question." AU § 330.32. They also
provide that "[i]n he examination of accounts receivable, for example, alternative
procedures may include examination of subsequent cash receipts (including matching
such receipts with the actual items being paid), shipping documents, or other client
documentation to provide evidence for the existence assertion." Id.
ORDER
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were performed on a non-representative sample of ten receivables.
35
Additionally,
those procedures were not performed with due professional care, and did not address
contradictory evidence. As a result, they did not provide sufficient competent evidence
to support either the existence or value of SLCB's FYE 2010 accounts receivable.
44. PCAOB standards provide that, in order to obtain relevant audit evidence
about a population of transactions through a test of details performed on a sample of
transactions, a sample should be designed so that it is reasonably expected to be
representative of that larger population.
36
However, the engagement team failed to
select a representative sample of receivables for its confirmations and alternative
procedures, and instead made a targeted selection of ten very large receivables from
those that SLCB had marked "current." Other receivables in the A/R population did not
have an opportunity for selection.
37
Accordingly, the results of the test could not be
extrapolated to the entire A/R balance, including the population of high-risk overdue
receivables for FY 2010. However, because Teles did not appropriately supervise the
confirmation testing, he was not aware that his team had restricted that testing to
"current" receivables.
45. Teles's failure to appropriately supervise the confirmation and alternative
procedures also resulted in the engagement team failing to appropriately respond to
contradictory evidence obtained through the alternative procedures. When positive
confirmation procedures are performed, but no replies are received, the auditor should
apply alternative procedures to the nonresponses to obtain the evidence necessary to
reduce audit risk to an acceptably low level.
38
46. PwC-Brazil did not receive any responses from customers confirming the
receivables, which was consistent with the engagement team's experience on the prior
year's audit and Teles's experience in Brazil, generally. PwC-Brazil attempted to apply
alternative procedures for the receivables not confirmed by examining subsequent cash
receipts for the selected receivables. However only two of the ten receivables tested for
subsequent cash receipts were matched to a cash receipt of equal value to the
35
The confirmation and alternative procedures were performed on a
selection of just ten current receivables from SLCB's May 31, 2010 A/R balance. That
selection covered just 2.4% of the total value of the May 31, 2010 A/R balance, which
was comprised of more than 32,000 receivables totaling R$205.8 million.
36
See AU §§ 350.16-.17, .24, Audit Sampling.
37
See AU § 350.39.
38
See AU § 330.31.
ORDER
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receivable. For three other receivables, SLCB provided PwC-Brazil with information
indicating that SLCB had received cash, but the amounts of the cash it received were
different from the amounts of the receivables. PwC-Brazil did not obtain any evidence
that the customers had designated the cash for the receivables it was testing, nor did it
perform any procedures to test whether the cash receipts had been appropriately
applied.
39
47. For the remaining five receivables, PwC-Brazil did not obtain evidence of
cash being subsequently received by SLCB. PwC-Brazil did, however, receive
information that three of those receivables (totaling 18% of the tested value) had been
subsequently reversed by applying credit memos for trade promotions. Such
information alone did not provide audit evidence that the receivables were valid. In
particular, the relative magnitude of the receivables reversed through credit memos
within PwC-Brazil's selection should have garnered additional attention from Teles.
48. At the end of the FY 2010 audit work, Teles signed-off that the
engagement team had properly performed accounts receivable confirmation testing and
alternative procedures. However, before doing so, Teles failed to properly evaluate the
evidence obtained, including contradictory audit evidence that cast doubt on whether
A/R Reserves and/or trade promotion liabilities had been appropriately recorded to
prevent misstatements of SLCB's special purpose financial information.
FY 2011
49. For the FY 2011 audit, Teles and his engagement team did not perform
any confirmation or alternative procedures for A/R. Teles and the engagement team
documented that they decided to forego confirmation of A/R with SLCB's customers,
based on the prior year's poor response rate. Although an auditor may choose to
forego confirmation of accounts receivable where the use of confirmations would be
ineffective,
40
PwC-Brazil was still required to obtain sufficient competent evidence
concerning the existence and value of accounts receivable, a significant account,
through substantive testing,
41
and neither Teles nor his engagement team recorded the
reason for eliminating the subsequent cash receipts testing they had performed the prior
39
As reflected in AU § 330.32, examination of subsequent cash receipts as
an alternative procedure for receivables confirmations typically includes "matching such
receipts with the actual items being paid."
40
See AU § 330.34.
41
See AU § 319.107.
