SEC Launches Probe Into Big Four Accounting Firms Conflicts Of Interest

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The reinvigorated SEC is investigating so many industries and businesses, you may have to hire an accounting firm just to keep track. But now even the accountants have been flagged by the federal government’s fiscal watchdog.

The SEC is pursuing a sweeping investigation into conflicts of interest at the nation’s largest accounting firms – including the so-called “Big Four” of Deloitte & Touche, Ernst & Young, KPMG, and PricewaterhouseCoopers – according to a Wall Street Journal report.

You Can’t Account On Me

The Big Four firms audit two-thirds of all public companies with a market capitalization over $75 million, according to independent corporate research firm Audit Analytics, providing shareholders both important fiscal information and a vital safeguard against sloppy accounting or possible fraud. To maintain objectivity, the SEC places limits on the amount of non-audit services that audit firms can provide, such as lobbying, consulting, and tax advice.

But since last year, the SEC has been probing whether accounting firms are crossing that line, according to the WSJ. The agency has asked audit firms to disclose any instance in which it offered audit clients non-audit services – services the firms have been providing in droves, and, in many cases, have already faced regulatory scrutiny over:

  • Nearly half of S&P 500 index companies had non-audit fees account for over 25% of total fees they paid to firms hired for audits in 2018, according to Audit Analytics. That crosses the SEC’s threshold for “significant”, though services for major M&As, an IPO, or auditor changes are often legitimate reasons for high non-audit fees.
  • Ernst & Young paid $10 million last year and $4 million in 2014 to settle SEC claims of audit independence violations, PwC paid nearly $8 million in 2019 to settle SEC claims, while KPMG paid over $8 million in 2014 to settle claims; none of the firms admitted or denied any wrongdoing.

The probe is yet another step in the federal government’s attempt to shed light on financial gatekeepers like accountants, bankers, and lawyers, at long last answering the question “Who audits the auditors?”