Big Four in Accounting Face SEC Investigation BY DAVE MICHAELS December, SEC Enforcement Director Gurbir Grewal said: WASHINGTON-Regula- "You will see that we will have tors are carrying out a sweep- a firm commitment moving ing investigation of conflicts forward to continue to target of interest at the nation's larg- deficient auditing by auditors, est accounting firms, asking auditor independence cases, whether consulting and other cases around earnings man- nonaudit services they sell - agement." dermine their ability to con- The SEC's Miami office sent duct independent reviews of letters last year seeking infor- public companies' financials, mation about client work that according to people familiar could cause auditors to violate with the matter. rules requiring they be inde- The Securities and Ex- pendent of clients whose fi- change Commission probe nances they inspect, according highlights the agency's new to the people. focus on financial market They said the letters were gatekeepers such as accoun- sent to some smaller tants, bankers and lawyers. accounting firms as well as These firms help companies the Big Four: Deloitte & raise capital and communicate Touche LLP, Ernst & Young with shareholders, but also LLP, KPMG LLP, and Pricewa- have duties under federal in- terhouseCoopers LLP. vestor-protection laws. Audi- Spokesmen for the SEC, tors are a shareholder's first KPMG and PwC declined to line of defense against sloppy comment. A spokeswoman for or dodgy accounting. Ernst & Young and a spokes- Speaking at a national con- man for Deloitte didn't re- ference of auditors in Please turn to page A2 spond to requests to comment. The Big Four audit 66% of all public companies with a market capitalization over $75 million, according to Audit in the current investiga-cases in which audit firms ob- ellent design software that Analytics. All for have peld tion, the SEC has asked andit tained contracts that rem was part of its accounting fines to the SEC since 2014 to firms to disclose instances to burse them for losses caused compliance systems. The ar settie prior regulatory investi regulators in which the firms by lawsuits over their work, Tangement violated nudit-in- gations of audit independence provided services such as or made fees contingent on a dependence rules because it violations consulting, tax advice, and particular resalt or outcome, put PwC in the position of SEC roles prohibit account lobbying to audit clients, ac they said. potentially auditing its own ing firms from doing other cording to the people familiar PwC paid almost $8 mil project management func work for an audit client that with the matter. The SEC also lion in 2019 to settle SEC tions, according to an SEC could Impair their objectivity asked for information on any claims that it helped an audit settlement order. and impartiality as auditors. Companies pay audit firms to test their accounting and then issue an opinion stating whether shareholders can rely on the financial numbers and systems designed to reduce the risk of fraud or error. Public companies disclose audit and nonnudit fees in Regulators alleged that a their annual proxy statements. PwC accountant handied the About 47 companies in the negotiations for the software S&P 500 Index paid significant work at the same time he nonaudit fees to firms hired to worked on the client's annal test their accounting practices, Audit. PwC settled the case according to Audit Analytics without admitting or denying The analysis defined signif- the SEC allegations, while the cance as nonaudit fees that accountant paid a $25,000 constituted more than 25% of fine and agreed to be us- total fees paid to the account pended from auditing public Ing firm company financial statements for four years Ernst & Young has twice in the past seven years settled SEC investigations alleging it violated independence rules. In 2014, regulators accused the firm of lobbying concres sional staff on behalf of two audit clients. As Ernst & Young subsidiary sent letters signed by an executive of an audit client to lawmakers staff and directly lobbled for bill that would help the business of an audit cijent, the SEC alleged Ernst & Young peld 54 mil lion to settle the SEC claims without sitting or drying wrongdoing KPMG pald $ 2 million in 2014 to settle in SEC vesti sation that alleged it pro- vided prohibited nonaudit services such as booping to ffiliates of companies whose books it audited Deloitte & Touche paid $1 million in 2015 to settle an SEC nforcement action claiming audit independence violations. Both fire settled without admitting or denying misconduct 1. Briefly summarize the article. 2. What is the Security and Exchange Commission and why is it interested in investigating potential conflict of interest issues? 3. Why does the issue of auditor independence seem so critical? 4. What are some of the services offered by major accounting firms? 5. Select one publicly traded company. Which firm audited that company? What did the auditor's opinion state
