Risk Update

Independence Limited? — Accounting Firms Facing SEC Conflicts Concern

SEC probing Big Four accounting firms over conflict-of-interest concerns: report” —

  • “The Securities and Exchange Commission (SEC) has launched a probe into conflict-of-interest concerns within the financial sector that includes the Big Four accounting firms — Deloitte , Ernst & Young, KPMG, and PricewaterhouseCoopers.”
  • “Sources told The Wall Street Journal on Tuesday that the probe will focus on whether accounting firms undermined their ability to conduct independent audits by offering other consulting or non-audit services to clients. “
  • “The SEC’s Miami office reportedly sent letters to the big four companies and smaller accounting firms last year seeking information about client work that would cause auditors to violate rules requiring them to be independent of clients whose finances they inspect.”
  • “All four of the biggest firms have paid fines to the agency since 2014 to settle regulatory investigations of audit independence violations, the Journal reported.”
  • “The SEC has also asked audit firms to disclose instances to regulators when they provided non-audit services such as consulting, tax advice, and lobbying to audit clients — and instances in which their financial outcomes depended on those ties, such as making fees contingent on a particular result.”

WSJ: “Big Four Accounting Firms Come Under Regulator’s Scrutiny” —

  • “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.”
  • “SEC rules prohibit accounting firms from doing other work for an audit client that could impair their objectivity and impartiality as auditors. Companies pay audit firms to test their accounting and then issue an opinion stating whether shareholders can rely on the financial numbers and systems designed to reduce the risk of fraud or error.”
  • “Public companies disclose audit and nonaudit fees in their annual proxy statements. About 47 companies in the S&P 500 index paid significant nonaudit fees to firms hired to test their accounting practices, according to Audit Analytics. The analysis defined significance as nonaudit fees that constituted more than 25% of total fees paid to the accounting firm.”
  • “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.”
  • “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.”

For more commentary, see this dialogue published in 2018 by the Financial Times and others: “Should the Big Four accountancy firms be split up? Two experts debate how best to reform auditing ” —

  • “Yes — Separating audit from consulting would prevent conflicts of interest”
  • “Auditors are supposed to underpin trust in financial markets. Major stock markets require listed companies to hire auditors to verify their accounts, providing reassurance to shareholders that material matters have been inspected and their capital is protected. In the UK, auditors must certify that the published numbers give a ‘true and fair view’ of circumstances and income; that they have been prepared in accordance with accounting standards; and that they comply with company law.”
  • “Multiple market failures need to be addressed. The most obvious problem is that audit quality is invisible to those whom it is intended to benefit: the shareholders. It is difficult to differentiate good and bad audits. Even with the introduction of extended auditor reports in the UK (and starting in 2019 in the US), formulaic notes about audit risks often hide more than they convey.”
  • “Even when questions are raised about the quality of audits, shareholders almost always vote to retain auditors, with most receiving at least 95 per cent support.”
  • “The dominance of the Big Four in large company audits is another concern: when large and powerful firms are able to crowd out high quality competitors, the damage is lasting.”
  • “Taken together, these failures have resulted in a dysfunctional audit market that needs a broad revamp. Splitting audit from consulting would prevent the most insidious conflict of interest. When non-audit work makes up around 80 per cent of fee income for the Big Four (and just over half of income from audit clients), the influence of this part of the business is huge.”


  • “No — Lopping off advisory services would hurt performance”
  • “Forcing Deloitte, EY, KPMG and PwC to shed their non-audit businesses would neither add competition nor boost smaller competitors. Lopping off the Big Four’s consulting and advisory services would degrade their performance, weaken them financially, and hamper their ability to meet the needs of their clients and the capital markets.”
  • “Although the UK regulator is raising competition concerns, the root problem is global. The growth of the Big Four, operating in more than 100 countries, reflects their multinational clients’ needs for breadth of geographic presence and specialised industry expertise.”
  • “The suggestion that competition and choice would be increased by splitting up the Big Four is doubly unrealistic. Forcing them to spin off their non-auditing business would not create any new auditors.”
  • “A split by industry sector — say, assigning auditing of banking and technology to Firm A-1, while manufacturing and energy go to new Firm A-2 — would be no better. Each sector would still be served by just four big firms. If each firm were split in half, the two smaller firms would struggle to amass the expertise, personnel and capital necessary to provide the level of service that big companies expect.”
  • “Splitting auditing from advisory work is a solution in search of a problem. Many jurisdictions, including the UK, EU and US, restrict the ability of firms to cross-sell other services to their audit clients. Concerns about inherent conflicts of interest are overblown.”
  • “Auditors should be held accountable for their mistakes, but these issues are too complex for simplistic solutions. Rather than a quick amputation, we need a full-scale re-engineering of the current model with all of its parts.”