By MICHAEL SMALLBERG
We mentioned in a recent post that the Public Company Accounting Oversight Board (PCAOB)--a non-profit corporation overseen by the Securities and Exchange Commission (SEC)--had finally released a 2008 report that criticized the auditing practices of top 100 federal contractor Deloitte & Touche.
This week, Jonathan Weil at Bloomberg added a disturbing footnote to the story: turns out three of the five current Board members “had recused themselves from participating in meetings or discussions this year concerning Deloitte, because of past or current ties to the firm, according to three people with knowledge of the matter."
Weil highlights the ties between the Board members and Deloitte:
The board members—Lewis Ferguson, Jay Hanson and the board’s chairman, James Doty—were appointed by the Securities and Exchange Commission in January. Doty had been a partner at the law firm Baker Botts LLP, where Deloitte is a client. Ferguson was a partner at the law firm Gibson Dunn & Crutcher LLP, which also represents Deloitte. Hanson, a former partner at the accounting firm McGladrey & Pullen LLP, has a daughter who works for Deloitte in its Phoenix office.
These are hardly the only connections between the PCAOB and the “Big Four” auditing firms (Deloitte, PricewaterhouseCoopers, Ernst & Young, and KPMG). For instance, Weil notes that Baker Botts (Chairman Doty’s former employer) also represents Ernst & Young, while Gibson Dunn (Ferguson’s former employer) represents all four firms.
These revelations about the cozy ties between the SEC/PCAOB and the Big Four will probably come as no surprise to close followers of the auditing industry. Francine McKenna has pointed out, for instance, that the SEC’s current chief accountant, James Kroeker, is a former Deloitte partner; Kayla Gillan, former Deputy Chief of Staff to SEC Chairman Mary Schapiro, left the agency to become the head of PwC’s new Regulatory Relations Group; and Thomas Ray, a former Chief Auditor and Director of Professional Standards at PCAOB, left the organization to become a partner at KPMG.
Caleb Newquist at Going Concern argues that it would be difficult to “find accounting policy makers who aren’t from the biggest, best connected firms that have the most resources,” and that it would be “pretty tough to find any D.C. lawyer who didn’t do some time at a firm that represented Deloitte” or “any Big 4 firm.” Nonetheless, Weil wonders “how good a job this board can do when a majority of its members can’t make decisions about one of the largest firms it oversees. No agency’s ties to the industry it regulates should run this deep.”
Weil reported that the PCAOB does not disclose or comment on recusals.
Deloitte and the other Big Four firms are well represented in POGO’s SEC Revolving Door Database, which features statements filed by former SEC employees who communicate with the SEC on behalf of an outside client within two years of leaving the agency. The database includes 34 statements filed between 2006 and 2010 by 9 former employees who went to work for Deloitte; 27 statements filed by 8 former employees who went to work for Ernst & Young; 6 statements filed by at least 4 former employees who went to work for KPMG; and 5 statements filed by 1 former employee who went to work for PwC.
Michael Smallberg is a POGO Investigator