The SEC investigation highlights the agency's new emphasis on financial-market gatekeepers such as accountants, bankers, and lawyers. These firms assist companies in raising capital and communicating with shareholders, but they also have responsibilities under federal investor protection laws. Auditors are a shareholder's first line of defense against sloppy or questionable accounting practices.
SEC Enforcement Director Gurbir Grewal stated at a national auditors conference in December, "You will see that we will have a firm commitment moving forward to continue to target deficient auditing by auditors, auditor independence cases, and cases around earnings management."
According to the people, the SEC's Miami office sent letters last year seeking information about client work that could cause auditors to violate rules requiring them to be independent of clients whose finances they inspect. They claim the letters were sent to a variety of accounting firms, including the Big Four: Deloitte & Touche LLP, Ernst & Young LLP, KPMG LLP, and PricewaterhouseCoopers LLP.
The SEC, KPMG, and PwC all declined to comment. An Ernst & Young spokeswoman and a Deloitte spokesman did not respond to requests for comment.
According to Audit Analytics, the Big Four audit 66 percent of all public companies with a market capitalization of more than $75 million. Since 2014, all four have paid fines to the SEC to resolve prior regulatory investigations of audit independence violations.
Accounting firms are prohibited by SEC rules from performing any other work for an audit client that could impair their objectivity and impartiality as auditors. Companies pay audit firms to test their accounting systems and then issue an opinion on whether shareholders can rely on the financial numbers and systems designed to reduce the risk of fraud or error.
In their annual proxy statements, public companies disclose audit and nonaudit fees. According to Audit Analytics, approximately 47 companies in the S&P 500 index paid significant nonaudit fees to firms hired to test their accounting practices. The analysis defined significance as nonaudit fees that exceeded 25% of total fees paid to the accounting firm.
According to people familiar with the matter, 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 as part of the current investigation. According to the SEC, they also requested information on any cases in which audit firms obtained contracts that reimbursed them for losses caused by lawsuits over their work or made fees contingent on a specific result or outcome.
In 2019, PwC paid nearly $8 million to settle SEC claims that it assisted an audit client in designing software that was part of its accounting-compliance systems. According to an SEC settlement order, the arrangement violated audit-independence rules by putting PwC in the position of potentially auditing its own project-management functions.
Regulators claimed that a PwC accountant handled the software work negotiations while also working on the client's annual audit. PwC agreed to settle the case without admitting or denying the SEC allegations, and the accountant agreed to pay a $25,000 fine and be barred from auditing public-company financial statements for four years.
Ernst & Young has settled SEC investigations alleging violations of independence rules twice in the last seven years. Regulators charged the firm in 2014 with lobbying congressional staff on behalf of two audit clients. According to the SEC, 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 benefit an audit client's business. Ernst & Young agreed to pay $4 million to settle SEC allegations without admitting or denying wrongdoing.
KPMG paid $8.2 million to settle an SEC investigation alleging that it provided prohibited nonaudit services such as bookkeeping to affiliates of companies whose books it audited in 2014. Deloitte & Touche LLP settled an SEC enforcement action alleging audit independence violations in 2015 for $1.1 million. Both companies reached an agreement without admitting or denying wrongdoing.