Question.1061 - Read the article: Eaglesham, J., & Schwartz, L. (2020, Feb 06). Ernst & Young Won a Multimillion-Dollar Audit Spot. Investigators Want to Know Why. SEC looking into allegations a finance executive rigged audit competition for Sealed Air contract. Wall Street Journal (Online), available in the UMGC library. Accounting reform occurred after significant corporate misconduct was discovered in the early 1980s. Some of the reform sought to require public companies to put the hiring and pay of their auditors in the hands of an independent audit board committee. There has been concern that management still has significant influence on the evaluation and final decisions. Phillip Lamoreaux, an accounting professor at Arizona State University, conducted a study of more than 2,000 auditor changes in publicly traded companies. He found that companies whose top executives had worked with a Big Four accounting firm were twice as likely to select that firm. Many executives make their way into corporate America through the largest accounting firms in the world. A chief accountant in the Securities and Exchange Commission (SEC) stated that auditor independence is "critical to the integrity of the whole process." Currently, a criminal investigation of Ernst & Young LLP (EY) is underway related to allegations of so-called bid rigging. According to the Federal Trade Commission (FTC), bid rigging is an unethical process which can be illegal. When soliciting competitive bids from potential auditors, competitors should not be allowed to coordinate or collaborate their bidding strategy based on information shared with other bidders. Some examples include taking turns being the low bidder, sitting out of the bidding process, and providing high bids to cover up the bid rigging process. As the above study noted, close ties with accounting firms by company executives can eliminate objectivity in selection decisions. William Stiehl and Carol Lowe were top executives at Sealed Air, a bubble wrap manufacturer in 2015 when they appointed EY as their auditor. Previously, the two were top executives at Carlisle Cos. when EY was selected as auditor. The SEC and North Carolina prosecutors are looking into whether bid rigging occurred through Stiehl sharing KPMG's bid with EY to help them win the auditing contract. Sealed Air fired Stiehl, terminated their relationship with EY, and hired PricewaterhouseCoopers LLP. The reason for the termination of EY by Sealed Air was a result of "dissatisfaction with information it learned about the process by which EY was selected as auditor." Over the last twenty years, the SEC has taken roughly 100 enforcement actions for not supporting auditor independence guidelines and mandates. Of those investigated, very few dealt with corporate senior management. Both Lowe and Stiehl worked with EY as their auditors in three separate companies. EY released a statement saying, "...our clients value the quality of our work and if they move to a different company, they hire us again." Dr. O.C. Ferrell and Dr. Linda Ferrell with Auburn University wrote this case with the approval and collaboration of the Daniels Fund, which provides open access to their learning resources. Consider: 1) What caused the SEC to question EY's independence? 2) Research EY's history for other instances where its independence was questioned. Discuss your findings.
Answer Below:
After reading the article, the SEC and North Carolina prosecutors are investigating allegations of bid rigging in selecting EY as the auditor for Sealed Air. In awarding and auditing the contract to EY by Sealed Air, the SEC Securities and Exchange Commission Questioned Ernst & Young LLP's independence due to bid rigging. According to the definition of Bid rigging, it means unethical and potentially illegal practices where competitors in a bidding process collaborate or coordinate their strategies (Eaglesham & Schwartz, 2020). In this scenario, it was said that a top executive at Sealed Air may have shared KPMG's bid with EY to help EY win the auditing contract. Another reason that caused SEC to Question EY's Independence is that they had the benefit of the doubt that Stiehl and Carol Lowe had previously worked with EY as auditors in other companies. Their relationship with EY could influence their decisions (Eaglesham & Schwartz, 2020). Lehman Brothers, a significant provider of financial services that declared bankruptcy during the financial crisis of 2008, hired EY as its auditor (Wiggins et al., 2019). Concerns were raised regarding EY's role in approving Lehman's financial statements and whether or not EY had accurately evaluated Lehman's financial situation before its collapse. This led to lawsuits and investigations into EY's independence and audit practices. References Eaglesham, J., & Schwartz, L. (2020, Feb 06). Ernst & Young Won a Multimillion-Dollar Audit Spot. Investigators Want to Know Why. Wiggins, Rosalind Z.; Bennett, Rosalind L.; and Metrick, Andrew (2019) "The Lehman Brothers Bankruptcy D: The Role of Ernst & Young," Journal of Financial Crises: Vol. 1: Iss. 1, 100–123. Available at: https://elischolar.library.yale.edu/journal-of-financial-crises/vol1/iss1/5More Articles From Accounting
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