Risk & Compliance

The Secret Life of the Big Five

Do some of the Big Five have something to hide? Now with the Securities and Exchange Commission engineering a review of the major accounting firms'...
Stephen BarrJuly 1, 2000

Do some of the Big Five have something to hide? Now with the Securities and Exchange Commission engineering a review of the major accounting firms’ independence, we’ll soon find out.

Until the review agreement was reached, the Big Five eagerly wanted to look forward, not back. And it seemed to Lynn Turner, chief accountant at the SEC, that they did indeed have something to conceal, when in May the American Institute of Certified Public Accountants threatened to withhold funding for the review. The AICPA, in fact, sent a letter to the Public Oversight Board, an industry- backed watchdog group, saying that it would “not approve nor authorize payment” for independence reviews at eight major accounting firms.

“I don’t know why anyone would object,” Turner says of the letter.

The AICPA letter referred to the special reviews ordered by the SEC after the discovery of thousands of auditor-independence violations at Pricewaterhouse-Coopers LLP. The report, issued in January, found that PwC employees or their relatives owned investments in half of the firm’s audit clients. While all the top firms have agreed to revamp their internal systems for monitoring equity holdings, a few have been reluctant to undergo the same kind of scrutiny of past practices as PwC.

“We’re implementing the new system on a go-forward basis, and we’re happy to share that with the POB,” Stephen Butler, the chairman of KPMG LLP, told CFO last March. But, he added, “We’re not going back to audit years of investments. There’s absolutely no value in doing that.”

Turner disagrees. He argues that the Big Five, on a consulting assignment, would never offer a client a solution without first dissecting the problem. That view prevailed when the major accounting firms, including KPMG, consented to a look-back of at least nine months ending March 31, 2000.

As for the letter threatening to cut off POB funding, that came to light during a May 10 speech by SEC chairman Arthur Levitt, in which he proposed new rules and other measures to enhance auditor independence and to reinforce investor confidence in financial reporting. He saved his harshest rebuke for the AICPA’s threat to undermine the oversight role of the POB. “This development is a significant setback to self-regulation,” he said.

David Brumbeloe, the AICPA official who wrote the letter to the POB, says his intent was not to threaten to cut funding for the special reviews, but to suspend work on them until there was an agreement between the SEC, the POB, and the profession on the scope of the project.

With that agreement now in place, and the AICPA ready to pay for it, Turner will find out whether the Big Five really have something to hide.