Put Your Money Where Your Money Is: The Auditors and the US Midterm Elections

By • Nov 8th, 2010 • Category: Latest, Pure Content, The Case Against The Auditors

It looks like Ernst & Young finally booked a winner.

Ernst & Young, the global accounting firm, hosted a fund-raising breakfast late last month for Representative Dave Camp that drew so many donors the firm’s lobbyists had to pull extra chairs into their largest conference room…To an outsider, it might be confounding why Mr. Camp, a relatively unknown Michigan Republican who has no viable challenger in his re-election bid this year, would be seeing such a flood of cash…

But there is nothing mysterious for the lobbyists and corporate executives writing most of these checks. Mr. Camp is slated to take over the powerful, tax-writing House Ways and Means Committee if Republicans win the majority next week, transforming this low-key conservative Republican almost overnight into one of the most powerful men in town.

That was the lede in a New York Times story on October 26th, Lobbyists Court Potential Stars of House Panels. How Ernst & Young ended up in the first paragraph, given their recent infamy over Lehman and the audit firms’ general penchant for staying under the radar is anyone’s guess. Representative Camp was elected last week to his 11th term. He is now one of the most powerful men in Congress.

I’ve written before about the Big 4 audit firms and their campaign contributions. The audit firms prefer to contribute to candidates who are in powerful positions rather than focus on their party politics. It’s purely opportunistic largesse. They typically donate heavily to those in legislative leadership positions and to those in a position to take over leadership roles like Representative Camp.

To use a hockey metaphor: The audit firms put their money more often where the puck is rather than where it’s going and hardly ever chase the puck for strictly ideological reasons.

The money comes from the firms’ own lobbying efforts, their Political Action Committees (PAC), donations to candidates from individuals in the firms and from lobbyists hired by the firms. The auditors also support lobbying by their trade group, the AICPA.

Accounting Today, October 21, 2010: With only weeks to go before next month’s game-changing midterm congressional elections, the accounting profession is in position to make record-breaking contributions to the campaigns of key House and Senate candidates.

Since the 2008 Presidential election, political fundraisers for the profession have assembled a war chest of more than $9 million to support their allies on Capitol Hill, and there’s every indication that the industry is willing to spend it on the 2010 elections…

The reporter, Ken Rankin, did a fantastic job detailing the parties and the politicians who got the audit industry’s money for the midterm elections. I’ve never seen such detailed information and analysis in any major media.

Although the political tide is turning against Democrats this year, the industry PACs tracked by Accounting Today are showing no signs of switching back to the previous practice of providing overwhelming support to the GOP.

According to the latest filings received by the Federal Election Commission, PACs sponsored by the AICPA, Deloitte & Touche, KPMG, PricewaterhouseCoopers, Ernst & Young, Grant Thornton, and the National Society of Accountants are tilting even more toward Democrats than they did two years ago. Of the just over $5 million that these organizations donated to federal candidates through the beginning of October, nearly $2.3 million — 44 percent — went to Democrats.

In Senate races GOP candidates fared somewhat better, pulling in almost two-thirds of the $1 million that accounting PACs contributed to campaigns in the upper chamber. But in House contests, where the industry’s political fundraisers channeled more than $4 million in donations, Republicans held a much slimmer edge: 53 percent to 47 percent.

What are the accounting industry’s specific legislative interests?  Which legislation would they like to influence and in what way? Since they rarely speak to the media about anything controversial, testify publicly for Congressional committees or go on record with partisan views – better to keep corporate clients happy – we can look at the activities of their lobbyists to decipher their priorities.

Someone will correct me about audit firms’ public statements.  Yes. Ernst & Young did make a few public statements about Lehman. And the EY Chairman recently received favorable treatment from Fortune. (It’s always nice when a journalist is willing to ask obvious questions and allow the CEO to answer unchallenged.) The firms do typically defend themselves in the media when sued or accused of something, to a limited extent, using their stock phrases:

“We are confident in our ability to successfully defend ourselves against claims arising from our work with Lehman Brothers,” said a statement forwarded by Ernst & Young spokesman Charles Perkins. “Throughout our period as the auditor of Lehman, we firmly believe our work met all applicable professional standards, applying the rules that existed at the time. Lehman’s bankruptcy was the result of a series of unprecedented adverse events in the financial markets. As the Bankruptcy Examiner has acknowledged, Lehman’s bankruptcy was caused by a collapse in its liquidity, which in turn was caused by declining asset values and loss of market confidence in Lehman. It was not caused by any accounting issues.”

We’ve seen the Big 4 chairmen savor the attention showered on them as bobble-head world-leader savants at Davos. There was a full retinue of interviews last year by clueless journalists in reindeer sweaters who could barely pronounce IFRS and PCAOB, let alone ask a probing question about the value of either to investors.

