Risk Update

Consulting Conflicts — More On the Evolving Audit/Consulting Conflicts Conversation

Posted Dan Bressler

Updates for those like me who are intrigued by the evolving conflicts discussion unfolding on this side of the landscape: “Big Four Firms Test Audit Safeguards as Consultancy Booms” —

  • “The Big Four accounting firms increasingly rely on consulting and advising to drive their profits and boost partner paychecks, but it comes at a cost.”
  • “That resurgence of consulting—now the biggest slice of Big Four revenue—comes packaged with potential conflicts of interest that could threaten what was once their core business: the audit.”
  • “US regulators, alarmed that the outsized influence of that advisory work could undermine the job of auditors, are closely monitoring firms’ business deals. Ernst & Young has been exploring a possible split of its operations in part to fend off such ethics crackdowns, including a record $100 million settlement with the Securities and Exchange Commission for ethics violations.”
  • “‘What happens when we essentially have a consulting firm who also does audit work—what does that do to say the firm culture?’ said Stephen Rowe, associate accounting professor at the University of Arkansas and a former Big Four auditor. ‘It is problematic and the culture itself could deteriorate to the point where we could see large scale frauds again.'”
  • “The Big Four have built up extensive systems to track clients and their affiliates around the world to prevent the sale of restricted services to audit clients. Those systems also track the personal finances of their global workforces to comply with SEC and international ethics requirements.”
  • “Managing independence requirements for the firm’s 327,000 staff requires a ‘huge investment but it is an investment worth making, as we believe the multidisciplinary model is the best one to deliver quality audits for our stakeholders and the best experience for our people,’ PwC’s global arm said in a recent statement to Bloomberg Tax.”
  • “New ethics rules with new categories of prohibited services could be coming as independence rules also have not kept pace with the market growth or expanding lineup of consulting services the firms offer, he said.”
  • “SEC Chairman Gary Gensler said in late July that he wanted the PCAOB to bolster its independence standards and the board has added a project to update its requirements to its rule-writing agenda.”

“Big Four Firms, AICPA Report Lobbying on Federal Contractor Conflicts Bill” —

  • “A bill to implement new conflict-of-interest safeguards for federal contracting drew the attention of lobbyists at the AICPA and three Big Four firms in the second quarter of 2022, according to quarterly lobbying disclosures filed with Congress in July.”
  • “The main accounting industry trade group, along with Ernst & Young LLP, KPMG LLP, and Deloitte LLP, listed the Preventing Organizational Conflicts of Interest in Federal Acquisition Act on their lobbying activity for the months of April, May, and June.”
  • “The bill was at least in part a response to a controversy surrounding management consulting firm McKinsey & Company’s previous overlapping work as a contractor to the Food and Drug Administration (FDA) and as a consultant to opioid manufacturers, prompting an Oversight Committee investigation.”
  • “The Preventing Organizational Conflicts of Interest in Federal Acquisition Act would direct the Federal Acquisition Regulatory Council to revise the Federal Acquisition Regulation to, among other things, provide executive agencies with solicitation provisions and contract clauses for avoiding conflicts ‘that require contractors to disclose information relevant to potential organizational conflicts of interest and limit future contracting with respect to potential conflicts of interest with the work to be performed under awarded contracts.’ The bill would also direct executive agencies to update their anti-conflict procedures to implement the changes.”