The SEC Investigation into Ernst & Young's Lobbying Activities Isn't Going to Amount to Much

Late yesterday, Sarah Lynch and Dena Aubin at Reuters reported that the SEC was poking around Ernst & Young's lobbying activities on behalf of audit clients. Apparently the investigation has been going on since Reuters first broke the story back in March that the specialized advisory group of Washington Council Ernst & Young was trotting around the Hill on behalf of audit clients like Amgen, CVS and Verizon.

Unfortunately, this latest story doesn't have many details on the progress of the probe or what kind of penalty E&Y could face if it's determined that these lobbying activities were in fact in violation of independence rules, but it did get one perspective on whether or not this would constitute an independence conundrum:

Harvard Business School Professor Max Bazerman said on Monday that it was "abundantly clear" that a firm that is lobbying for a company is no longer capable of independently auditing that company.

That sounds pretty definitive! But just to be sure, let's look at the services provided by WCEY:

  • Full service representation before the Congress and Executive branch
  • Strategic legislative advice
  • Legislative process, issue monitoring and reporting, and technical legislative analysis
  • Coalition development and management
  • Statutory and report language drafting
  • Development of "position papers" and other background documents
  • Drafting congressional testimony and regulatory comments

So if you were to interpret the list of services in a strict-ish manner, there's definitely some advocacy going on in there, but even ex-Chief Accountant Jim Kroeker admitted back in March, "what constitutes advocacy really depends on specific facts and circumstances." 

So like independence, advocacy in fact is important; unlike independence, advocacy in "appearance" is not.

Among those "facts" are carefully-worded engagement letters that SEC investigators will be reviewing, and I'll bet they were worded carefully enough so they would pass the sniff test with the companies' audit committees.

As for the "circumstances" -- well, that's when the winking and nodding probably started but nobody actually sees any winks or nods because the guys at WCEY aren't stupid and neither are the good folks in E&Y's compliance department who probably wrote those engagement letters in the first place. Unfortunately for the SEC, these are the kinds of things that are never find their way on to paper or stupidly written emails

E&Y's only comment from yesterday was attributed to Director of Communications Amy Call Well who said, "All of our services for audit clients undergo considerable scrutiny to confirm they are consistent with applicable rules." Fortunately, back in March the firm was a little more chatty:

Ernst & Young said Washington Council's work complied with independence rules. It was pre-approved by clients' audit committees and it was limited to tax-related issues, E&Y spokesman Charles Perkins said in an e-mailed statement.
 
The firm does not solicit votes on legislation for E&Y audit clients, Perkins said.
 
"We assist clients in monitoring public policy, analyzing legislation and educating Treasury officials, the IRS, legislators, other policy makers and their staffs about the potential consequences of legislation," Perkins said.

What is "monitoring"? What is "analyzing"? What is "educating"? In the realm of E&Y parlance, I don't know. All these things could theoretically include advocacy but actually proving that was in violation of auditor independence rules? Good luck with that.

SEC probes Ernst & Young over audit client lobbying [Reuters]
Ernst & Young tightropes between audit, advocacy [Reuters]

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