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Are Ernst & Young’s Lobbying Activities a Violation of Auditor Independence Rules?

This morning we linked to a Reuters story that revealed Ernst & Young doing quite a fancy dance with auditor independence rules. You see, there is an advisory group within the firm known as Washington Council Ernst & Young who "helps clients manage opportunities and risks associated with the legislative and regulatory process." That's a quite wordy version of, "lobbying." Here are the services they provide:

  • Full service representation before the Congress and Executive branch
  • Strategic legislative advice
  • Legislative process, issue monitoring and reporting, and technical legislative analysis
  • Coalition development and management
  • Statutory and report language drafting
  • Development of "position papers" and other background documents
  • Drafting congressional testimony and regulatory comments

Naturally, this wouldn't be a problem if they were providing these services to non-audit clients, but Reuters reports that is exactly what has been going on:

Amgen Inc (AMGN.O), CVS Caremark Corp (CVS.N) and Verizon Communications Inc (VZ.N) have ongoing lobbying contracts with Washington Council Ernst & Young, an E&Y unit, while also using the audit firm to review the corporations' books, according to documents reviewed by Reuters. The same arrangement occurred in the past with E&Y, its lobbying unit and AT&T Inc (T.N), Fortress Investment Group LLC (FIG.N) and Transocean Ltd (RIG.N), records show. Those lobbying contracts ended between 2006 and 2011. 
For E&Y's part, they're saying that all the lobbying services provided to audit clients were for "tax-related issues," that they complied with independence rules, and were pre-approved by the clients' audit committees. The crux of the biscuit here, as I'm sure those of you studying for AUD can attest, is whether or not E&Y's services consist of the firm serving in an advocacy role for these audit clients. Judging by the list of services above, there's quite a bit of advocacy to be had, but are audit clients getting that special treatment? E&Y head spinmeister Charlie Perkins says no:
The firm does not solicit votes on legislation for E&Y audit clients, Perkins said. "We assist clients in monitoring public policy, analyzing legislation and educating Treasury officials, the IRS, legislators, other policy makers and their staffs about the potential consequences of legislation," Perkins said.
So, E&Y claims that they are keeping things objective, and thus, there's no cause for concern. Fine. But what constitutes "lobbying" in the first place? It's not exactly clear:
The Lobbying Disclosure Act says that making contact with government officials counts as lobbying, with some exceptions. It makes no exception for education. The tax code says that activity is not lobbying unless it has the purpose of influencing legislation.
Well, that's not very helpful. Gotta love ambiguity in legislation!
But what's really interesting is that the other Big 4 firms have a combined 12 registered lobbying clients (Deloitte: 0; KPMG: 1; PwC: 11) compared to E&Y's 72. Those belt-and-suspenders risk managers at the other firms clearly don't want to go near this while E&Y seems perfectly comfortable with it. Combine that with E&Y's six-month ban from taking public clients back in 2004, and the fact that CEO-elect Mark Weinberger founded a lobbying firm in DC, and it's no surprise that people on the Hill are asking the PCAOB and SEC to start sniffing around. 
But is the firm actually violating independence rules? It would be pretty hard to prove since any agreements for lobbying services with the audit clients are no doubt worded very carefully. But as for the conversations held behind closed doors, well, that's another matter entirely.


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