On August 24, a coalition of sixteen Republican state attorneys general (AGs) dispatched a substantial 38-page letter to the chief executives of Deloitte, EY, KPMG, and PwC, the prominent "Big Four" accounting firms. The correspondence, which also copied the Chairman and Director of Enforcement of the Securities and Exchange Commission (SEC), alleged that these firms compromised their professional independence by publicly endorsing climate-related disclosures. The letter concluded with thirty-eight specific demands for documentation from the firms.
This legal maneuver represents a significant escalation in the ongoing debate surrounding Environmental, Social, and Governance (ESG) factors in corporate reporting and investment strategies. The authors of the letter, Robert G. Eccles, a Visiting Professor of Management Practice at Saïd Business School, University of Oxford, and Daniel F. C. Crowley, a Partner at K&L Gates LLP, argue that the AGs’ actions, regardless of political alignment, continue a broader effort to pressure financial market participants into disregarding the potential financial implications of climate risks. They draw a parallel to a July 2025 letter from the State Financial Officers Foundation to asset managers concerning ESG, suggesting a coordinated campaign.
The AGs’ allegations, as analyzed by Eccles and Crowley, center on the assertion that the accounting firms’ public support for climate disclosure constitutes a breach of their professional independence. The authors contend that the AGs misunderstand the standards governing such disclosures, pose questions that are fundamentally misdirected, and insinuate conflicts of interest without presenting factual evidence. They warn that such targeted pressure on professional service providers can distort market functioning and lead to unintended consequences, with the potential for "misfires to ricochet."
The Independence Theory Under Scrutiny
A core tenet of the AGs’ argument hinges on the concept of auditor independence and its perceived compromise by the accounting firms’ stance on climate disclosures. However, Eccles and Crowley assert that the AGs’ letter itself contains material misconceptions and omits critical information necessary for a comprehensive understanding of the issue.
The International Sustainability Standards Board (ISSB) has developed standards, namely IFRS S1 (General Requirements) and IFRS S2 (Climate-related Disclosures), with the explicit aim of meeting the capital markets’ demand for information regarding climate and sustainability-related risks and opportunities that could influence a company’s prospects. IFRS S1 outlines the general requirements, while IFRS S2 provides specific guidance on climate disclosures, including greenhouse gas emissions, time horizons, and future projections.
The AGs’ letter reportedly attacks the climate standard without direct citation, focusing on the perceived demand for speculation over undefined periods. Eccles and Crowley point out that Paragraph 30 of IFRS S1 and Paragraph 10 of IFRS S2 require companies to define their own short, medium, and long-term horizons, aligning these with their existing strategic planning horizons. These definitions are to be disclosed and explained by the companies themselves, not dictated by external bodies in an arbitrary manner. Furthermore, the AGs appear to overlook the established role of market-driven information flows in capital markets, a channel that the SEC itself has recognized as a legitimate avenue for investors to seek information.
AGs Contradict Their Own Benchmarks on Accounting Principles
The AGs cite the Financial Accounting Standards Board (FASB) as their benchmark for proper accounting practices. They quote FASB’s Concepts Statement No. 8, which addresses materiality, neutrality (information presented without bias), and freedom from error. They also reference FASB’s definition of the primary users of financial reporting: existing and potential investors, lenders, and other creditors.
Paradoxically, the AGs then proceed to condemn the ISSB for adopting these very same principles. IFRS S1, they note, mandates fair presentation through a complete, neutral, and accurate depiction. Appendix D of IFRS S1 explicitly states that these qualitative characteristics are derived from a conceptual framework that closely mirrors FASB’s own formulation. The definition of primary users in IFRS S1 is presented in language identical to FASB’s, not as a dilution. The authors observe that the AGs approve these FASB principles on one page of their letter, only to later treat their adoption by the ISSB as evidence of regulatory capture.
A similar reversal is noted concerning the concept of materiality. The AGs correctly cite Public Company Accounting Oversight Board (PCAOB) standards, which stipulate that materiality is determined on an issuer-by-issuer basis. Management makes these judgments, auditors test the supporting evidence, and external parties do not unilaterally make these determinations. However, the AGs, acting as external observers for a class of companies, then declare an entire category of information (climate-related disclosures) as immaterial for public companies as a group. Eccles and Crowley argue that this constitutes an elimination of the concept of materiality rather than a determination of it.