ORDER
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year. Nor did Teles or his team devise or carry out any other alternative procedures to
test SLCB's A/R as of FYE 2011.
b. Teles's and His Team's Analysis of Receivables' History,
Aging, Collectability and Bad Debt Write-Offs Was
Flawed
50. For both FYE 2010 and FYE 2011, Teles and his engagement team
planned to respond to the risks indicated by the customer disputes and overdue
receivables by testing the reasonableness of management's estimated A/R Reserves
for doubtful accounts. PwC-Brazil's procedures to evaluate the reasonableness of the
A/R Reserve for doubtful accounts included recalculating the aging of SLCB's A/R by
using aging data in SLCB's A/R subledger, and holding discussions with management
about customers with large overdue balances. The procedures also included examining
period-to-period changes in the age of receivables balances. That testing, however,
was flawed because it ignored the impact of SLCB's re-aging of receivables and placed
undue reliance on management representations that were contradicted by other
information.
51. Teles knew that there was an elevated risk that Net A/R was materially
overstated with uncollectable receivables and amounts that should have been offset by
trade promotion credits. Teles also understood that a material portion of SLCB's
reported A/R more than 90 days overdue were disputed by SLCB's customers, and
therefore raised the risk of uncollectability. Teles also should have realized that the
disputed receivables, and thus the potential for overstatement of Net A/R, were not
confined to those A/R that were recorded as being more than 90 days overdue, since he
knew SLCB had been re-aging some overdue A/R that had been the subject of
disputes.
52. Under PCAOB standards, Teles needed to assess the reliability of SLCB's
A/R subledger data, before he could use that data to evaluate the reasonableness of
SLCB's estimated A/R Reserves.
42
Nevertheless, Teles failed to make an appropriate
assessment of the reliability of that data. Teles never sought to have his engagement
team determine the extent and impact of the re-aging, nor did he seek to quantify the
amounts in dispute. Had he done so, data already contained in PwC-Brazil's work
papers would have allowed Teles and his engagement team to observe that SLCB's
FYE 2010 and FYE 2011 receivables balances had been significantly re-aged.
42
See AU §§ 342.04, .09-.12, Auditing Accounting Estimates.
ORDER
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53. PwC-Brazil's review of SLCB's bad debt write-offs was also compromised
by the practice of re-aging, and that review provided insufficient evidence as to the
reasonableness of A/R Reserves. That review did not take into consideration that
uncollectable receivables, if re-aged, might persist in the A/R balance without being
written-off as bad debts. Without evidence to support that all bad debts were being
timely written off, this procedure could not provide competent evidence to support the
reasonableness of the A/R Reserves.
54. Because the aging analysis and the bad debt write-off review both failed to
yield audit evidence that was either relevant or reliable, PwC-Brazil's substantive testing
of the AR Reserve for doubtful accounts amounted to little more than management
inquiry about the collectability of SLCB's A/R. In both FY 2010 and FY 2011, Teles and
the engagement team made inquiries to various members of SLCB's management,
including SLCB's CFO, about the overdue receivables. Teles and the engagement
team received representations that SLCB was pursuing the overdue receivables and
that management believed SLCB would be successful in collecting them.
43
55. However, management inquiry, alone, could not provide sufficient
competent evidence as to the collectability of A/R or the reasonableness of the A/R
Reserves. Although management representations "are part of the evidential matter the
independent auditor obtains, . . . they are not a substitute for the application of those
auditing procedures necessary to afford a reasonable basis for an opinion regarding the
financial statements under audit."
44
In particular, "[i]f a representation made by
management is contradicted by other audit evidence, the auditor should investigate the
circumstances and consider the reliability of the representation made."
45
56. Teles failed to obtain evidence to corroborate management's
representations. Teles should have sought additional evidence to corroborate
management's representations, particularly because the claims by SLCB customers that
they were owed additional trade promotions constituted contradictory evidence as to the
existence and value of the overdue receivables, and as to the adequacy of SLCB's
related estimates for its A/R Reserves. .
43
Sara Lee's internal investigation indicated that SLCB management did not
accurately represent the circumstances surrounding the receivables.
44
See AU § 333.02, Management Representations.
45
See AU § 333.04.
ORDER
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57. At the request of Teles and the engagement team, management also
presented the engagement team with management's own analyses of changes in the
aging of the receivables from period-to-period, but those analyses (like the ones
prepared by PwC-Brazil) were based on altered due dates.
c. PwC-Brazil's Control Testing and Analytical Procedures
Did Not Provide Sufficient Competent Audit Evidence to
Respond to the Elevated Risk of Material Misstatement
for Net A/R
58. During the FYE 2010 and FYE 2011 audits, Teles placed significant
reliance on SLCB's internal controls to substantially reduce the level of substantive
testing for Net A/R. That reliance was unreasonable for the following reasons:
a. Teles had direct knowledge that SLCB was re-aging overdue receivables, and
did not test the basis for the re-aging.
b. PwC-Brazil's test of the control for estimating the A/R Reserves for doubtful
accounts only examined whether the calculation was being performed and
reviewed.
c. As highlighted by the 2009 and 2010 IA Reports, some of SLCB's revenue
and receivables were recorded during a period when Internal Audit had
identified deficiencies in related internal controls.
