The Big-4 Accounting Firms Admitted to Violating Rules on Audit Independence Hundreds of Times

The so called "Big Four" accounting firms —Deloitte, PwC (PricewaterhouseCoopers), EY (Ernst & Young), and KPMG — have admitted hundreds of violations of regulations designed to protect the independence of their audit work, reported the Financial Times (FT).

This information comes after the introduction of new disclosure rules in the US by the Public Company Accounting Oversight Board (PCAOB), an audit inspector of the US established by Congress to oversee the audits of public companies.

The FT report said that confessions by the Big-4s come as the PCAOB urges companies and investors to pay greater attention to the findings of its annual inspections of audit firms, the latest round of which are expected to be released in the coming weeks.

US regulators require audit firm staff and their immediate family to make thorough financial disclosures, for example of their investments, and they ban employment and financial relationships with audit clients that could impair the firm's independence.

Under the disclosure, PwC said that it had identified 129 breaches of independence rules affecting 74 clients and PCAOB inspectors had found a further one themselves while inspecting audit work in 2022. The figures were included in an update to PwC's audit quality report, published on its website.

Citing a person familiar with the situation at PwC, the FT report said, "one example was the spouse of a staffer (PwC) holding a cash balance on payments app Venmo while PwC was auditing Venmo's parent company PayPal.

Notably, PwC affiliates served as independent auditors of Satyam Computer Services when the report of scandal in the account books of Satyam Computer Services broke. Satyam was an IT services company that once had Fortune-500 clientele, which later merged with Tech Mahindra.

Deloitte had told PCAOB inspectors of 129 breaches across 78 clients in 2022 affecting approximately 3% of its US audits and 107 across 53 clients in the 2023 inspection cycle.

According to the Deloitte, the most common instances of non-compliance were "related to financial relationships and employment relationships of approximately 145,000 professionals monitored".

"I would characterise them as technical violations," said Dennis McGowan, vice-president of the Center for Audit Quality, Deloitte.

In June 2023, Deloitte resigned from India's Byju's statutory auditor midway saying that the financial statement of the edtech company for FY22 was long delayed.

EY disclosed that it had found independence violations affecting 3% of its audits in 2022.

KPMG is the only Big-Four firm not to have disclosed its figures, which will become public in the PCAOB's forthcoming inspection reports for 2022. The PCAOB decided last year to begin routinely including data on independence violations.

Big Four audit clients are what arguably make the largest audit companies in the world worth working for. A staggering 100% of the Fortune 500 are audited by one of the Big Four accounting firms.

Early this month, India's National Financial Reporting Authority (NFRA) has also started investigating audit and non-audit services provided by the Big Four and other firms to clients. NFRA had raised concerns about conflict of interest and independence issues, leading to disciplinary actions. Violations include exceeding the revenue limit for non-audit services and breaching the cap on revenue from a single client.

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