TheChek News Flow

SEC has launched probe into how firms manage conflicts of interest caused by sale of nonaudit services

WASHINGTON—Regulators are carrying out a sweeping investigation of conflicts of interest at the nation’s largest accounting firms, asking whether consulting and other nonaudit services they sell undermine their ability to conduct independent reviews of public companies’ financials, according to people familiar with the matter.

The Securities and Exchange Commission probe highlights the agency’s new focus on financial-market gatekeepers such as accountants, bankers and lawyers. These firms help companies raise capital and communicate with shareholders, but also have duties under federal investor-protection laws. Auditors are a shareholder’s first line of defense against sloppy or dodgy accounting.

Speaking at a national conference of auditors in December, SEC Enforcement Director Gurbir Grewal said: “You will see that we will have a firm commitment moving forward to continue to target deficient auditing by auditors, auditor independence cases, cases around earnings management.”

The SEC’s Miami office last year sent letters seeking information about client work that could cause auditors to violate rules requiring they be independent of clients whose finances they inspect, according to the people. They say the letters were sent to some smaller accounting firms as well as the Big Four: Deloitte & Touche LLP, Ernst & Young LLP, KPMG LLP, and PricewaterhouseCoopers LLP.

Spokesmen for the SEC, KPMG and PwC declined to comment. A spokeswoman for Ernst & Young and a spokesman for Deloitte didn’t respond to requests for comment.

The Big Four audit 66% of all public companies with a market capitalization over $75 million, according to Audit Analytics. All four have paid fines to the SEC since 2014 to settle prior regulatory investigations of audit independence violations.

SEC rules prohibit accounting firms from doing other work for an audit client that could impair their objectivity and impartiality as auditors. Companies pay audit firms to test their accounting and then issue an opinion stating whether shareholders can rely on the financial numbers and systems designed to reduce the risk of fraud or error.

Public companies disclose audit and nonaudit fees in their annual proxy statements. About 47 companies in the S&P 500 index paid significant nonaudit fees to firms hired to test their accounting practices, according to Audit Analytics. The analysis defined significance as nonaudit fees that constituted more than 25% of total fees paid to the accounting firm.

In the current investigation, the SEC has asked audit firms to disclose instances to regulators in which the firms provided services such as consulting, tax advice, and lobbying to audit clients, according to the people familiar with the matter. The SEC also asked for information on any cases in which audit firms obtained contracts that reimburse them for losses caused by lawsuits over their work, or made fees contingent on a particular result or outcome, they say.

PwC paid almost $8 million in 2019 to settle SEC claims that it helped an audit client design software that was part of its accounting-compliance systems. The arrangement violated audit-independence rules because it put PwC in the position of potentially auditing its own project-management functions, according to an SEC settlement order.

Regulators alleged that a PwC accountant handled the negotiations for the software work at the same time he worked on the client’s annual audit. PwC settled the case without admitting or denying the SEC allegations, while the accountant paid a $25,000 fine and agreed to be suspended from auditing public-company financial statements for four years.

Ernst & Young has twice in the past seven years settled SEC investigations alleging it violated independence rules. In 2014, regulators accused the firm of lobbying congressional staff on behalf of two audit clients. An Ernst & Young subsidiary sent letters signed by an executive of an audit client to lawmakers’ staff and also directly lobbied for a bill that would help the business of an audit client, the SEC alleged. Ernst & Young paid $4 million to settle the SEC claims without admitting or denying wrongdoing.

KPMG in 2014 paid $8.2 million to settle an SEC investigation that alleged it provided prohibited nonaudit services such as bookkeeping to affiliates of companies whose books it audited. Deloitte & Touche LLP in 2015 paid $1.1 million to settle an SEC enforcement action claiming audit independence violations. Both firms settled without admitting or denying misconduct.

SEC has launched probe into how firms manage conflicts of interest caused by sale of nonaudit services

WASHINGTON—Regulators are carrying out a sweeping investigation of conflicts of interest at the nation’s largest accounting firms, asking whether consulting and other nonaudit services they sell undermine their ability to conduct independent reviews of public companies’ financials, according to people familiar with the matter.

The Securities and Exchange Commission probe highlights the agency’s new focus on financial-market gatekeepers such as accountants, bankers and lawyers. These firms help companies raise capital and communicate with shareholders, but also have duties under federal investor-protection laws. Auditors are a shareholder’s first line of defense against sloppy or dodgy accounting.

Speaking at a national conference of auditors in December, SEC Enforcement Director Gurbir Grewal said: “You will see that we will have a firm commitment moving forward to continue to target deficient auditing by auditors, auditor independence cases, cases around earnings management.”

The SEC’s Miami office last year sent letters seeking information about client work that could cause auditors to violate rules requiring they be independent of clients whose finances they inspect, according to the people. They say the letters were sent to some smaller accounting firms as well as the Big Four: Deloitte & Touche LLP, Ernst & Young LLP, KPMG LLP, and PricewaterhouseCoopers LLP.

