The US Securities and Exchange Commission (SEC), the market regulator in the country, has opened investigations into the world’s four largest accounting firms. The investigation will look into conflicts of interest that may arise when the firms sell consulting and other non-audit services to other companies, according to the Wall Street Journal.

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The investigation is part of the SEC’s campaign to shore up regulatory compliance from accountants, bankers and lawyers. As these entities are the line of communication between the companies and investors, it is important for their integrity to be maintained.

“You will see that we will have a firm commitment moving forward to continue to target deficient auditing by auditors, auditor independence cases, cases around earnings management,” Gurbir Grewal, SEC Enforcement Director, had said at the national conference of auditors in December.

Why are the four firms being investigated?

Under SEC rules, accounting and auditing firms are barred from conducting any services for clients that would cause impairment in their auditing and accounting duties to ensure that auditors remain objective and impartial in their findings. In this regard, the SEC had sent out notices to Deloitte & Touche LLP, Ernst & Young LLP, KPMG LLP, and PricewaterhouseCoopers LLP; the four biggest accounting companies in the world, asking for information about services being given to clients that may potentially violate the above rule.

While other smaller firms also received letters from the SEC, the Big Four, as they’re known, audit 66 percent of all public companies in the US. Analysis from Audit Analytics also found that 47 of the S&P500 companies paid significant non-audit fees, amounting to more than 25 percent of the total fees paid, to the accounting firms. These non-audit services include consulting, tax advice, and lobbying to audit clients.

Not the first time

This is not the first time that the Big Four have been in the crosshairs of the SEC. All four companies have faced similar actions in the past.

PwC had paid nearly $8 million to the SEC to settle a case regarding a violation of audit-independence rules in 2019. EY has settled twice with the SEC in the past seven years regarding investigations alleging it violated independence rules, paying $4 million in 2014 and $10 million last year. KPMG in the same year had paid $8.2 million to the SEC to settle an investigation into its alleged violations. Deloitte also paid $1.1 million to settle an SEC enforcement action in 2015. EY, KPMG and Deloitte settled their cases without admitting or denying any wrongdoing. PwC also settled their cases without admitting or denying any wrongdoing but agreed to be suspended from auditing financial statements of public companies for four years.

First Published:Mar 17, 2022 9:01 AM IST