Exclusive: What it’s like to be interviewed by the SEC

Steve Baldwin The experience of Steve Baldwin, a senior Deloitte Consulting partner in the US, is typical.

A four-man team from the US Securities and Exchange Commission, made up of industry and profession members, arrived at his Atlanta office to conduct the interview.

The panel was briefed to discover the full extent of services offered by Baldwin and the likelihood of him offering independent judgements about company financial statements as well as its method of compensation based on results. Questions centred on his ability and Deloitte Consulting’s ability to render independent opinion on clients.

Baldwin describes the interview as ‘generally fair’ but the severity of the SEC’s actions is beginning to leave a bad taste in the mouth of many within the profession. That’s no surprise given the SEC’s remit.

This is the day-to-day reality of the SEC’s inquiry into auditor independence, an inquiry designed to stamp out perceived conflicts of interest in the profession. And with the SEC set to issue the preliminary findings of its investigations any day now, it is a reality that could get worse.

Baldwin was among partners at Deloitte Consulting targeted by the SEC during this fiscal year as part of its sweeping attempts to question partners and clients. He was interviewed at his office by the panel.

According to Baldwin the impression within the Big Five firms in the US is that the SEC is becoming more severe in its treatment of them, and the crackdown on firms which offer consultancy and audit services to the same client is expected to increase.

This is reflected in the line of questioning by the regulator which even requires details of who partners are sleeping with. ‘That line of questioning is within their jurisdiction,’ acknowledges Baldwin, though he adds that it is an area seen by the SEC to be ‘inflammatory’.

Financial closeness is as important as physical closeness. During questioning the SEC also suggested it believed the closer a partner gets to reaching performance-based fee targets, the less likely they are to be impartial.

Baldwin expects a raft of cases of partners being forced to quit their jobs as a result of breaches of SEC audit independence rules. But he adds: ‘That kind of thing happens periodically.’

There has already been one notable casualty. UK PricewaterhouseCoopers partner Geoff Westmore was told in February he must resign after PwC’s internal compliance process found he was in breach of SEC audit independence rules – his brother-in-law is financial controller of Reuters, a PwC client.

The SEC is working towards compiling statistics on each partner in every firm as well as other individual employees within practices, detailing where exactly they have investments placed, and added it was also working towards actively policing this information.

‘In a worst-case scenario the SEC may decide that because a secretary has shares in a company, that affects the ability of a firm to retain audit independence,’ says Baldwin.

Although Deloitte Consulting has not made any decisions on how it will evolve in light of the SEC rules, Baldwin believes it is increasingly likely firms will move in one of two possible directions.

‘They are likely to look to situate themselves outside the accountancy profession using spin-offs and mergers,’ he says. ‘Or return to the origins of accountancy by becoming a tight firm with a limited range of professional services, as already witnessed with the recent announcement by Ernst & Young.’

Related reading