Bubble-Wrap Around Sealed Air’s Auditor Change — Perforated by SEC Blunt Tool


It is not in dispute. The replacement of KPMG by EY by Sealed Air Corporation for its 2015 audit was corrupt.

The Securities and Exchange Commission so concluded. In proceedings dated August 2, 2021 (here and here), the agency banned and fined William Stiehl, the company’s chief financial officer at the heart of the scheme, censored and fined EY $ 10 million, and imposed fines and training bars on three of his partners (paragraph 2):

“EY solicited and obtained from (Stiehl) a competitive bid and other confidential documents and information on several occasions in an attempt to secure the audit engagement.”

Alert to readers: This is not to ask whether a selection of professional advisers should be tainted with abuse of corporate confidences. It shouldn’t. It is not a question of defending or excusing the conduct in question.

Instead, it’s surprising why the SEC should invoke its creaky, ineffective and unpredictable rules for auditor independence (paragraph 3):

“The manner in which EY obtained the engagement would lead a reasonable investor to conclude that EY was not capable of demonstrating objectivity and impartiality in becoming the independent auditor (of Sealed Air) …”

The SEC’s approach was called “bizarre” by a Bloomberg News columnist on August 3, as it explored the non-exceptional notion that auditors share common ground with lawyers, bankers and others. ” other consultants:

“The real service these companies provide is basically ‘wise and reliable advice’, and to provide that service you really need a personal relationship of trust. “

The columnist rightly notes that in deciding on the financial statements of their clients, auditors have a differentiating obligation from other advisers to public enterprises. Two observations answer his perplexity:

First, consistency should matter. The misled but honest senior executives and directors of Sealed Air, and later the SEC, would have been no less insulted by a selection of lawyers, bankers, underwriters or other advisers if they had been perverted in the same way.

Second, the following, the SEC had a broad and consistent enforcement enforcement tool. By virtue of its rule of practice 102 (e) (1) (ii), it has the power to sanction all person in the practice of the SEC found to be “lacking in character or integrity or having engaged in unethical or inappropriate business conduct.”

Complete stop. Prosecutions under this provision would be directed, with analytical consistency, against legal professionals. all Bandaged. Warning them all would increase any “quirk” the columnist might find in Sealed Air.

On the other hand, the SEC’s heavy reliance on the following provision of Rule 102) (e) – subsection (1) (iii) – gets lost, in its assumption that investors have granted any importance to Stiehl / EY machinations. The indifference of investors to the performance of auditors in general has a long history; the torpor is disturbed only if an explosion of embezzlement is serious enough to animate the cry: “Where were the listeners?”

Which was not the case. On June 20, 2019, the company’s Form 8-K publicly announced Stiehl’s termination for cause, “relating to the process by which the company selected its independent audit firm for the period beginning with fiscal 2015,” and relating to the independence of this audit. solidify.”

So informed, the market reaction that day was a modest drop in the share price, from $ 43.67 to $ 41.70 – just under $ 2 per share and less than 5% – on about four times the typical volume.

Even this reaction was fleeting. By July 1 — seven trading days later — the stock price had recovered to $ 43.61 — above which it has remained — while trading volume has returned to previous levels.

Frankly speaking, the investment community, to whose interests the SEC is allegedly devoted, has looked for itself at the Sealed Air auditor environment, yawned wearily, and resumed business as usual.

History provides another example: the Ventas case of 2016. There, the SEC defined and applied the scope of rule 102 to a “close personal and romantic relationship” between an audit partner and the director. client’s financial – although, as reported here, a senior agency the official’s contemporary discourse expressed the SEC’s unwillingness to develop rules to provide “clear lines and explicit direction.”

As in Sealed Air, investor indifference to the audit turmoil at Ventas was reflected in its share price: in the three-month period between the auditor’s withdrawal in place and filing of an amended Form 10-K with the opinion of the successor, the share price increase by 3%.

In my youth, growing up in a farming village, I was educated by mentors such as my grandfathers – a farmer and a country dentist – that a good job requires the right tools. For the SEC, deploying the elusive “principles” of independence to benefit its misfortune is like weeding a field with a snow shovel or using a spoon as a toothbrush – it could be tried, but the result would be. suboptimal in both cases. theory and result.

It is for further investigation once again that the principles and rules of independence for auditors – and their ill-trained and unloved offspring, the limitations of the scope of practice of audit clients – have outlived all value. that they might have had in the past. Independence has no demonstrable benefit; Since the delivery by William Welch Deloitte of the first modern auditor’s opinion in February 1850, no company, investor or other source of capital has made an auditor an example in respecting the rules of independence.

Rather, the elaborate mechanism by which the “appearance of independence” is enforced, regulated and defended only becomes visible with negative impact, in the inevitable and unpleasant handful of cases deemed non-compliant in hindsight.

Corporate reporting is under pressure to expand disclosures under environmental, social and governance headings, recently extended to diversity, equity and inclusion. Auditors will need broad and diverse skills to provide meaningful and informative assurance. For whom, the constraining influence of an archaic and obsolete independence structure is misplaced at best.

Against this background, the SEC’s clumsy and unnecessary approach to the Sealed Air affair is regrettable.

This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.

Author Info

Jim Peterson is an American lawyer and a 19-year veteran of Arthur Andersen’s in-house legal group. His international practice focuses on litigation and litigation in the accounting profession, quality of practice and regulatory matters.

Bloomberg Tax and Accounting Insights articles are written by seasoned practitioners, academics, and policy experts who discuss current tax developments and issues. To contribute, please contact us at [email protected].


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