Skip to Content

Walmart, Toshiba, and the audit firms: Wake up SEC!

The U.S. Securities and Exchange Commission (SEC) seal.The U.S. Securities and Exchange Commission (SEC) seal.

A letter dated Sept. 9 addressed to Securities and Exchange Commission Chair Mary Jo White and the SEC Commissioners was no ordinary letter.

Its signers included heavy-hitters such as former Federal Reserve Chairman Paul Volcker, Vanguard founder Jack Bogle, and former SEC Chairmen Arthur Levitt and Richard Breeden. Former Comptroller General of the U.S. Charles Bowsher, former board member and acting chair of the Public Company Accounting Oversight Board (PCAOB) Chuck Niemeir, and former Chair of the International Accounting Standards Board Sir David Tweedie, along with a host of other luminaries, also signed the letter.

In it they wrote that they have “an interest in the auditing and financial reporting quality of companies listed in the U.S. and internationally … Our purpose in sending this letter is to express our support for Chair [James] Doty’s reappointment [as Chair of the PCAOB] and to explain the reasons for this support.”

The PCAOB is responsible for overseeing public companies’ external auditors, and the SEC appoints the PCAOB Chair. That this “group of academics, former policymakers, and investor advocates” are alarmed enough to send a letter to White now should be a concern to all of us.


It’s astounding how long financial reporting integrity has been under siege and how little notice it receives. Several years ago I was thumbing through all the responses the PCAOB had received on a proposal that had been kicking around for a while. The nitpickiness, the whining, and the attempts large and small to put the brakes on any change rose like steam from the salvos thrown up by the audit firms, their representatives, and some companies. The fact that Doty hasn’t publicly blown his top is a real testament to his character. An Elon Musk, Jeff Bezos, or Steve Jobs could never do his job.

The letter to White comes at a very down moment for the profession. Walmart (WMT) recently reported that it had found material control weaknesses in the way in which the company was accounting for leases. “Based upon that discovery, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are not effective at a level that provides reasonable assurance,” Walmart reported in its latest quarterly filing. While the numbers, once corrected, may not ultimately skew the retail behemoth’s financials significantly, leases aren’t exactly an obscure or isolated part of its business. A Walmart spokesperson confirmed that Walmart had discovered the problem but was unable to provide further details. So where was Walmart’s external auditor of 45+ years, Ernst & Young? The retail giant paid $19.3 million on audit and audit related fees to E&Y in fiscal year 2015 alone.

This isn’t the audit firm’s only recent black eye involving Walmart. In May, a Wall Street Journal article on the Walmart Mexico bribery scandal reported on “an internal Wal-Mart email dated Feb. 27, 2006” in which Walmart’s head of internal audit wrote that his staff had “briefed Ernst & Young over the past several months, consistent with our updates to the chair of the audit committee” about their investigations. Yet “[i]t wasn’t until late 2011 that Wal-Mart disclosed its investigation to the Justice Department and Securities and Exchange Commission, according to the company’s securities filings,” the Journal reported.

Who was E&Y protecting with its silence? Certainly not investors. In May, CtW Investment Group asked the PCAOB to investigate E&Y’s role. “We have received no response to our letter from the PCAOB,” Rich Clayton, Research Director at CtW wrote me in an email. A PCAOB spokesperson did not respond to a request for comment. And the SEC, which has been fighting a Freedom of Information Act request for Walmart documents, through a spokesperson declined to comment on the status of its own Walmart bribery investigation. Why does Walmart’s audit committee keep reappointing the same firm? Are Walmart and its auditors untouchable?

The structure for overseeing auditors needs major reform. This summer, former chief accountant of the SEC Lynn Turner told me that a company’s investors should decide if the money spent on auditors is worth spending and that the PCAOB should collect money from the companies for the services that a board’s audit committee negotiates, using the same mechanism companies use today to pay the PCAOB for oversight of auditors. The PCAOB could demand a change in a company’s auditor if there were problems with an audit, Turner says. It sure seems like the system Turner proposes would have better served investors in the case of Walmart.


Certainly, this year, Toshiba investors also may feel that the audit firm there, Ernst & Young’s Japanese affiliate Ernst & Young ShinNihon, has let them down. Toshiba admitted “that it had overstated its profits by nearly $2 billion over the past 7 years,” Fortune reported last week.

Despite the wreckage and the need for stronger enforcement, auditors and some companies continue to resist oversight. The U.S. Chamber of Commerce, in particular, recently has been lobbing complaints about the burdens imposed by the PCAOB, according to a MarketWatch report last week. The Chamber did not respond to a request for comment by press time.

The fear, of course, is that White, who has not been strong on enforcement herself, will react to the bellyaching by choosing a weaker head of the PCAOB. In their letter to White, the authors write that “Many of the initiatives in [Doty’s] agenda inherently take time to implement. We therefore strongly support his continued leadership.”

Unless the SEC steps up to stand behind needed reforms and pushes the PCAOB forward to do so, financial statements won’t be worth the paper they are printed on.

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (, an independent board education and advisory firm she founded in 1999. She has been a regular contributor to Fortune since April 2010 and is the author of two books on corporate governance and valuation.