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Four large accounting firms are subject to the control of the regulatory authority

WASHINGTON – Regulators are conducting a wide-ranging conflict of interest investigation into the country’s largest accounting firms, asking whether consulting and other non-audit firms undermining their ability to conduct independent audits of public corporations, according to insiders. .

The Hellenic Capital Market Commission’s research highlights the agency’s new focus on financial market watchdogs such as accountants, bankers and lawyers. These companies help companies raise funds and communicate with shareholders, but they also have responsibilities under federal investor protection law. Auditors are the first line of defense of shareholders against sloppy or unpleasant accounting.

Speaking at a national conference of auditors in December, SEC Enforcement Director Gurbir Grewal said: “You will see that we will have a firm commitment to continue to target lack of auditors, auditors’ independence cases, earnings management cases.”

Gurbir Grewal, SEC Executive Director.


Photo:

Alyssa Schukar for The Wall Street Journal

The SEC’s Miami office sent letters last year seeking information about clients’ work that could force auditors to break rules that require them to be independent of clients whose finances they inspect, according to people. 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.

Representatives of the SEC, KPMG and PwC declined to comment. A representative of Ernst & Young and a representative of Deloitte did not respond to a request for comment.

The Big Four control 66% of all public companies with a market capitalization of more than $ 75 million, according to Audit Analytics. All four have paid fines to the Hellenic Capital Market Commission since 2014 to settle previous regulatory investigations into breaches of control independence.

SEC rules prohibit accounting firms from doing other work for a client of auditors that could damage their objectivity and impartiality as auditors. Companies pay auditors to audit their accounts and then issue an opinion stating whether shareholders can rely on financial numbers and systems designed to reduce the risk of fraud or error.

Public companies disclose audit and non-audit fees in the annual statements of their representatives. About 47 S&P 500 companies paid significant non-audit commissions to companies hired to test their accounting practices, according to Audit Analytics. The analysis defined significance as non-audit fees that accounted for more than 25% of the total fees paid to the accounting firm.

In the ongoing investigation, the SEC asked audit firms to reveal cases to regulators where companies provided services such as consulting, tax advice and lobbying to audit clients, according to those familiar with the matter. The SEC has also requested information on any cases in which audit firms have received contracts that compensate them for damages caused by lawsuits for their work or that the pay depends on a specific outcome or effect, they say.

PwC paid nearly $ 8 million in 2019 to settle SEC claims that it helped a customer design software that was part of accounting compliance systems. The agreement violated the independence control rules because it put PwC in a position to possibly control its own project management functions, in accordance with an SEC settlement order.

Regulators claimed that a PwC accountant handled the software job negotiations while working on the client’s annual audit. PwC settled the case without acknowledging or denying the SEC’s allegations, and the accountant paid a $ 25,000 fine and agreed to stay out of the public company’s financial statements for four years.

Ernst & Young has twice in the last seven years settled SEC investigations alleging that it violated the rules of independence. In 2014, regulators accused the company of pressuring congressional staff on behalf of two auditor clients. An Ernst & Young subsidiary sent letters signed by an audit client to lawmakers and also pushed for a bill that would help a client audit firm, the SEC said. Ernst & Young paid $ 4 million to settle the SEC claims without admitting or denying the wrongdoing.

KPMG in 2014 paid $ 8.2 million to settle an SEC investigation that allegedly provided prohibited non-audit services, such as bookkeeping to subsidiaries whose books it audited. Deloitte & Touche LLP in 2015 paid $ 1.1 million to settle an SEC enforcement action alleging breaches of control independence. Both companies settled without acknowledging or denying the misconduct.

I write to you Dave Michaels at dave.michaels@wsj.com

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Four large accounting firms are subject to the control of the regulatory authority

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