Risk Update

Conflicts News — Consulting, Accounting, Audits & Independence Edition

SEC Probe Looms Over Auditors’ Fastest-Growing Businesses” —

  • “When the two top executives of a hot electric-vehicle startup made share purchases that later drew scrutiny, they were helped by accounting firm BDO USA, according to the auto company. BDO was also the auditor of the company they ran.”
  • “The dual roles that BDO played at Electric Last Mile Solutions Inc. are typical of potential conflicts of interest faced by auditors. Relationships like this one are under scrutiny by the Securities and Exchange Commission, people close to the inquiry said.”
  • “The car maker said it took an internal probe to figure out that BDO was advising its chairman, Jason Luo, and Chief Executive Officer James Taylor. Both executives resigned and their deals for company stock are being investigated by the SEC, the company said in March.”
  • “BDO is one of several midtier accounting firms caught in a sweeping probe by the SEC into conflicts of interest by auditors, one of the people close to the investigation said. The probe also includes the Big Four accounting firms Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers, The Wall Street Journal has previously reported.”
  • “BDO resigned as auditor of Electric Last Mile Solutions in February, citing concerns that an illegal act might have occurred. The company decided after its internal investigation that it needed to restate earlier financial statements that were audited by BDO, in the light of the share deals the accounting firm had allegedly advised on.”
  • “The SEC investigation reflects concerns about the increasing reliance by the big accounting firms on sales of consulting and tax services, which offer higher margins and greater growth potential than their core audit business.”
  • “A Deloitte spokesman said the firm’s multidisciplinary approach ‘enables us to deliver high quality audits for the benefit of the investing public.’ A PwC spokesman said ‘independence is core to the delivery of quality audits, at the heart of PwC’s culture and fundamental to everything we do.’ Representatives of KPMG and EY declined to comment.”
  • “In the U.S., senior SEC officials have in recent months publicly warned accounting firms not to ‘creatively apply the [independence] rules,’ and said sanctions may need to increase to deter rule breaking.”
  • “The agency’s ongoing conflicts-of-interest investigation is looking for breaches of rules banning accounting firms from selling specified services to audit clients, people close to the probe said.”

McKinsey & Co. worked with Russian weapons maker even as it advised Pentagon” —

  • “Russia has fired more than 2,000 missiles on Ukraine since invading in February. The engines for many of these missiles were manufactured by a massive state-owned enterprise called Rostec, and executives for that company hired the global consulting giant McKinsey & Co. in recent years for advice.”
  • “At the same time McKinsey was advising the Russian defense conglomerate, though not on any work directly involving weapons, the firm was carrying out sensitive national security contracts for the Defense Department and the U.S. intelligence community, according to an NBC News investigation.”
  • “McKinsey has come under scrutiny in Congress for its work with state-owned companies in China, with lawmakers questioning if the company should be awarded national security-related contracts given its extensive presence in China. McKinsey also faces accusations of ignoring possible conflicts of interest when it advised both opioid manufacturers and officials regulating opioids at the U.S. Food and Drug Administration.”
  • “By carrying out consulting work with a company like Rostec, McKinsey placed itself in a potentially risky position, given its work with the U.S. government, according to Scott Blacklin, a former head of the U.S. Chamber of Commerce in Russia and president of the consultancy Blacklin and Associates.”
  • “‘It’s really hard to understand how an American consulting firm … would want to be involved in sensitive areas of the Russian defense or intelligence or scientific establishment. And when you talk about Rostec, you’re talking about all of those mixtures,’ Blacklin said.”
  • “Sen. Maggie Hassan, D-N.H., told NBC News that McKinsey has displayed a ‘pattern of behavior’ in its consulting abroad and in Washington that raised ‘grave concerns about conflicts of interest.'”
  • “‘Whether it be the substance misuse crisis or work for state-owned enterprises in places like Russia and China, I am deeply concerned by McKinsey’s choices and by the fact that the U.S. government continues to contract with McKinsey despite those potential conflicts,’ the senator said.”
  • “But the company, which has its headquarters in New York, says it does not see its recent work in Russia as posing a conflict with its consulting for the Pentagon and other federal agencies. When asked by NBC News, a company spokesperson, Neil Grace, said McKinsey has strict rules and firewalls to safeguard against conflicts of interest, and that its work abroad is walled off from its work in Washington.”
  • “‘As we have stated previously, McKinsey complies with all applicable U.S. contracting laws, including those regarding conflicts of interest,’ Grace said. ‘When we serve the U.S. government, we do so through a separate legal entity with separate operational structures and separate information technology where required.'”