agreed to pay $8.2 million to settle allegations by the Securities and Exchange Commission that it violated the auditor-independence rule under the Sarbanes-Oxley Act of 2002 between 2007 and 2011.
By providing auditing and consulting services simultaneously to the same client, KPMG undermined its ability to perform a thorough and objective assessment of its clients' financial statements.
Moreover, the KPGM clients were not notified that certain KPGM employees owned stock in a client and an affiliate of another. The SEC and KPMG’s Australian affiliate reached a similar settlement in 2011 in which an alleged affiliate provided non-audit services to an audit client from 2001 through 2004, according to the Wall Street Journal.
A 2013 paper by Joseph Gerakos and Chad Syverson, both of the University of Chicago Booth Business School, suggests a substantial portion of demand for audit services is mandatory, since publicly traded firms are compelled to purchase these services and the supply is extremely scarce.
The Big Four accounting firms — KPMG, Ernst & Young, Deloitte Touche, and PricewaterhouseCoopers — managed 67 percent of all U.S. audit activities and received 94 percent of all audit fees in 2010.
This type of accounting oligopoly or cartel is also being challenged in the U.K., where the Office of Fair Trading (OFT) has recommended an investigation of the Big Four accounting firms by the Competition Commission, according to Andrew Chambers, Special Advisor to the House of Lords inquiry and Professor of Corporate Governance at London South Bank University.
A captive client base, high barriers to entry, and self-interested lobbying by the U.K. accounting firms undermine the public interest in favor of private profits. The Big Four received 99 percent of audit expenditures from the FTSE 100 firms and 98 percent from the FTSE 250, according to the OFT. The rate of tender (switching) is extraordinarily low: every 43 years for FTSE 100 firms and 24 years for FTSE 250 firms.
Stronger competition in the accounting industry and more effective law enforcement are critical if we are to maintain a stable financial environment that permits robust, sustainable economic growth.
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