Audit Failures, Whistleblower Claims, and Renewed Scrutiny of the Big Four
From the desk of Jim Eccleston at 麻花传媒
A series of lawsuits, congressional findings, and high-profile corporate collapses has reignited long-standing concerns about the audit industry’s ability to confront fraud, as reported by Bloomberg Law. Recent allegations involving EY, KPMG, and BDO illustrate how structural conflicts, revenue pressures, and client relationships continue to strain auditors’ objectivity, even as regulators and investors demand stronger oversight.
Whistleblower Allegations Against EY
According to Bloomberg Law, EY faces intense scrutiny after former partner Joe Howie filed a whistleblower lawsuit claiming the firm ignored clear warning signs of fraud and retaliated against him for raising concerns. According to the complaint, EY dismissed red flags involving clients who allegedly created fake transaction documents and, in one instance, offered a bribe to halt an investigation. Howie asserts that EY prioritized client relationships and revenue over audit quality, particularly in the aftermath of the 2020 Wirecard scandal and other failures at NMC Health and Luckin Coffee.
EY has defended its reforms, citing new mandatory fraud training, expanded use of third-party information, and greater deployment of forensic specialists on high-risk audits. Bloomberg Law reports that the firm also has severed ties with certain clients amid accounting disputes. Still, Howie argues EY’s changes amount to branding rather than genuine improvement. EY seeks dismissal on the grounds that Howie was not a protected whistleblower and claims he improperly disclosed privileged information.
Congress Rebukes KPMG Over Bank Audits
According to Bloomberg Law, KPMG also faces criticism after a Senate Homeland Security and Governmental Affairs subcommittee issued a 291-page report faulting the firm for issuing clean audit opinions shortly before the failures of Silicon Valley Bank, Signature Bank, and First Republic Bank. The panel alleged “willful blindness,” highlighting a series of conflicts, including KPMG’s discussions about sponsoring a cycling team linked to one of the banks during its audit period.
Bloomberg Law reports that lawmakers concluded that long-term auditor-client relationships create incentives to maintain lucrative engagements rather than challenge management. They recommended mandatory auditor rotation to help restore independence, though such reforms are unlikely to advance in a divided Congress. KPMG previously told Senate staff that evaluating a client’s business strategy is beyond the scope of an audit and declined further comment.
BDO Faces Questions After First Brands Collapse
BDO confronted its own controversy when First Brands Group collapsed under undisclosed financing arrangements that hid more than $10 billion in debt only months after BDO issued a clean audit. BDO maintains it followed professional standards and had no knowledge of off-balance-sheet transactions managers allegedly concealed. The firm stressed the inherent difficulty auditors face when corporate executives deliberately mislead them.
Persistent Conflicts and Industry Challenges
Although auditors long have resisted calls to serve as fraud detectors, the major firms acknowledge growing regulatory pressure, according to Bloomberg Law. EY, KPMG, and BDO each report taking more audit work earlier in the fiscal cycle to allow deeper review of complex issues and potential red flags. Experts argue, however, that these steps fall short. Some call for forensic specialists on every audit—an approach firms resist due to increased cost and time.
Beginning in 2027, international standards will require auditors to more directly identify and respond to fraud risks that could materially affect financial statements. Comparable updates in the United States remain stalled amid leadership shifts at the Public Company Accounting Oversight Board, according to Bloomberg Law.
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