Spokesmen for the SEC, KPMG and PwC declined to comment. A spokeswoman for Ernst & Young and a spokesman for Deloitte didn’t respond to requests for comment.

The Big Four audit 66% of all public companies with a market capitalization over $75 million, according to Audit Analytics. All four have paid fines to the SEC since 2014 to settle prior regulatory investigations of audit independence violations.

SEC rules prohibit accounting firms from doing other work for an audit client that could impair their objectivity and impartiality as auditors. Companies pay audit firms to test their accounting and then issue an opinion stating whether shareholders can rely on the financial numbers and systems designed to reduce the risk of fraud or error.

Public companies disclose audit and nonaudit fees in their annual proxy statements. About 47 companies in the S&P 500 index paid significant nonaudit fees to firms hired to test their accounting practices, according to Audit Analytics. The analysis defined significance as nonaudit fees that constituted more than 25% of total fees paid to the accounting firm.

In the current investigation, the SEC has asked audit firms to disclose instances to regulators in which the firms provided services such as consulting, tax advice, and lobbying to audit clients, according to the people familiar with the matter. The SEC also asked for information on any cases in which audit firms obtained contracts that reimburse them for losses caused by lawsuits over their work, or made fees contingent on a particular result or outcome, they say.

Joseph Lubin says rival must ‘figure out a more sustainable business model for the network’

Ethereum’s co-founder Joseph Lubin has questioned the sustainability of rival projects, including the fast-growing Solana blockchain, as venture capital pours into a raft of new cryptocurrency networks.

The Ethereum blockchain has become one of the world’s most widely used digital ledgers, but it is facing challenges from rivals such as Solana, which has set lower transaction fees to draw in users.

Lubin told the Financial Times that Solana, which pitches itself as a faster and cheaper alternative to Ethereum, was paying outsized rewards to users who validate transactions on the network compared to the revenues generated by those transactions.

Solana needs to “figure out a more sustainable business model for the network”, Lubin said.

“That’s natural,” he said. “All the projects in our ecosystem essentially fake it until they make it, or they die.”

The fast-growing blockchain project has faced doubts before. Some critics have argued that Solana sacrifices security for greater efficiency, and the network has experienced multiple significant outages.

In response to Lubin’s criticism, Solana said that “simply looking at protocol revenue doesn’t tell the full story of the long-term performance” of a blockchain’s economic model.

Lubin’s comments came as tech investors make big wagers on new projects trying to create more efficient alternatives to Ethereum — including Avalanche, Near Protocol and Solana — in a race to capitalise on growing mainstream interest in cryptocurrency applications.

ConsenSys, a cryptocurrency software company led by Lubin and closely tied to Ethereum, said on Tuesday it had more than doubled its valuation to $7bn in a new $450mn round of financing. The company has soared in value as an influx of new users turned to its products to navigate Ethereum.

Ethereum is the most widely used digital ledger for rapidly expanding areas such as decentralised finance and non-fungible tokens. Lubin has become one of the project’s loudest advocates on Wall Street after playing a hand in the network’s development.

MetaMask, an app developed by ConsenSys with more than 30mn monthly active users, has recorded almost $330mn in transaction fees since late 2020 through a feature that lets users swap between cryptocurrency tokens on Ethereum, according to public data.

Venture capitalists invested the new money in ConsenSys Software, an entity Lubin created with the help of JPMorgan during a restructuring that was finalised in 2021.

It comes after almost three dozen former employees of its Swiss-incorporated predecessor company, ConsenSys AG, recently challenged the legality of the restructuring and requested a special audit. The employees have alleged the deal undervalued the intellectual property behind MetaMask and other key products transferred to the new entity.

Lubin said ConsenSys had been “extremely open” about negotiating with the former employees and “understanding their concerns”, and the company’s products were effectively “pre-monetisation” at the time of the transaction.

“It’s a very different world in our ecosystem as we’re crossing the chasm into mainstream adoption than it was during the darkest moments of Covid,” Lubin said.

ParaFi Capital, a cryptocurrency venture firm backed by KKR, led the new round of funding in ConsenSys. Microsoft, Singapore’s Temasek and SoftBank’s second Vision Fund also invested.

ConsenSys declined to comment on whether Lubin or other shareholders sold any shares in the financing.

RWE says ‘immediate’ halt to energy supplies would hurt households and damage industry

Germany’s biggest power supplier RWE has warned against halting Russian energy imports to put pressure on Moscow, saying it would hurt German households and lead to lasting damage for industry in Europe’s largest economy.

“I understand very well the calls to extend the sanctions to the maximum. After all, the aim is to support Ukraine by weakening Russia’s leadership to the greatest degree possible,” said Markus Krebber, chief executive of RWE.

“However, we must unfortunately also acknowledge that there is a strong dependence on Russia, especially in energy supply, in Europe and in particular in Germany.”

