Big Four Accounting Firms Face US Securities Regulator Scrutiny

The US Securities and Exchange Commission (SEC), the market regulator in the country, has opened investigations into the world’s four largest accounting firms. The investigation will focus on conflicts of interest that can arise when firms sell consulting and other non-audit services to other companies, according to the Wall Street Journal.

The investigation is part of the SEC’s campaign to strengthen regulatory compliance for accountants, bankers and lawyers. As these entities are the line of communication between companies and investors, it is important that their integrity is maintained.

“You will see that we will have a firm commitment in the future to continue to target deficient audits by auditors, auditor independence cases, cases concerning the management of profits,” said Gurbir Grewal, director of the SEC enforcement, at the National Auditors Conference in December.

Why are the four companies under investigation?

Under SEC rules, accounting and auditing firms are prohibited from providing services to their clients that could interfere with their auditing and accounting functions to ensure that auditors remain objective and impartial in their conclusions. In this regard, the SEC had sent notices to Deloitte & Touche LLP, Ernst & Young LLP, KPMG LLP and PricewaterhouseCoopers LLP; the four largest accounting firms in the world, requesting information about services provided to clients that could potentially violate the above rule.

While other smaller companies have also received letters from the SEC, the Big Four, as they are called, audit 66% of all public companies in the United States. Analysis by Audit Analytics also found that 47 of the S&P500 companies paid significant non-audit fees, representing more than 25% of total fees paid, to accounting firms. These non-audit services include consulting, tax advice and lobbying of audit clients.

Not the first time

This isn’t the first time the Big Four have been in the SEC’s crosshairs. All four companies have faced similar actions in the past.

PwC had paid nearly $8 million to the SEC to settle a case over a violation of audit independence rules in 2019. EY has settled with the SEC twice in the past seven years over investigations alleging that she had violated independence rules, paying $4 million in 2014 and $10 million last year. That same year, KPMG paid $8.2 million to the SEC to settle an investigation into its alleged violations. Deloitte also paid $1.1 million to settle an SEC lawsuit in 2015. EY, KPMG and Deloitte settled their cases without admitting or denying any wrongdoing. PwC also settled their cases without admitting or denying any wrongdoing, but agreed to be suspended from auditing public company financial statements for four years.

First post: STI

Previous How private equity boosted various links in the value chain
Next Machine learning could help predict migraine sufferers' response to NSAIDs