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The SEC Only Gives Out Wrist-Slaps to the Big 4 When They Break Independence Rules On Providing Non-Audit Services to Audit Clients

The big news in the accounting profession yesterday afternoon from Dave Michaels of the Wall Street Journal was that the SEC is investigating the Big 4 and other public accounting firms on whether the consulting and non-audit services they sell to clients is conflicting with their independence as the auditors of said clients.

Michaels reported that last year the SEC’s office in Miami sent letters to each of the Big 4 firms as well as some smaller accounting firms “seeking information about client work that could cause auditors to violate rules requiring they be independent of clients whose finances they inspect,” sources told the WSJ.

The article also says:

In the current investigation, 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, according to the people familiar with the matter. The SEC also asked for information on any cases in which audit firms obtained contracts that reimburse them for losses caused by lawsuits over their work, or made fees contingent on a particular result or outcome, they say.

We’re not sure what exactly spurred the SEC to all of sudden investigate these conflicts of interest at the Big 4. The regulator already has auditor independence rules etched in stone that prohibit audit firms from providing non-audit services to an audit client, including its affiliates, such as:

  • Bookkeeping
  • Financial information systems design and implementation
  • Appraisal or valuation services, fairness opinions, or contribution-in-kind reports
  • Actuarial services
  • Internal audit outsourcing services
  • Management functions or human resources
  • Broker-dealer, investment adviser, or investment banking services
  • Legal services and expert services unrelated to the audit

But as we all know, auditor independence rules are a farce. Can you really, truly be independent if the client is paying you, the audit firm, millions of dollars a year to review its financials? Then when auditors do their jobs correctly by, say, issuing an internal control material weakness, their clients don’t like that and they don’t want investors to know about that, and then things can get messy.

And because auditor independence rules are a farce, audit firms will still try to find some sliver of gray area in the rules to sneakily sell non-audit services to their audit clients. Sometimes they get caught, but the fines the SEC gives them for breaking the rules are a farce too, with the highest one being $8.2 million to KPMG in 2014. Here are some examples over the past 10 years:

A Few EY Partners Didn’t Get the Auditor Independence Rules Right (Dec. 15, 2021)
While EY wasn’t punished, the SEC on Dec. 10 fined former principal Philip Hurak $20,000, former partner Alan Greenwell $15,000, and current principal Adam Bering $10,000 for their roles in the firm providing tax credit and incentive services to an audit client, Cintas Corp., on a contingent fee basis between July 2009 and August 2018. SEC rules stipulate that an audit firm is not independent of its audit client if it provides any non-audit services to the audit client for a contingent fee. As a result, EY was not independent of Cintas during that time period, the SEC said.

PwC Fined $7.9 Million By the SEC for Making Pretty Dumb and Obvious Independence Violations (Sept. 23, 2019)
PwC agreed to pay nearly $8 million and partner Brandon Sprankle $25,000 to settle charges of improper professional conduct and violating auditor independence rules, which were mostly due to failures in PwC’s independence-related quality controls. In summary, the SEC said:

PwC violated the SEC’s auditor independence rules by performing prohibited non-audit services during an audit engagement, including exercising decision-making authority in the design and implementation of software relating to an audit client’s financial reporting, and engaging in management functions. In connection with performing non-audit services for 15 SEC-registered audit clients, the order states that PwC violated Public Company Accounting Oversight Board (PCAOB) Rule 3525, which requires an auditor to describe in writing to the audit committee the scope of work, discuss with the audit committee the potential effects of the work on independence, and document the substance of the independence discussion. According to the SEC order, PwC’s actions deprived numerous issuers’ audit committees of information necessary to assess PwC’s independence. As further detailed in the order, the violations occurred due to breakdowns in PwC’s independence-related quality controls, which resulted in the firm’s failure to properly review and monitor whether non-audit services for audit clients were permissible and approved by clients’ audit committees.

RSM US’s $950,000 Fine Is a Reminder That Performing Non-Audit Services for Audit Clients Can Get You Into Trouble (Aug. 27, 2019)
According to the SEC, “from 2014 to 2015, RSM US or its associated entities, including other member firms of the RSM International network, provided non-audit services to, and had an employment relationship with, affiliates of RSM US audit clients, which violated the SEC’s auditor independence rules. The prohibited non-audit services included corporate secretarial services, payment facilitation, payroll outsourcing, loaned staff, financial information system design or implementation, bookkeeping, internal audit outsourcing, and investment adviser services.”