59. Although Teles relied on control testing related to sales transactions, those
tests did not provide sufficient competent evidence to support the existence or valuation
of accounts receivable at either fiscal year-end. In the FY 2010 control test the
engagement team selected 25 sales transactions and sought to verify the existence of
(1) an invoice, (2) an inventory picking list, (3) a delivery confirmation slip, and (4) a
subsequent payment. When performing the same control test in FY 2011, the
engagement team selected 45 sales transactions, but failed to seek evidence of
subsequent payment. Although the engagement team obtained evidence indicating that
the shipments had occurred and/or been delivered, the engagement team did not
perform procedures to test whether the receivables had been correctly recorded or
appropriately credited.
60. Teles also relied on PwC-Brazil's analytical procedures for A/R, but those
procedures did not provide substantive audit evidence to overcome the deficiencies in
PwC-Brazil's other Net A/R testing. The analytical procedures could not provide the
high level of assurance needed to address the elevated risk and fraud risk associated
with A/R. Among other things, PwC-Brazil's expectation was not precise enough to
ORDER
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provide a high level of assurance, because it was based on overall changes to total
revenue and A/R, and not disaggregated (e.g., by customer or customer type).
46
2. Teles's Failures Concerning Net Revenues and Trade
Promotions
61. Teles also violated PCAOB standards by failing to appropriately plan and
supervise his team's testing of trade promotions with due professional care and
professional skepticism, in light of the red flags and risks associated with trade
promotions. As a result of those failures, Teles and the engagement team failed to
appropriately assess the reasonableness of the trade promotion estimates. And they
failed to obtain sufficient competent audit evidence that SLCB had appropriately
recorded its obligations relating to trade promotions.
62. SLCB's trade promotion accounts were significant accounts and were
susceptible to fraud risks. SLCB's recorded trade promotion costs totaled R$320 million
in FY 2010 and R$639 million in FY 2011, and comprised a significant component of
SLCB's net revenues. As a constituent part of SLCB's revenue, there was a
presumptive fraud risk for trade promotion costs.
63. In both FY 2010 and 2011, PwC-Brazil also identified in its work papers
that SLCB's trade promotion liability was a significant management estimate for which
there was a risk of fraud. As Teles was aware, by FYE 2010, SLCB's trade promotion
liability had been almost entirely exhausted. And although the trade promotion liability
balance had increased to R$5.9 million as of FYE 2011, it was still relatively low in light
of the volume of SLCB's trade promotion activity and customer disputes over trade
promotions.
64. During both FY 2010 and 2011, there were also multiple indications that
there was an increased risk of material understatement in SLCB's trade promotion
accounts, which should have caused Teles to expand the testing of trade promotions.
For example, Teles knew that SLCB's management attributed much of the A/R more
than 90 days past due to customer disputes and claims that they were owed additional
trade promotions. Further, during the FY 2010 audit, Teles was provided with
information demonstrating that SLCB's FYE 2010 trade promotion liability balance of
just R$1.1 million was more than R$13 million below its budgeted amount. PwC-NL's
instructions for the audits also indicated that trade promotions were a "key" risk in FY
2010 and an "elevated" risk in FY 2011.
46
See AU § 329.14, .17-.19, Analytical Procedures.
ORDER
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65. Nevertheless, Teles changed PwC-NL's risk assessment for trade
promotions, and decided that the audit risk for SLCB's trade promotion accounts was
normal. Teles decided that PwC-Brazil would seek a low level of assurance from its
substantive testing for those accounts and would evaluate trade promotions through a
combination of control testing and analytical procedures. Teles also permitted the
engagement team to forego several of the procedures that were identified as part of the
planned response to the risk of fraud for the trade promotion liability, including
retrospective review of the trade promotion liability estimate. Moreover, despite PwC-
NL's instructions specifically identifying a high risk to completeness and accuracy of
revenue related to trade promotions, Teles failed to ensure that PwC-Brazil's testing
adequately addressed these assertions for trade promotions.
66. Teles's decision to reduce the assessed risk for trade promotions was
unreasonable, and demonstrates his failure to exercise due professional care and
professional skepticism. Teles did not document the reason for his lower trade
promotions risk assessment, and nothing in the circumstances of SLCB supported that
risk assessment. Indeed, Teles should have considered that the disputes between
SLCB and its customers indicated an increased risk that SLCB may have failed to
record all trade promotions, and therefore may have materially understated its trade
promotion costs and related trade promotion liability, and overstated its net revenues.