He added that “an immediate stop would have unimaginable consequences for the heating supply of households”, while “a prolonged supply interruption would probably cause lasting damage to the production facilities of industry and small and medium-sized enterprises”.

Germany relies on Russia for more than half its natural gas, and Chancellor Olaf Scholz has pledged to diversify the country’s supply in the wake of the invasion of Ukraine. Although gas flows from Russia are continuing at normal levels, Moscow has threatened to cut supplies to Europe as a response to sanctions imposed on the country because of the invasion.

RWE said it supported the German government’s efforts to reduce dependence on Russian oil and gas and could revive as much as 3.5GW of coal-power capacity if requested.

It said British coal plants, however, could not be resurrected as they were already being demolished. Kreber added that RWE was in “constant dialogue” with the UK government, where there was “an ongoing discussion” to accelerate renewables, particularly wind farms where the “focus should be on offshore”.

Germany’s three nuclear power stations — one of which is run by RWE — are due to close by the end of this year but Berlin has ruled out extending their lifespan to help cut the country’s reliance on Russian gas.

Scholz has pledged to accelerate the construction of liquid natural gas terminals, which would make the country less dependent on supplies from Russia.

RWE said a memorandum of understanding for such a project in Brunsbüttel, north of Hamburg, was signed “just a few days ago” and that the company was “working flat out to be able to start operations as soon as possible”.

Some of Europe’s biggest energy companies, including oil supermajors Shell and BP, have announced plans to exit their business interests in Russia, although completely disconnecting from energy deals may take some time.

Both RWE and domestic rival Uniper SE have said they will not sign new long-term contracts with Russia but will continue to receive fuel under existing deals.

RWE said it would end all non-energy business with Russian companies with immediate effect.

Krebber said that “even though security of supply is the centre of attention at the moment, the medium- and long-term vision for energy policy remains unchanged”, insisting: “Expanding renewables and ramping up the hydrogen economy are more important than ever.”

Activist investor Enkraft Capital, which built a small stake in RWE last year, accused the company of being insufficiently ambitious in its decarbonisation plans, however.

“[War] seems to be yet another reason for RWE to wait for the government to take action rather than implementing a compelling forward-looking strategy that would benefit the company and Germany,” said Benedikt Kormaier, managing director at Enkraft.

More names added to asset freeze and travel ban list, including Chelsea FC owner

The EU has added names including Chelsea Football Club owner Roman Abramovich to an asset freeze and travel ban list, in an attempt to increase the pressure on Russia for its invasion of Ukraine.

Alfa Group shareholders German Khan and Alexey Kuzmichev are among the individuals placed under sanctions, according to draft legal texts seen by the Financial Times.

Tigran Khudaverdyan, executive director of Yandex, one of Russia’s leading tech companies, is also blacklisted for being one of the businesspeople with close ties to Russian president Vladimir Putin.

The economic measures include a ban on transactions with state-owned Russian companies, except in the oil and gas sector, and certain raw materials such as aluminium, copper and palladium, according to diplomats briefed on the discussions.

An EU import ban on steel products worth €3.3bn, as well as an EU export ban for luxury goods to Russia, including luxury cars and jewellery, had also been adopted by the bloc, said the European Commission.

European companies will be banned from making new investments in the Russian energy sector, except for civil nuclear energy and the transport of certain energy products to the EU.

European credit rating agencies would also be banned from rating Russian companies and the country’s sovereign debt, the commission said.

“These sanctions will further contribute to ramping up economic pressure on the Kremlin and cripple its ability to finance its invasion of Ukraine,” the commission said, adding that the restrictions had been co-ordinated with allies, notably the US.

German finance minister Christian Lindner said the bloc was working on closing any loopholes for oligarchs to circumvent the sanctions regime. “No one who supports Putin is untouchable,” he told reporters in Brussels.

The new sanctions are to be published in the EU’s official journal later on Tuesday.

The move comes as the UK government announced an additional set of sanctions on more than 370 oligarchs and politicians linked to Putin’s regime, including Mikhail Fridman, co-founder of Alfa-Bank, and Mikhail Mishustin, prime minister of Russia.

Other individuals targeted include Dmitry Peskov, Putin’s press secretary, and Alexander Ponomarenko, the chair of Sheremetyevo airport who has a fortune estimated to be worth £2.22bn.

The legislation gives the government powers to designate individuals and entities under an “urgent procedure”, allowing the UK government to quickly align its sanctions package with other nations.

All individuals named by the UK government have already been placed under sanctions by allies such as the EU, Canada and the US. The UK’s Foreign, Commonwealth and Development Office said the sanctions were made possible in part due to the economic crime bill, which was fast-tracked through the House of Commons earlier this week.

“We are going further and faster than ever in hitting those closest to Putin — from major oligarchs, to his prime minister and the propagandists who peddle his lies and disinformation,” UK foreign secretary Liz Truss said in a statement.