The audit clients included funds of eight registered investment advisers seeking to comply with the SEC’s Custody Rule, the employee benefit plans of three public companies that filed reports with the SEC on Form 11-K, two broker-dealers, and two public companies.

EY Is In Trouble With the SEC For Lobbying On Behalf of Audit Clients (July 14, 2014)
Because the SEC is currently investigating whether firms are providing lobbying services to audit clients, here’s an instance when EY got busted for doing just that:

The Securities and Exchange Commission today charged Ernst & Young LLP with violations of auditor independence rules that require firms to maintain their objectivity and impartiality with clients.

Ernst & Young agreed to pay more than $4 million to settle the charges.

The SEC’s order instituting a settled administrative proceeding finds that an Ernst & Young subsidiary [Washington Council EY] lobbied congressional staff on behalf of two audit clients. Such lobbying activities were impermissible under the SEC’s auditor independence rules because they put the firm in the position of being an advocate for those audit clients. Despite providing the prohibited legislative advisory services on behalf of the clients, Ernst & Young repeatedly represented that it was “independent” in audit reports issued on the clients’ financial statements.

ALSO: Are Ernst & Young’s Lobbying Activities a Violation of Auditor Independence Rules? (March 9, 2012)

The SEC is Not Pleased With KPMG’s Independence (Jan. 24, 2014)
As mentioned above, KPMG was given the biggest fine to date by the SEC, $8.2 million, for providing prohibited non-audit services to audit clients. In this instance, KPMG offered non-audit services, such as bookkeeping and expert services, to affiliates of companies whose books they were auditing. In addition, some KPMGers also owned stock in companies or affiliates of companies that were KPMG audit clients, further violating auditor independence rules.

The SEC said at the time:

According to the SEC’s order instituting settled administrative proceedings, KPMG repeatedly represented in audit reports that it was “independent” despite providing services to three audit clients that impaired KPMG’s independence. The violations occurred at various times from 2007 to 2011.

According to the SEC’s order, KPMG provided various non-audit services – including restructuring, corporate finance, and expert services – to an affiliate of one company that was an audit client. KPMG provided such prohibited non-audit services as bookkeeping and payroll to affiliates of another audit client. In a separate instance, KPMG hired an individual who had recently retired from a senior position at an affiliate of an audit client. KPMG then loaned him back to that affiliate to do the same work he had done as an employee of that affiliate, which resulted in the professional acting as a manager, employee, and advocate for the audit client. These services were prohibited by Rule 2-01 of Regulation S-X of the Securities Exchange Act of 1934.

We now know that, in the last situation mentioned above, KPMG had a “loan staff arrangement” with General Electric, its longtime audit client, but that arrangement had ended sometime in 2012.

See, these fines from the SEC are just a drop in the bucket for multibillion-dollar firms like the Big 4. So to summarize: auditor independence rules are a farce, fines to the Big 4 and other firms for auditor independence violations are a farce, and this new SEC investigation will probably be a farce too.

Big Four Accounting Firms Come Under Regulator’s Scrutiny [Wall Street Journal]

4 thoughts on “The SEC Only Gives Out Wrist-Slaps to the Big 4 When They Break Independence Rules On Providing Non-Audit Services to Audit Clients

  1. I have noticed that articles by Jason Bramwell are pretty bias against KPMG in general.

    The WSJ article actually said EY had the largest fine at $10 million; not KPMG.
    The only chart in the article showed EY with the 2 of the largest fines of $10M and $4M.
    Pretty hard to not see this chart.

    I’m always pretty skeptical when I read articles from this guy.

    1. Nah, I’ve got nothing against KPMG. That $10 million for EY is for an auditor independence violation in regards to the Sealed Air Corp. fiasco, not for providing non-audit services to audit clients. Whether you like it or not, KPMG has the biggest fine related to getting busted for selling non-audit services to audit clients in the last 10 years. Have a great evening!

  2. SEC bias against small CPA firms is an old story. In 1976, Lee Metcalf, then a US Senator, noted it in a study he authored, “The Accounting Establishment”.
    Look at the PCAOB: in its entire history, it has only brought 15% of its enforcement actions against the Big Four and the Big Four’s partners. has written about this if anyone is interested.

  3. If it is an independence violation, why doesn’t the SEC require that the Company be reaudited? Because the SEC would very rarely do that – so if the violation doesn’t require a re-audit, what’s the point in a big fine to the accounting firm?

    Why not just insist on training, implement procedures and reprimand the offending partner and personnel?

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