Recently we saw another perfect example of the media’s short memory for scandal. The new KPMG Chairman was invited by CNBC to wax vaguely and without committing to any specific prediction or position about potential tax law changes post-midterms.

KPMG.  Talking about tax policy. It’s a joke, right?

This has been a big year for financial reform. In addition to making contributions to candidates who were expected to take leadership position after the mid term elections, the Big 4 sought to influence the legislation that became the Dodd–Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111-203, H.R. 4173). The Act was signed into law by President Barack Obama on July 21, 2010.

Wikipedia: The law was initially proposed on December 2, 2009, in the House by Barney Frank, and in the Senate Banking Committee by Chairman Chris Dodd. The Act, which was passed as a response to the late-2000s recession, is the most sweeping change to financial regulation in the United States since the Great Depression, and represents a paradigm shift in the American financial regulatory environment affecting all Federal financial regulatory agencies and affecting almost every aspect of the nation’s financial services industry.

Ernst & Young has paid five lobbying firms a total $625,000 for the first nine months of 2010. Ernst & Young has also spent $2,170,000 for their own office in Washington DC, lobbying on behalf of clients who contract with Ernst & Young Washington Council, a subsidiary of the firm.

KPMG has paid two lobbying firms a total $270,000 for the first nine months of 2010. KPMG also spent $1,260,000 so far this year to lobby the US House, the Senate and the SEC directly on their own behalf regarding issues such as:

  • HR 607 (fair value accounting)
  • The oversight and regulation of the accounting profession, in general
  • HR 1212 (Sarbanes-Oxley revisions)
  • HR 1349 (Federal Accounting Oversight Board)
  • HR 1406 (market to market accounting)
  • HR 1797 (Sarbanes-Oxley revisions)
  • HR 1909 (market to market accounting)
  • Single audits and particularly in regards to ARRA (HR 1/S 1)
  • HR 3346 (Sarbanes-Oxley Act)
  • HR 4110 Comptroller General of GAO to be CPA
  • PCAOB proposal on disciplinary proceedings

They also frequently set up special coalitions to advocate for specific client interests.

Deloitte has paid three lobbying firms a total $500,000 for the first nine months of 2010. Deloitte also spent $2,030,000 so far this year to lobby the US House of Representatives, the Senate and the SEC directly on their own behalf regarding issues such as:

  • H.R. 607 – To Direct the Securities and Exchange Commission to Issue Guidance on the Interpretation of Fair Value Accounting
  • H.R. 1212 – To Amend the Sarbanes-Oxley Act of 2002 to Provide Oversight of Auditors of Brokers and Dealers by the Public Company
  • Accounting Oversight Board, and for Other Purposes
  • H.R. 1349 – Federal Accounting Oversight Board Act of 2009

PricewaterhouseCoopers has paid six lobbying firms a total $ 730,000 for the first nine months of 2010. PricewaterhouseCoopers has also spent $2,130,000 so far in 2010 for their own office in Washington DC, lobbying the US House, Senate, the SEC and the Treasury directly regarding issues such as:

  • Support for globally consistent accounting standards
  • Support for independent accounting standard setting process
  • Support for use of fair value accounting
  • HR 607 – fair value accounting
  • HR 1212 – Public Company Accounting Oversight Board, oversight of auditors of brokers and dealers
  • HR 1349 – Accounting principles and Standards Oversight Board
  • HR 1406 – mark-to-market accounting principles, section 3
  • HR 1797 – To amend the Sarbanes-Oxley Act of 2002
  • HR 1909 – mark-to-market accounting
  • HR 3126 – Consumer Financial Protection Agency
  • HR 3817 – The Investor Protection Act
  • HR 3346 – To amend the Sarbanes-Oxley Act of 2002 to permit the sharing of confidential supervisory information with foreign auditor oversight bodies
  • HR 4173 – Wall Street Reform and Consumer Protection Act of 2009
  • S 3217 – Restoring American Financial Stability Act of 2010
  • Dodd-Frank Wall Street Reform and Consumer Protection Act

The AICPA had a fairly light lobbying load for 2010. It seems that other than two contracts – with Clark, Lytle and Gedulig and a woman known for her connections – Juleanna Glover – the heavy lifting was done by the firms themselves.

Clark, Lytle and Gedulig had contracts with the Big 4 firms individually in the past but that relationship seems to have now been limited to the AICPA. Their work with the AICPA seems to focus on issues of interest, in particular relating to the tax code, that interest the population of public accounting firms that are not the four-six largest.

Ms. Glover is a Republican operative who is known to throw splendidly non-particsan parties. She was formerly a director at Clark and Weinstock, a top public and government affairs firms and she was a founder of the Ashcroft Group, LLC where she worked with her former boss former Senator John Ashcroft (R-Missouri). The AICPA has been a client of both Clark and Weinstock and the Ashcroft Group.