The Conflicts Theory and Its Flaws
The second major charge leveled by the AGs is that the accounting firms profit from the very disclosures they support, thereby creating a conflict of interest. Eccles and Crowley argue that even if this premise were true, the AGs fail to ask the crucial question: "Whose client?"
If an accounting firm provides emissions-inventory work or scenario analysis to a company it does not audit, there is no inherent independence issue. Such services are already provided by engineering firms, environmental consultancies, and software vendors, none of whom are subject to the rules invoked by the AGs.
The situation changes when an accounting firm offers such services to an existing audit client. In this scenario, existing regulations are already stringent. Regulation S-X, for instance, explicitly prohibits ten categories of non-audit services to audit clients, including appraisal and valuation services, actuarial services, internal audit outsourcing, and management functions. Any services not explicitly prohibited require pre-approval from the audit committee, and associated fees are publicly disclosed in the issuer’s proxy statement. This regulatory architecture, established after the Enron scandal, is designed to address precisely the types of conflicts the AGs purport to be concerned about.
The AGs cite three SEC enforcement actions involving Deloitte, PwC, and KPMG as evidence of impropriety. Eccles and Crowley contend that these actions are, in fact, applications of the existing regulatory framework. They argue that by presenting these enforcement actions, the AGs ignore the very framework from which they originate. This leads to a dilemma: either the firms’ sustainability consulting is separate from their audit work, in which case there is no conflict as alleged, or it is not separate, in which case existing rules already prohibit or condition such arrangements, and the appropriate recourse is through enforcement by the SEC and state boards of accountancy.
Thirty-Eight Demands, Yet No Concrete Allegations
The AGs’ thirty-eight demands for documentation are structured to investigate whether any audits were actually affected by climate commitments. They seek internal policies, training materials, changes to audit methodology, and records of concerns raised by partners. However, Eccles and Crowley highlight a critical omission: the AGs do not allege a single instance where an audit outcome was altered due to a firm’s commitment to climate disclosure. There is no mention of a specific company, engagement, or judgment that was compromised. They conclude that an argument based on mere appearance, when the authors themselves had the opportunity to convert it into a factual claim and did not, carries less weight than it might initially suggest.
The Broader Implications of the AGs’ Doctrine
Beyond the specifics of this case, Eccles and Crowley express concern about the broader doctrine the AGs are attempting to establish, as it has the potential to outlast this particular dispute. Independence rules are traditionally designed to govern auditors’ entanglements with the companies they audit, focusing on financial interests, business relationships, and prohibited services. The existing framework for identifying threats to independence is relational and does not typically concern itself with the firm’s internal opinions or beliefs.
The AGs’ letter, however, appears to convert these rules into a test of permissible policy positions for accounting firms. If publicly supporting climate disclosure creates an appearance of adopting an objective external to the audit, then, by extension, publicly supporting the rescission of the SEC’s climate risk disclosure rule, testifying for tax reform, or engaging in lobbying on auditor liability or PCAOB funding could create similar "appearances."
This creates a framework with no natural stopping point. As political administrations and congressional majorities change, the same theory established in this instance could be used by future officeholders against firms that have taken opposing stances. This is not a partisan observation, but rather a fundamental reason, according to the authors, why such a framework should be resisted by all sides.
The tactic of referencing professional audit standards without actionable allegations is seen as intentionally invoking the prospect of investigation and professional discipline. This is considered dangerous because professional conduct standards are among the few areas in American capital markets where both parties historically prioritize principles over politics. Preserving this restraint is crucial not only on principle but also because it underpins the credibility of audited financial statements and, consequently, the United States’ position as a robust global capital market.
A Call for Balanced Discourse
In summary, Eccles and Crowley assert that the AGs’ letter, and the alleged legal violations it purports to rely upon, do not withstand scrutiny. While the letter is likely to generate significant media coverage, they urge caution against building upon this precedent.
They emphasize that serious conversations are indeed needed regarding the costs and utility of sustainability reporting, the actual use of such information by investors, and the appropriate scope of the SEC’s disclosure authority. However, they conclude that meaningful progress on these complex issues will depend on a balanced and well-reasoned examination of the relevant legal, economic, and investor considerations, rather than on politically charged attacks that risk undermining fundamental principles of market integrity.