Likewise, the re-aging of the disputed receivables and the history of adverse findings in
the IA Reports relating to trade promotion controls should have caused Teles to perform
additional procedures and obtain additional audit evidence during the FY 2010 and FY
2011 audits.
67. In light of the actual audit risks surrounding SLCB's trade promotions,
Teles's decision to restrict the trade promotion testing to certain tests of controls and
analytical procedures violated PCAOB auditing standards,
47
as did his decision not to
perform planned retrospective reviews of the trade promotion liability.
48
PwC-Brazil's
control tests and analytical procedures were neither designed nor executed to provide
the level of assurance for substantive testing necessary to address the increased risk of
misstatement, including for fraud, in trade promotions. The nature, timing and extent of
the control tests—including the small number of occurrences and transactions tested—
were too limited to provide sufficient competent evidence as to whether all trade
47
See AU § 319.107; AU § 329.09; AU § 316.51; see also AU § 316.41.
48
See AU § 316.64 (the auditor should perform a retrospective review of
significant accounting estimates reflected in the financial statements of the prior year to
determine whether management judgments and assumptions relating to the estimates
indicate a possible bias on the part of management).
ORDER
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promotion costs were appropriately recorded.
49
Also, the tested controls failed to
address the risk that SLCB's trade promotions could be understated because of failures
to record liabilities and reserves for agreed-upon trade promotions and other
incentives/concessions. And the analytical procedures performed by PwC-Brazil did not
serve to provide a high level of assurance, because they did not employ any detailed
expectation based on a plausible relationship.
50
IV.
In view of the foregoing, and to protect the interests of investors and further the
public interest in the preparation of informative, accurate, and independent audit
reports, the Board determines it appropriate to impose the sanctions agreed to in
Respondent's Offer. Accordingly, it is hereby ORDERED that:
A. Pursuant to Section 105(c)(4)(E) of the Act and PCAOB Rule 5300(a)(5),
Wander Rodrigues Teles is hereby censured;
B. Pursuant to Section 105(c)(4)(B) of the Act and PCAOB Rule 5300(a)(2),
Wander Rodrigues Teles is barred from being an associated person of a
registered public accounting firm, as that term is defined in Section 2(a)(9)
of the Act and PCAOB Rule 1001(p)(i);
51
and
49
See AU § 350.44.
50
See AU § 329.14 (as higher levels of assurance are desired from
analytical procedures, more predictable relationships are required to develop the
expectation); AU § 329.17 ("The expectation should be precise enough to provide the
desired level of assurance that differences that may be potential material
misstatements, individually or when aggregated with other misstatements, would be
identified for the auditor to investigate.").
51
As a consequence of the bar, the provisions of Section 105(c)(7)(B) of the
Act will apply with respect to Teles. Section 105(c)(7)(B) provides: "It shall be unlawful
for any person that is suspended or barred from being associated with a registered
public accounting firm under this subsection willfully to become or remain associated
with any issuer, broker, or dealer in an accountancy or a financial management
capacity, and for any issuer, broker, or dealer that knew, or in the exercise of
reasonable care should have known, of such suspension or bar, to permit such an
association, without the consent of the Board or the Commission."
ORDER
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C. After two (2) years from the date of this Order, Wander Rodrigues Teles
may file a petition, pursuant to PCAOB Rule 5302(b), for Board consent to
associate with a registered public accounting firm; and
D. Pursuant to Section 105(c)(4)(D) of the Act and PCAOB Rule 5300(a)(4),
a civil money penalty in the amount of $10,000 is imposed upon Wander
Rodrigues Teles. All funds collected by the Board as a result of the
assessment of this civil money penalty will be used in accordance with
Section 109(c)(2) of the Act. Respondent shall pay the civil money penalty
imposed within ten (10) days of the issuance of this Order by (1) wire
transfer pursuant to instructions provided by Board staff; or (2) United
States Postal Service money order, bank money order, certified check, or
bank cashier's check (a) made payable to the Public Company Accounting
Oversight Board, (b) delivered to the Controller, Public Company
Accounting Oversight Board, 1666 K Street, N.W., Washington D.C.
20006, and (c) submitted under a cover letter that identifies Teles as a
respondent in these proceedings, sets forth the title and PCAOB release
number of these proceedings, and states that payment is made pursuant
to this Order, a copy of said cover letter and money order or check shall
be sent to Office of the Secretary, Attention: Phoebe W. Brown, Secretary,
Public Company Accounting Oversight Board, 1666 K Street, N.W.,
Washington D.C. 20006.
ISSUED BY THE BOARD.
/s/ Phoebe W. Brown
_______________________________
Phoebe W. Brown
Secretary
March 20, 2017
