(UPDATE) Auditor Swap: Bubble Popped On EY’s Engagement with Sealed Air Corp.

Editor’s note: This article was originally published on Aug. 15, 2019. Update is at the bottom of this article.

Bubble Wrap maker Sealed Air Corp. disclosed in a securities filing earlier this week that it dumped EY as its external auditor and hired PwC, the Wall Street Journal reported yesterday.

Now, EY losing an audit client isn’t all that shocking. According to Audit Anaytics’ recent analysis of auditor changes in the second quarter of this year, the Black and Yellow lost nine public company audit clients, five of whom went to KPMG and one going to PwC. In Q1, Uncle Ernie lost 13 engagements, including five to Deloitte.

But it’s the circumstances around Sealed Air dropping EY that’s kinda weird. The Aug. 12 securities filing states:

This change is being made in light of the Company’s previously disclosed receipt of a subpoena from the U.S. Securities and Exchange Commission (“SEC”) on May 2, 2019 for documents and information relating to the process by which the Company selected its independent audit firm for the period beginning with fiscal year 2015, and relating to the independence of that audit firm.

Interesting. The filing also states:

Nonetheless, the pendency of the SEC investigation, along with the Committee’s dissatisfaction with information it learned about the process by which EY was selected as auditor, caused the Company to make this change now to allow for an orderly transition for the audit of the Company’s fiscal 2019 consolidated financial statements and to minimize the risk of disruption that could arise in the event of an unplanned change in independent auditors at an undetermined time in the future.

So, as the WSJ mentioned, Sealed Air made this move to stay one step ahead of the SEC possibly forcing the packaging company to change its auditor. What did EY do that is making the SEC question its independence? (Although EY has had quite the history of auditor independence violations.) And what information did the audit committee just learn about out of the blue regarding the process of hiring EY? Didn’t the audit committee have a say when Sealed Air dumped KPMG as its external auditor in favor or EY a few years ago?

For the record, Sealed Air disclosed that EY doesn’t think it did anything to break the rules, and the company “has not reached a contrary conclusion” about EY’s independence.

Sealed Air also had to double-check whether hiring PwC would get the company into trouble with the SEC:

As part of the engagement process, the Company and PwC identified certain non-audit services that PwC or another firm in PwC’s global network of firms had performed for the Company that are not permitted under the SEC’s auditor independence rules. The Committee and PwC discussed the services, which are no longer being performed, and concluded that the provision of the services will not affect PwC’s objectivity or its impartiality and will not impair its ability to serve as the Company’s independent registered public accounting firm. In reaching this conclusion, the Audit Committee and PwC noted that, among other things, (i) the services were entered into with entities at a time when PwC had no independence restrictions; (ii) the services were performed by persons who were not, and will not be, part of the audit engagement team; (iii) certain of the services were performed for immaterial subsidiaries of the Company; and (iv) PwC’s fees associated with the services in 2019 are immaterial to both PwC and the Company. In selecting PwC, the Committee determined that PwC is well qualified to serve as the Company’s auditor because of its experience with large global companies, including large accelerated filers and other multinational issuers and PwC’s extensive resources and qualifications, including the strength of its national office and its thought leadership regarding complex accounting issues.

According to the filing, Sealed Air paid PwC approximately $223,000 in fees in 2019.

The WSJ also noted that Sealed Air recently fired its CFO, Bill Stiehl, as part of the SEC investigation. Stiehl’s attorney Josh Van Kampen told the WSJ that, hell yeah, he would contest the former CFO’s firing because “Sealed Air’s acknowledgement that it has not found an independence violation is powerful evidence that it did not have ‘cause’ to fire Mr. Stiehl.”

But let’s say EY did play fast and loose with the auditor independence rules. What do you think the SEC will dig up? All crackpot theories are welcomed in the comment section.

UPDATE: We now have a pretty good idea of the reason why EY was dropped as Sealed Air’s auditor last August. It seems that EY did do quite the fancy dance with auditor independence rules. The Wall Street Journal reported this on Feb. 6:

A rare criminal investigation into corporate auditing is focused on allegations that bid-rigging helped Ernst & Young LLP win a competition run by Sealed Air Corp., according to people close to the probe.

William Stiehl and Carol Lowe were senior executives at Sealed Air when the bubble-wrap maker in 2015 appointed Ernst & Young. A decade earlier, the two were senior executives at Carlisle Cos. when that company also appointed Ernst & Young, public records show.

Securities and Exchange Commission officials and North Carolina prosecutors are investigating allegations that Mr. Stiehl rigged the competition to win Sealed Air’s multimillion-dollar audit contract in favor of Ernst & Young by tipping the Big Four firm details of rival KPMG’s bid, the people said. Sealed Air last year fired both Mr. Stiehl and Ernst & Young.

According to the WSJ, the SEC widened its inquiry to look at EY’s independence after emails allegedly showed that Stiehl interfered with the bidding process in 2014.

Lowe, who was Sealed Air’s CFO from 2012 until 2017 when she left the company and was replaced by Stiehl, began her career at … wait for it … EY as an audit manager in the 1980s. She was later CFO at both Carlisle and Sealed Air when those companies chose EY as their independent external auditor, the WSJ reported. And Lowe and Stiehl worked with EY auditors based in Charlotte, NC, for more than a decade, at a total of three public companies, including Sealed Air.

This loyalty makes EY “proud,” the firm said in a statement to the WSJ, that “our clients value the quality of our work and if they move to different companies, they hire us again.”

This just goes to show how easily auditor independence rules can be manipulated.

Sealed Air, Under Federal Investigation, Switches Audit Firms [Wall Street Journal]
Ernst & Young Won a Multimillion-Dollar Audit Spot. Investigators Want to Know Why. [Wall Street Journal]

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