Accountancy Age analysis: Big Five left reeling after renewed attack by US regulator

As UK boss of the world’s largest professional services firm, Hazell could perhaps have been left feeling a little bruised from a fresh body blow delivered by the Securities and Exchange Committee chairman Arthur Levitt.

Speaking in New York last week, Levitt made a veiled threat that the SEC would force the Big Five firms to break up.

The SEC, he said, is to look at how firms should be structured to ensure independence. He also called for the regulator to be given powers to make rules to clarify activities and called for support for a plan by the US profession’s overseer – the Public Oversight Board – to enhance its powers and responsibilities.

The move is being viewed by observers as a broadside against the profession following the discovery of more than 8,000 breaches of auditor independence rules at PwC.

But responding to Levitt’s comments, Hazell said he was generally happy with the US regulator’s positional statement on tackling conflicts of interest in the profession.

He added that the remarks contained few surprises and welcomed the suggestion that conflicts of interest within the profession centered on ‘perception’.Levitt’s speech followed announcements of major reorganisations within the Big Five accountancy firms, including divestitures of firms’ consulting businesses through sales to third parties.

PwC announced a major review of the relationship between consulting and audit arms following a perceived crackdown by the SEC on shares in audit clients held by staff and partners at the firm.

And KPMG has pressed the SEC for a decision on whether the firm can float its consulting arm, while Ernst & Young partners backed plans to sell its consulting arm to Cap Gemini.

Therefore the firms clearly recognise that the conflicts of interest issue exists.

Writing in Accountancy Age today, Hazell explains why PwC chose to examine the possibility of separating its consulting businesses.

‘The plans already announced by three of the largest firms for separation of their consulting practices represent the most significant structural change in the profession in memory,’ he said.

‘We believe our proposed structuring will address many of chairman Levitt’s concerns and will effectively close the gap between independence in fact and independence in appearance.’

Speaking soon after Levitt’s speech, Hazell stressed it was very much a ‘US speech’ about ‘US rules’ and he added: ‘This was directional rather destinational. He didn’t say “this isn’t where we wanted to get to”.’

Backing the SEC’s ‘continued support for self-regulation in the accountancy profession’, Hazell also welcomed Levitt’s suggestion that personal investment rules should be altered.

But he urged the SEC to go no further than encouraging disclosure among firms. ‘We don’t support further rule making,’ he said.

Levitt had also challenged newly-empowered audit committees to pay close attention to the types of services their auditors are performing and to question whether it is in investors’ interests to have those services performed by someone else.

He also urged audit committees to inquire about their auditor’s past compliance with independence rules and about firms’ program for enhancing safeguards to ensure conflicts do not arise in the future.

Levitt proposed several measures, including regulations to make it clearer which activities an independent auditor is allowed to perform for audit clients, and self-evaluation by each of the major accountancy firms of past compliance over the past 15 months with audit independence rules.

Highlighting conflict of interest problems within the Big Five, Levitt said: ‘In recent months, several of the major accounting firms also have announced major reorganisations – including divestitures of significant portions of their consulting businesses through sales to third parties or public offerings.

But while PwC was happy to defend its position, Big Five rival KPMG went on the offensive. An interesting counter-move to the SEC attackChairman Stephen Butler blasted SEC rules as ‘archaic, irrelevant and discriminatory’ in an interview with CFO magazine. He also rejected the need for such restrictive rules when audits are almost always above board.

The KPMG boss added: ‘People in the profession resent that we get characterised as not being serious about independence. That’s absolutely false. We’re more interested [in maintaining independence] than the SEC and the rest of the world.

‘With KPMG clearly rattled, it seems the fears of the Big Five could come true.If the SEC fails to believe firms are serious about independence and its own work on the issue turns up radical ideas the Big Five landscape could change considerably.

What the chiefs must decide is whether they will drive forward the change or be left to obey SEC orders.

And if Levitt’s warnings are to be taken seriously, the SEC is not about to let independence concerns be swept under the carpet.

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