Operation Broken Gate

The SEC considers the auditor as the key factor or the gatekeeper in protecting public interest through strictly follow the professional standards to perform the audit job. However, under SEC’s investigation, there are many cases in which many auditors and audit firms, especially the big four accounting firms, did not follow the professional standards in doing the audit job. That led SEC to concern about the violation of the accounting profession.
Independence is the first common issue considered by the SEC. To detect frauds or violations of independence of the CPAs and CPA firms in providing auditing services for their clients and protect the public interest, “Operation Broken Gate” was launched by the SEC in October, 2013. Through the
program, the SEC has discovered and filed many cases to penalize CPAs/CPA firms. Many accounting firms tried to maintain the relationship with clients and develop their business to make more profits through providing nonattest services even loaning their staffs to the audit clients. That led the accounting firms to create many threats to independent. Moreover, some auditors even own the client’s stock. That violates the SEC approach to independence which requires the auditor must be independence in fact and appearance. Specifically, to keep the auditor independence in fact and appearance, Rule 2-01(b) of the SEC regulations about independence does not allow the auditor to provide the audit clients some nonauditing services, such as management services, accounting services, or tax services because that may place the auditor to work as the employee of the clients, support for the client, even audit their own work job, or may create mutual interest between the clients and the auditor.
KPMG LLP, one of the Big Four accounting firm, was investigated by the SEC in 2014 because of independence violations is an example.
The accounting firm was charged $8.2 million by the SEC because the firm violated the independence principles of the SEC. While providing the audit service, KPMG provided accounting services like bookkeeping, payroll for the audit client. That creates the self-review threat and impairs auditor’s independence which is stated in the second principle of the general standard of independence of the SEC “places an accountant in the position of auditing her own work.” KPMG also provided management service through sending the staff to work on senior position for its client affiliate. Moreover, the staff was a senior management of the client’s affiliate before and just retired. The accounting firm created the management participation and advocacy threats to independence and violated the third and fourth principle of the SEC independence standards which states “place the accountant acting like the client’s management or employees and being an advocate for the client.” Moreover, KPMG let some employees own the client’s stocks that impairs the auditor’s independence as pointed out by the first independence principle “creating reciprocal interest between the two parties.” Through the case, we can see that KPMG violated all independence principles of the SEC even there are many rules established by the SEC, AICPA, and PCAOB to help them maintain
independence of the relationship with clients.
Besides, many violation of independence cases of other big four firms like Deloitte, PwC and non-big four firms were discovered because of having mutual interest with their attest clients. The real situation of independence impairment alerted and led the SEC to consider about the quality of the attest service. That led the SEC’s Operations Broken Gate to work on not only independence issue but also to investigate violation of professional standards. The investigations filed many cases showing the auditors did not provided competent and diligent auditing services as required by due care principle of both the SEC and the AICPA Code of Conduct and performing unappropriated audit process or performing untidy audit work, such as not collecting enough sufficient evidence, not making detailed evaluation and analysis about audit risks as well as internal control system, and not effectively communicating with the audit committee.
Through the investigation information about violation of accounting profession above, we can see that the accounting firms and auditors surely created the mutual interest with their attest clients through providing non attest services or owning client stocks.
Additionally, they even placed their own interest before the public interest through reducing audit work to make the audit process easy for the client. These issues clearly violate the independence objectivity principle which the auditor must have and maintain in order to provide professional audit service. According to the Revised AICPA Code of Conducts, Sub section 01 and 02 of principle 0.300.050 “Objectivity and Independence,” there must be no mutual or conflict interest created between the auditor and the client in order to maintain auditor independence. Objectivity is very important in accounting profession since maintaining objectivity helps auditors make unbiased decision or make decision free conflicts of interest when facing unethical issues. Additionally, independence is an important to keep an auditor from involving to any relationships that may impair auditor’s objectivity. Therefore, in my opinion, a CPA auditor cannot be objective without being independent. Mutual or conflicts interest is the most essential issue which lead a CPA auditor to be not independence and easy to make a favorable or unfavorable decisions which benefit the auditor first while offering the attest service. Conversely, without being
objective a CPA cannot be independent because the auditor without objectivity may make decision that may create conflict of interest issue which can be favorable or unfavorable for his or her clients. That may lead them to not be independent in appearance under the third party’s perception.
The cases filed by the SEC through the Operation Broken Gate proved that the SEC’s concerns about violation of the accounting profession is real. We can conclude that Operation Broken Gate is a successful initiative of the SEC in an effort maintaining the accounting profession and protecting public interest for some reasons. Operation Broken Gate has been working effectively in discovering violation of independence and professional standards of the accounting firms. Moreover, the program is a signal which the SEC want to send a message to CPAs and accounting firms that the SEC has been watching and checking the accounting firms in practicing the accounting professional standards; therefore, the firms should strictly maintain their accounting profession in preforming attest service for the clients.