The SEC probe hangs over the fastest growing auditor companies

The carmaker said it took an internal investigation to find out that the BDO is advising its chairman Jason Law and CEO James Taylor. Both executives have resigned and their stock deals are being investigated by the SEC, the company said in March.

BDO is one of several mid-level accounting firms that have been caught as part of an extensive SEC investigation into conflicts of interest by auditors, Said one of the people close to the investigation. The investigation also includes the accounting firms of the “Big Four” Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers, previously reported by The Wall Street Journal.

A BDO spokesman did not respond to requests for comment. BDO in documents rejected the company’s claim that it helped “create and structure” deals with shares, but did not comment on whether it advised executives.

A spokesman for Electric Last Mile Solutions declined to comment, as did a spokesman for its former chairman, Mr. Lo. Former CEO Mr. Taylor did not respond to requests for comment. The SEC also did not respond to inquiries.

Electric Last Mile said the investigation revealed that two executives bought its shares at “significant discounts to market value” in late 2020 before the shares went public, through a special purpose acquisition company. He accused the two men of giving investigators answers that allegedly did not match the documents.

BDO resigned as auditor of Electric Last Mile Solutions in February, citing fears that illegal action could occur. The company decided after an internal investigation that it needed to list previous financial statements audited by BDO, in light of the share transactions on which the accounting firm allegedly consulted.

The SEC investigation reflects concerns about the growing reliance of large accounting firms on sales consulting and tax services that offer higher margins and greater growth potential than their core auditing business.

According to data provider Monadnock Research LLC, last year the Big Four of them earned $ 115 billion worldwide on consulting and tax services, more than double the $ 53 billion from audits. Between 2011 and 2021, four companies increased their total global revenue from consulting and tax work by 96%, well ahead of the 17% increase in audit fees over the same period, Monadnock data show.

A Deloitte spokesman said the firm’s interdisciplinary approach “allows us to conduct high-quality audits for the benefit of the investing public.” A PwC spokesman said that “independence is the core of conducting a quality audit, at the heart of PwC’s culture and fundamental to everything we do”. Representatives of KPMG and EY declined to comment.

The Accounting and Industry Group of the Audit Quality Center stated that an average of 90% of the total amount of fees paid by a company listed on the SEC to its audit accounted for the audit or audit-related services. Most of the remaining fees went to the tax authorities.

Concerns about the poor quality of auditing are at the heart of reforms under way in the UK. The Big Four firms separate their audit operations from the rest of the business in response to regulatory demands. The measure came after a series of accounting scandals.

In the U.S., senior SEC officials in recent months have publicly warned accounting firms not to “creatively apply [independence] rules, ”and said sanctions may need to be stepped up to prevent violations.

The agency’s ongoing conflict of interest investigation is looking for violations of rules that prohibit accounting firms from selling certain services to audit clients, people close to the investigation said. The accounting firm RSM US was fined $ 950,000 in 2019 for selling services ranging from accounting to lending staff while working on more than 100 audits.

RSM said that when it settled the SEC’s allegations without acknowledging responsibility, it was “committed to the highest standards of honesty and audit quality.” The spokeswoman declined to comment further.

SEC investigators are also considering situations where an audit firm sells non-audit services that are not banned, such as some tax services, said people close to the investigation. Even if there is no specific prohibition, SEC rules impose a general requirement on auditors to be independent “in fact and in appearance”.

In a state lawsuit filed in Texas in June 2020, accounting firm Ryan LLC accused EY of violating its independence from auditing, including auditing its own work related to the tax authorities. Ryan says EY is engaged in oil and gas tax consulting, similar to Ryan’s services. EY later reviewed tax work as part of its annual audit, as alleged in Ryan’s lawsuit, which creates a conflict of interest that is prohibited by U.S. law.

Ryan did not name specific EY customers in his lawsuit. The Texas firm argued that EY’s auditors improperly obtained Ryan’s methodologies for calculating exit taxes and royalties, which allowed EY to market competing services.

An EY spokesman said the company strongly disputes Ryan’s claims and strongly challenges them in a Harris County court, Texas. The Big Four accounting firm has sought to dismiss part of the case and is awaiting a decision from the state appeals court on the petition. The civil case is scheduled for October.

Email Gene Eaglesham at Jean.Eaglesham@wsj.com and Dave Michaels at dave.michaels@wsj.com