PracticeConsultingNews Analysis: SEC crackdown – Land of the free puts stop to glittering career

News Analysis: SEC crackdown - Land of the free puts stop to glittering career

Last month the US Securities and Exchange Commission introduced a new set of independence quality controls for auditors. But this was no arcane piece of regulatory bureaucracy. For the first UK victim it put the brakes on a glittering career and the profession is still reeling from the repercussions.

Senior PricewaterhouseCoopers accountant Geoff Westmore was forced to resign because of an internal discovery that he was the brother-in-law of the financial controller of media giant Reuters.

Westmore was ordered to move 500 miles from any PwC office where a material part of the audit took place.

In America, that would mean simply moving town, but in Europe, it would mean adapting to another culture.

Just as Westmore will not be the only accountant to be hurt, it is not just the Big Five that will feel the effects of the SEC’s decision to flex its extra-territorial muscle.

PwC may be the world’s largest professional services firm, but the globalisation of companies and capital means that it will not just be the partners of large firms who end up paying the ultimate price for their clients’ ambitions.

Smaller firms and thousands of companies will also feel the heat.

Baker Tilly chairman Clive Parritt says starkly: ‘This is an illogical crusade and I have never heard of anything so stupid in my life, but any firm with a worldwide association which has SEC-registered clients needs to be very cautious. It is very easy to fall foul of the regulations.

It is a problem we all have to face.

‘This is an issue which the British government and our professional bodies should be taking up with the SEC. I can not see how the rules are in the public interest.’

The Stock Exchange has lobbied chancellor Gordon Brown to cut stamp duty on shares because of the fear that more companies were jumping ship to register on the New York stock exchange in order to take advantage of its zero rates.

And it is not just the low stamp duty that is making America attractive.

The US economy is booming and companies are finding the lure of readily available capital just too hard to resist.

Of course this comes at a price. The by-product of the shift to the US market is that auditors have to comply with SEC rules. And so the increasingly global nature of business means that many mid-tier, as well as Big Five firms, will already have to make sure that they comply with the toughest common denominator.

The spread of corporates into new markets has been matched by the widening of services offered by major accountancy firms. A new dynamic – the consolidation of US practices, spurred on by the likes of American Express – has added to the SEC’s concerns about the quality of audit.

As long ago as 1997, the SEC and American Institute of Certified Public Accountants announced the creation of an Independence Standards Board, charged with enhancing the independence of auditors of public companies.

For UK firms this is the crux of the problem. More clients are seeking to list in America while at the same time, the SEC is cracking down on what it sees as a potential conflict between accountancy firms offering both consultancy and audit to the same client.

Ian Plaistowe, Arthur Andersen partner and chairman of the Auditing Practices Board, says: ‘The SEC is on the warpath and it will continue because, for some years, it has felt that some of the trends appearing within accountancy firms have not been consistent with what it looks for.

‘It is not helped by the fact that in the US in the last year, there have been some very large accounting scandals and the SEC is asking why the auditors did not find the problems.’

Unfortunately for firms in the firing line, observers range from doubtful to highly critical of the appropriateness of the commission’s rules in its own country, and are even less supportive of their applicability in overseas jurisdictions.

One senior regulator painted a grim picture of the future if the UK does not take the hint from the plight of Westmore and unite behind a European-wide effort to restore the balance of power.

‘It is time for Europe to come forward with its own philosophy so that we do not end up with stupid rules. The SEC is trying to impose its rules on the world and if the UK continues on its course it will inherit exactly what it does not want. The Union Jack will not overrule them,’ he said.

Certainly there seem to be few obvious UK contenders willing to enter the ring against the US regulator. ACCA technical director Roger Adams, says: ‘We are aware that accountancy institutes in the UK and Europe are observing SEC action and trying to have some contribution.’

But such a response will offer little comfort to a profession which is being bombarded with rules which even the SEC itself admits were written years ago and do not reflect the complexity of accountancy firms today.

Mary Keegan, head of PwC’s global corporate reporting group, says the debate highlights the need to revamp the independence rules which apply to partnerships. While it is possible that a firm with a handful of partners could compromise each other’s independence, there is no chance of this happening with modern, global firms with hundreds of partners.

‘The real issue here is that there are a number of SEC rules which are designed for the USA and we know that they do not work in so many ways in the rest of the world. Many would argue that the rules are antiquated even for the USA,’ she says. ‘The 500 miles thing is designed for the USA but in Europe it means removing your children to a school in another country and another language.’

For now, it seems that Westmore will not be an isolated resignation as other conflicts are reported to the SEC.

But Big Five and mid-tier firms working behind the scenes are not doing anything to stem the power of the US regulator.

Discussions held at the level of the International Federation of Accountants, which combines 143 member bodies, are working to achieve global standards which are appropriate for all, and not just for one country.

‘The Americans, the Europeans and ourselves are working on ethics and we are all working along similar lines,’ says IFAC president Frank Harding.

‘We very much hope that the IFAC approach will be accepted around the world and we hope to have a report out by the summer.’


Firms remain tight-lipped over who might follow Geoff Westmore, PwC’s global head of transaction services (right), out of the door as a result of the US Securities and Exchange Commission’s clamp down on firms that offer consultancy and audit services to the same clients.

But the news that a senior UK partner at the world’s largest firm has been forced to resign by a US regulator has raised serious questions about who really runs the UK profession.

The SEC said Westmore – whose brother-in-law is financial controller of Reuters, an SEC-registered company audited by PwC – must move both his place of work and his home at least 500 miles from any of the firm’s offices where a material part of the Reuters’ audit was carried out. It made his job untenable.

For now firms of all sizes must ask themselves whether any of their partners are in breach of SEC rules. But the question facing UK and European institutes and regulators alike is how much influence do they really wield?


Each member firm shall establish independence policies covering relationships between a member firm, its benefit plans, and its staff (and their close relatives) as well as ‘restricted entities’ of the firm (this includes all audit clients of the member firm and all companies related to these clients).

These policies shall be available to each staff member and communicated on a timely basis and there shall be independence training as required.

The firm shall maintain a database that includes all ‘restricted entities’.

The firm shall designate a partner to keep the list updated and make it available to all personnel required to comply with independence restrictions.

The firm’s independence policies and procedures should require the following:

Staff, their spouse and dependents should review the ‘restricted entities’ list to determine whether a company is included before acquiring security in a company, obtaining a loan from or entering into a business relationship with the company.

Each staff member shall certify near the time of initial employment and at least annually thereafter that they have: read the independence policies; understood their applicability; and have complied with the requirements.

Staff shall report apparent violations involving themselves, their spouses or dependents and corrective action should be taken or proposed.

Each member firm shall have a follow-up system under the supervision of the designated partner. special feature: US audit clampdown hits

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