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SEC Investigation of Auditors Driven by Conflicts of Interest and a Lack of Independence

Is the SEC the Cause of the Problem?

I have blogged before about the problems the Big Four accounting firms are having with respect to conflicts of interests and independence impairments. These concerns have moved the SEC to launch a probe into how firms manage conflicts of interest caused by the provision of nonaudit services to audit clients. The ethics rules prohibit performing certain nonaudit services when conducting an audit for a client in large part because of these conflicts and impairments to independence. SEC rules prohibit accounting firms from doing work for an audit client that could impair their objectivity and impartiality as auditors.

Auditors have been called gatekeepers in that they are charged with protecting the interests of the public (i.e., investors and creditors) who rely on the ethics and independence of auditors and audit firms to ensure that audits are conducted in accordance with appropriate standards. Auditors render opinions on the financial statements whether those statements are free of material misstatement that may be due to error or fraud. The public relies on that opinion to make investment and credit decisions.

The SEC’s investigation of conflicts of interest are due to questions that have arisen whether consulting and other nonaudit services the firms sell undermine their ability to conduct independent audits of public companies’ financial statements.

Speaking at a national conference of auditors in December 2021, SEC Enforcement Director Gurbir Grewal said: “You will see that we will have a firm commitment moving forward to continue to target deficient auditing by auditors, auditor independence cases, cases around earnings management.”

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

The SEC has asked audit firms to disclose instances to regulators in which the firms provided services such as consulting, tax advice, and lobbying to audit clients. The SEC also asked for information on any cases in which audit firms obtained contracts that reimburse them for losses caused by lawsuits over their work or made fees contingent on a particular result or outcome, they say. A Wall Street Journal article on these matters identifies ethics violations that emanate from independence problems as follows. Audit

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

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 congressional staff on behalf of two audit clients. An Ernst & Young subsidiary sent letters signed by an executive of an audit client to lawmakers’ staff and also directly lobbied for a bill that would help the business of an audit client, the SEC alleged. Ernst & Young paid $4 million to settle the SEC claims without admitting or denying wrongdoing.

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

In my view, one of the problems with the independent audit today, and the accounting profession’s ethics rules of conduct, is the recent shift by the SEC towards objectivity as a defining standard of the independent audit and away from being independent in fact and appearance. In other words, the SEC seems to believe that if auditors are objective in performing services, then some financial and other relationships with clients that heretofore would have been labeled independence violations, won’t be prosecuted. Being objective is, in my opinion, is an integral part of independence and the two should not be separated.

It's ironic that the SEC is investigating the accounting profession for a lack of independence and conflicts of interest when it can be argued that the SEC is the cause of the problem. It’s time for the SEC to recommit to the independent audit, which requires approaching the audit with an objective and impartial mindset and avoiding conflicts of interest that could lead the public to believe the auditors were not independent, or do not seem to have been independent, and the audit report should, therefore, not be relied upon.

Blog posted by Dr. Steven Mintz, The Ethics Sage, on March 24, 2022. You can sign up for his newsletter and learn more about his media activities at: Follow him on Facebook at: and on Twitter at: