Posts Tagged ‘Auditor Independence’

Following journalists and bloggers has become part of my daily routine.  I pay attention to what is written and to its impact.  In accounting, there tends not to be too much impact, because regulators, corporate executives and audit firm managers seem impervious to what other people say.  They always do what they darn well want to.

Dena Aubin, David Ingram and Sarah N. Lynch, however, have been able to see the power of their pens.

Dena Aubin is a journalist for Reuters who writes on auditing.  David Ingram is a Reuters journalist who writes on lobbying and business.  Sarah N. Lynch is a financial regulatory reporter.  In various combinations, they have partnered on an interesting series of articles:

In today’s post I’ll write about the first and third of their series.

In  “Ernst & Young tightropes between audit, advocacy,” Aubin and Ingram write about Washington Council Ernst & Young (WCEY) and reactions to their activities.  Aubin and Ingram report that WCEY (a unit of Ernst and Young) provides lobbying services valued at $12 million per year.  WCEY does enough business that I had become aware of its existence.  Some of its clients also engage Ernst & Young to audit their financial statements.

And that’s the rub.  It is a violation of both common sense and professional ethics that I find shocking.

Aubin and Ingram reported that Senators Carl Levin and Jack Reed were now expressing concern.  Aubin and Ingram were unable to receive public comment from the SEC and PCAOB on the issue.

On March 8, I was skeptical that anything would happen to dissuade Ernst & Young from this practice.

On Friday, May 4, I received a pleasant surprise.  In “Ernst, clients, cut auditing ties-records.”  Ingram and Aubin report that an examination of reports filed under the Lobbying Disclosure Act revealed that some of Ernst’s audit clients were no longer lobbying clients.  None of the companies, nor Ernst & Young, would comment on the relationship changes.

However, the cause and effect seems obvious.   The first story apparently showed enough light on the Ernst & Young lobbying activity that it changed what it was doing.

Congratulations Dena and Dave!

Also included in the article are comments from the SEC:

The chief accountant for the U.S. Securities and Exchange Commission, James Kroeker, speaking at a financial reporting conference at Baruch College in New York on Thursday, said SEC rules state an auditor should not act in an advocacy role for a company it audits and lobbying would be inconsistent with that.

Kroeker did not mention any audit firms by name.

He said: “If you think about lobbying in the traditional sense, you would say, ‘wouldn’t somebody that’s lobbying be placing themselves in a position to be an advocate?'”

Asked whether the SEC was looking into E&Y’s lobbying activities, an official in the agency’s enforcement division declined to comment because its investigations are not public.

“We are aware of it and we are cognizant of what the rules are,” said Howard Scheck, chief accountant of the SEC’s division of enforcement, on the sidelines of Thursday’s conference.

“If there’s a violation that we find, we’ll certainly do something about that,” he said, without referring to E&Y.

I’m impressed with these journalists, Aubin, Ingram and Lynch.  Their articles have shown original fact finding, effective organization, and a steady flow from start to finish.  I’m adding them to the list of business journalists whom I follow.

Debit and credit – – David Albrecht

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Tim Reason, editorial director of CFO.com and award winning business journalist, has a new article out in this month’s CFO Magazine, “Auditing Your Auditor.”  It is always a pleasure to read his work, and his current piece is no exception.

His focus  is on audit fees.  As everyone knows there are three certainties in life:  death, taxes, and CFOs complaining about pricey audit fees.  About 2,500 public companies (out of 9,500 SEC reporting companies) pay at least $1,000,000 per year in audit fees.

Audit prices have been on a roller coaster in recent years.  When the Big 8 industry evolved into the Big 4, a smaller pool of major audit providers led naturally to higher prices.  Eventually, though, audits become commoditized (and coupled with consulting fees) and prices fell.  Following the turmoil of the early 2000s and passage of Sarbanes-Oxley, audit prices went through the roof.  Recently, however, prices have been dropping.  Reason cites information gleaned from AuditAnalytics reports that supports a conclusion that audit fees have been dropping as a percentage of a client company’s revenues even as corporate revenues have declined during the recent recession.

Reason reasons that declining audit fees result from three factors:

  1. Benefits realized from SOX required internal controls,
  2. Increasing trend for companies to shop for a new auditor on price considerations only, and
  3. CFO’s comparing their audit fee against a benchmark of average fees paid by their peers.

I wonder, though, if this is the complete story.


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