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Big 4 Firms in SEC’s Scope Regarding Audit Independence

The US Securities and Exchange Commission is now probing potential conflicts of interest within big four firms which includes Ernst & Young, PricewaterhouseCoopers, Deliotte, and KPMG, as first reported by the Wall Street Journal.  The probe will focus largely on whether accounting firms undermined their ability to conduct independent audits by offering other consulting or non-audit services to clients.

The SEC’s latest investigation highlights the agency’s new focus aimed at financial-market gatekeepers such as accountants, bankers, and lawyers.  Firms like those mentioned, help companies in a multitude of ways, but may also have duties under federal investor-protection laws.  These duties stem directly from performing audits, as auditors have a responsibility to protect shareholders and potential investors from the occasional fraudulent or unrepresentative financial claims made by public & private companies.

The Investigation

The SEC is said to have sent letters to each of the big four firms as well as some smaller accounting firms which was purposed to seek information on any client work being performed that could cause auditors to violate rules requiring they are independent from clients finances they inspect.  Diving deeper, the SEC also asked for information as to any work being conducted under a contract stating the audit firm would be reimbursed for losses caused by lawsuits, or made fees contingent upon a particular result or outcome.

Service Independence

There is not a definitive answer as to why the SEC is now looking into these firms, however, they are coming after them with much more vigor than before.  This can be seen by the SEC prying, and asking smaller audit firms to disclose instances where they provided consulting, tax, and lobbying services to their clients, on top of the information aforementioned.  Some additional non-audit services firms are prevented from performing on clients (including its affiliates) include, but are not limited to:

  • Bookkeeping
  • Financial information systems design and implementation
  • Appraisal or valuation services, fairness opinions, or contribution-in-kind reports
  • Actuarial services
  • Internal audit outsourcing services
  • Management functions or human resources
  • Broker-dealer, investment adviser, or investment banking services
  • Legal services and expert services unrelated to the audit

Wrap Up

These services are not all disallowed by independence rules, however, the rules put in place still have some room for firms to find grey areas, which the SEC now seems like they are putting more effort into uncovering.  We will be following along this story to see how everything shakes out..

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