Ms. Glover has been profiled in the New York Times and recently commented for the Washington Post on a possible “Real Housewives of Washington DC“ reality show:

If someone asked your advice on doing the “Real Housewives” show, would you discourage her?

I would never want to do something like this because I’m riddled with intellectual insecurity, and I would just be terrified that people would find out that I didn’t know what people might think I know. Other folks might be more open.

That just might sum up the modus operandi of most of the lobbying industry.

Later this week I will comment in more detail on the specific legislative agendas, by firm, and highlight some of their campaign contribution wins and losses.

On Tuesday, look for my column in Forbes, Accounting Watchdog. I’ll be talking about one important legislative initiative that the Big 4 are being very vocal about. Only, they’re not talking about it in the US.

All lobbyist data from the U.S. Senate website.


Main page image, Andy Warhol’s Dollar Sign owned by Jerry Hall.

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13 Responses »

  1. Francine:

    The accounting industry has a history of contributing to political causes and individual politicians to stave off unwanted legislation. In the 1990s the industry lobbied Congress to fight off efforts by then-SEC chairman Arthur Levitt to adopt strict independence requirements including restricting nonaudit services for audit clients. It took frauds at companies such as Enron to change the landscape. At Enron, the Andersen auditors made $27 million in nonaudit fees as compared to $25 million in audit fees. In the aftermath of frauds at Enron, WorldCom, Tyco et al., the Sarbanes-Oxley Act was adopted by Congress and it contains restrictions on nonaudit services for audit firms including restricting the provision of financial information systems design and installation, the most lucrative of all nonaudit services. So, the extensive lobbying efforts by the largest firms is nothing new but it’s scope is troubling especially in an industry that prides itself on integrity and ethical conduct.

  2. @Steve Mintz

    I agree. It’s nothing new, but not very well known. The amounts dedicated to the efforts and the level of seriousness of the efforts are both growing. The industry feels threatened by populism and the growing awareness of the role. It all happens in the background, under the radar, while the average investor assumes that the audit firms are looking out for their interests or at least behaving innocuously. They are doing neither.

  3. [...] Insightlopedia wrote an interesting post today. Here’s a quick excerptErnst & Young, the global accounting firm, hosted a fund-raising breakfast late last month for Representative Dave Camp that drew so many donors the firm’s lobbyists had to pull extra chairs into their largest conference room… … [...]

  4. Francine,

    Excellent journalism on your part yet again. As I said before, Forbes is lucky to have you (as are all the rest of us!).

    Between the auditors and the Wall Street institutions (see my post entitled “Spread ‘em Wide” http://saramcintosh.wordpress.com/2010/03/31/spread-em-wide/ ) I’m surprised those in the most powerful Congressional positions even need to look anywhere else to fund their lavish lifestyles, I mean, re-election campaigns.

    Keep up the great work, and the fighting for the cause. One of these days, we just might get the status quo to change . . . I hope and pray.

    Ciao for Now,

    Sara McIntosh

  5. @Sara McIntosh

    Excellent, excellent detailed analysis of who can be bought and who can’t, in particular by the bank who did and didn’t fail. I urge everyone to read Sara’s post linked to above. It gives you all the ammunition you need to realize that the plaintiffs’ lawyers, if the status quo corporate captured judges stop getting in the way, may be our only hope for knocking some sense into the audit firms and making them pay attention to their real client, shareholders.

    Thanks Sara.

  6. Thank you, Francine for the high compliments. I’m a piker in your wake!!

    Sara

  7. What, Big 4 accounting firms are making political contributions? What, they are targeting them to support legislation? This is unheard of in American business. We need to stop this immediately. The US needs to create a government bureaucracy and put audits in the hands of low paid government workers who could complete the annual audit 2-3 years after the financial statements are filed. They should be able to Google some robust audit methodology to get us some great assurance several years down the road.

  8. [...] This post was mentioned on Twitter by Frank Barrett, Wealthy Writer. Wealthy Writer said: re: The Auditors » Blog Archive » Put Your Money Where Your Money …: Ernst & Young, the global accounting firm… http://bit.ly/bsC8OZ [...]

  9. http://www.nydailynews.com/news/world/2010/11/11/2010-11-11_pricewaterhousecoopers_in_ireland_in_hot_water_after_top_ten_email_rates_new_hir.html

  10. [...] independence rules around provision of tax services to audit clients are a little trickier. The auditors’ lobbyists carved out a pretty generous exemption in the Sarbanes-Oxley Act for their lucrative tax practices. [...]

  11. [...] the auditors were left out of the Dodd-Frank Reform Act completely. Their lobbyists succeeded in convincing legislators that, as opposed to ratings agencies who have the same business model and [...]

  12. [...] send professionalism packing and abdicate their public duty to shareholders when legislation threatens the lucrative business of being a public accounting [...]

  13. [...] Auditors send professionalism packing and abdicate their public duty to shareholders when legislation threatens the lucrative business of being a public accounting [...]

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