SEC Big 4 Settlement: CPA is Too Close to the Client

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Eager young accountants – all professionals, really – often set high goals, but the most common endgame for most is to become a “rainmaker.” Those who build significant relationships and turn leads to a regular stream of business are often in a position to excel professionally. While perceived expertise in a particular field is a must, it is often the relationships that set these partners apart.  But when does a relationship become so familiar that a CPA may lose his independence? The SEC recently weighed in on that topic in announcing its recent settlement with Ernst & Young.

On September 19, 2016, the SEC issued a statement that it came to a $9.3 million settlement with Ernst & Young over two partners’ allegedly improper relationships with audit clients. The first violation involved a partner’s romantic relationship with her audit client.  The second situation, however, raises far more questions as the SEC alleged that another partner “maintained an improperly close friendship” with his audit client’s CFO.

In making its first ever enforcement action for “auditor independence failures,” the SEC stated that this particular partner was tasked with improving the firm’s relationship with a “troubled account”.  The partner did just that, often traveling with the client’s CFO with “no valid business purpose” and staying overnight at each other’s homes.  Furthermore, the partner became close friends with the CFO’s son and would take him to sporting events such as football games and golf tournaments.  While some might call this successful marketing, the SEC found that it compromised the independence of the audit report and suspended the partner in addition to the hefty settlement reached with the firm.

Unfortunately for accounting professionals, this unprecedented enforcement action provides little guidance for determining where to draw the line between effective client relationship building and “auditor independence failure”.  However, it does provide some suggestions as to where the outside bounds may lie.  Of note, the SEC seemed particularly concerned with the relationship between the partner and his client’s family, as opposed to interactions with the client himself.  In fact, it appears the SEC’s primary concern regarding client contact pertained to the “hundreds of personal text messages, emails, and voicemails during the auditing periods.”

While it is currently unclear whether the SEC intends to actively pursue more of these “auditor independence failure” cases, all accounting professionals should be aware of the lessons learned from this settlement.  First, extending relationships to the family members of a client will be strictly scrutinized and should therefore be approached with caution.  Additionally, the auditing period creates particular concerns from a regulatory perspective. Consider curbing personal contact with the client during the auditing period.  While this may create some headaches for rainmakers looking to continue fostering relationships, the price is small compared to the millions spent in defending an SEC investigation and the accompanying license suspension.