SEC Probe Looms Over Auditors’ Fastest-Growing Businesses

When two top executives of a popular electric vehicle startup bought shares that later attracted scrutiny, they were helped by accounting firm BDO USA, according to the auto company. The BDO is also the auditor of the company they run.

The dual roles that BDO played at Electric Last Mile Solutions Inc.

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are typical of potential conflicts of interest faced by the auditor. People familiar with the investigation said relationships like these are being monitored by the Securities and Exchange Commission.

The automaker said it took an internal investigation to find out that the BDO was advising its president, Jason Luo, and CEO James Taylor. Both executives have resigned and their purchases of company shares are being investigated by the SEC, the company said in March.

BDO is one of a number of mid-sized accounting firms caught by the SEC in a sweeping investigation into auditors’ conflicts of interest., said one of the people close to the investigation. The investigation also includes Big Four accounting firms Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers, The Wall Street Journal previously reported.

A BDO spokesperson did not respond to a request for comment. The BDO in the filing denied the company’s claim that it helped “create and structure” the stock deals, but did not comment on whether the company advises executives.

BDO resigned as auditor of Electric Last Mile Solutions in February, citing concerns that an illegal act may have occurred.


Photo:

Kris Tripplaar / Sipa USA / REUTERS

A spokesman for Electric Last Mile Solutions declined to comment, as did a spokesman for the former president, Mr. Luo. Its former CEO Mr Taylor did not respond to a request for comment. The SEC also did not respond to the request.

Electric Last Mile said its investigation found two executives purchased their shares at a “significant discount to market value” at the end of 2020 until the shares were delivered. publicly available, through a special purpose acquisition company. It alleges the two men gave answers to investigators that were “supposedly inconsistent with the documents.”

BDO resigned as auditor of Electric Last Mile Solutions in February, citing concerns that an illegal act may have occurred. The company decided after an internal investigation that it needed to revise the financial statements previously audited by the BDO, based on the share purchases that the accounting firm is believed to have made. advise.

The SEC investigation reflects concerns about the growing reliance of large accounting firms on the sale of tax and consulting services, which offer higher profit margins and the potential to grow. grow larger than their core audit business.

The Big Four between them made $115 billion worldwide from tax and consulting services last year, more than double the $53 billion from audits, according to data provider Monadnock Research LLC . Between 2011 and 2021, the four companies increased their total global revenue from consulting and tax work by 96%, outstripping the 17% increase in audit fees over the same period, Monadnock data shows.

A Deloitte spokesman said the company’s multidisciplinary approach “allows us to conduct high-quality audits for the benefit of the investing public.” “Independence is at the core of delivering quality reviews, at the heart of PwC culture, and the foundation of everything we do,” said a PwC spokesperson. Representatives for KPMG and EY declined to comment.

The accounting industry group, Center for Auditing Quality, says that on average 90% of the total fees an SEC-listed company pays its auditors are for audits or audit-related services. Most of the remaining fees go to tax services.

Concerns about poor audit quality underpin the reforms underway in the UK. The four Big Four firms there are separating their audits from the rest, as required by regulators. The measure comes after a string of accounting scandals.

In the US, senior SEC officials in recent months have publicly warned accounting firms against “creatively adopting [independence] rules,” and said sanctions may need to be increased to prevent rule violations.

The agency’s ongoing conflict of interest investigation is looking for violations of rules that prohibit accounting firms from selling specific services to audit clients, people familiar with the investigation said. . The accounting firm RSM US was fined $950,000 in 2019 for selling services ranging from bookkeeping to employee lending during the course of more than 100 audits.

The RSM said in settling the SEC’s fees without acknowledging liability, that it was “committed to the highest standards of integrity and audit quality”. A spokeswoman declined to comment further.

People familiar with the investigation said that SEC investigators are also looking into situations where the audit firm’s sale of non-audit services is not prohibited, such as certain tax services. certain. Even without a specific ban, the SEC’s rules set an overall requirement for auditors to be independent “in fact and in appearance.”

In a lawsuit filed in state court in Texas in June 2020, accounting firm Ryan LLC accused EY of violations of audit independence, including auditing the company’s own work related to the service. tax service. Ryan says that EY performs oil and gas tax advice similar to Ryan’s services. EY then reviewed the tax work as part of its annual audit clause, which Ryan’s lawsuit alleges created a conflict of interest prohibited under US law.

Ryan did not name specific EY clients in his lawsuit. The Texas company alleges that EY’s auditors improperly obtained Ryan’s methodology for calculating client severance and royalty taxes, allowing EY to market competitive services.

An EY spokesman said the company strongly opposes Ryan’s statements and is vigorously contesting them in the Harris County, Texas court. The Big Four accounting firm has sought to dismiss part of the lawsuit and is awaiting a state appeals court ruling on that motion. The civil case is scheduled for trial in October.

Write to Jean Eaglesham at Jean.Eaglesham@wsj.com and Dave Michaels at dave.michaels@wsj.com

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https://www.wsj.com/articles/sec-probe-looms-over-auditors-fastest-growing-businesses-11653011440?mod=rss_markets_main SEC Probe Looms Over Auditors’ Fastest-Growing Businesses

Edmund DeMarche

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