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WASHINGTON — Regulators are conducting an in-depth investigation into conflicts of interest at the nation’s largest accounting firms, asking whether the consulting and other non-audit services they sell compromise their ability to conduct independent reviews of corporate finances public, according to people familiar with the matter.

The Securities and Exchange Commission investigation highlights the agency’s new focus on gatekeepers of the financial markets such as accountants, bankers and lawyers. These companies help companies raise capital and communicate with shareholders, but also have obligations under federal investor protection laws. Auditors are a shareholder’s first line of defense against sloppy or questionable accounting.

Speaking at a national conference of auditors in December, SEC Chief Enforcement Officer Gurbir Grewal said: “You will see that we will have a strong commitment going forward to continue targeting deficient audits. by auditors, auditor independence cases, profit management cases.”

Gurbir Grewal, SEC Chief Enforcement Officer.


Alyssa Schukar for The Wall Street Journal

Last year, the SEC’s Miami office sent out letters requesting information about clients’ work that could cause auditors to violate rules requiring them to be independent of clients whose finances they inspect, people say. . They say the letters were sent to some smaller accounting firms as well as the Big Four: Deloitte & Touche LLP, Ernst & Young LLP, KPMG LLP and PricewaterhouseCoopers LLP.

Spokespersons for the SEC, KPMG and PwC declined to comment. A spokeswoman for Ernst & Young and a spokesperson for Deloitte did not respond to requests for comment.

According to Audit Analytics, the Big Four audit 66% of all public companies with a market capitalization over $75 million. All four have paid fines to the SEC since 2014 to settle previous regulatory investigations into audit independence violations.

SEC rules prohibit accounting firms from performing other work for an audit client that could affect their objectivity and impartiality as auditors. Companies pay auditing firms to test their accounts, then issue an opinion on whether shareholders can trust the financial figures and systems designed to reduce the risk of fraud or error.

Public companies disclose audit fees and unaudited fees in their annual proxy statements. According to Audit Analytics, about 47 companies in the S&P 500 index paid significant non-audit fees to companies hired to test their accounting practices. The analysis defined materiality as non-audit fees that constituted more than 25% of the total fees paid to the accounting firm.

In the ongoing investigation, the SEC has asked audit firms to disclose to regulators instances in which the firms have provided services such as advice, tax advice and lobbying to audit clients, according to people familiar with the matter. The SEC also requested information on any cases in which auditing firms have obtained contracts that reimburse them for losses caused by lawsuits over their work, or have made fees dependent on a result or a particular outcome, they say.

PwC paid nearly $8 million in 2019 to settle SEC claims that it helped an audit client build software that was part of its accounting compliance systems. The arrangement violated audit independence rules because it placed PwC in the position of potentially auditing its own project management functions, according to an SEC settlement order.

Regulators alleged that a PwC accountant was handling negotiations for the software work at the same time he was working on the client’s annual audit. PwC settled the case without admitting or denying the SEC’s allegations, while the accountant paid a $25,000 fine and agreed to be suspended from auditing public company financial statements for four years.


How should the SEC deal with auditor conflicts if they are found to exist? Join the conversation below.

Ernst & Young has twice settled SEC investigations in the past seven years alleging it violated independence rules. In 2014, regulators accused the firm of lobbying congressional staff on behalf of two audit clients. An Ernst & Young affiliate sent letters signed by an audit client executive to lawmakers’ staff and also lobbied directly for a bill that would help an audit client’s business, a alleged the SEC. Ernst & Young paid $4 million to settle SEC claims without admitting or denying wrongdoing.

In 2014, KPMG paid $8.2 million to settle an SEC investigation that alleged it provided prohibited non-audit services such as bookkeeping to affiliates of companies whose books it audited. In 2015, Deloitte & Touche LLP paid $1.1 million to settle an SEC lawsuit alleging audit independence violations. Both firms settled without admitting or denying misconduct.

Write to Dave Michaels at [email protected]

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Appeared in the March 16, 2022 print edition as “Big Four in Accounting Face SEC Investigation”.