Ernst & Young, one of the world’s largest audit firms, has agreed to pay a $100 million fine after US securities regulators did enough to stop the practice.
The penalty, announced Tuesday, is the largest ever imposed by the Securities and Exchange Commission against an auditing firm, whose business occupies a unique ethical position in the financial world. These firms are responsible for verifying the accuracy of companies’ financial statements and issuing warnings to investors if they identify questionable accounting practices.
A civil administrative order filed by regulators said the big auditing firm, also known as EY, had misled investigators, withheld evidence and violated public accounting rules designed to uphold the integrity of the profession.
“It’s just outrageous that the same professionals responsible for detecting client cheating cheated on ethics reviews of everything,” Gurbir S. Grewal, the commission’s director of compliance, said in announcing the settlement.
the penalty is double the amount that KPMGanother large auditing firm, paid in 2019 to settle an investigation into similar allegations of fraud by auditors in internal training exams.
Forty-nine EY auditors received the “answer key” from an ethics exam that is part of the initial process to become a certified public accountant, according to the SEC. administrative order. In some cases, employees shared answer keys even after the SEC fined KPMG.
Hundreds of people at the auditing firm cheated on ethics exams that are part of continuing education programs offered by most states for accountants to maintain their professional licenses, according to the commission.
Some employees told investigators they cheated due to “job commitments or failure to pass training exams after multiple attempts,” the order says.
EY admitted in the order that its conduct was wrong. “Nothing is more important than our integrity and our ethics,” the firm said in a statement. He said that “sharing answers on any assessment or exam is a violation of our Code of Conduct and will not be tolerated,” and that the firm will step up efforts to enforce ethical rules.
EY, which has more than 300,000 employees, is one of the so-called Big Four accounting firms, along with Deloitte, KPMG and PwC, auditing the accounts of almost all of the world’s largest companies.
Regulators began looking more closely at the affairs of accounting firms about two decades ago. Enron’s collapse in 2001 highlighted the role of his auditor Arthur Andersen, which had helped perpetrate accounting fraud at the energy giant. Federal prosecutors later filed criminal charges against Arthur Andersen. The firm no longer exists.
In the wake of Enron and other big corporate frauds, Congress passed legislation establishing the Public Company Accounting Oversight Board, which sits within the SEC but brings its own enforcement actions against auditing firms. In the administrative order against EY, the SEC said some of the firm’s conduct had violated board rules.
More generally, one area of concern for the SEC is the issue of auditor independence. Regulators want to ensure that an accounting firm’s review of a company’s financial records is not compromised by other consulting, advisory or lobbying work it may perform for the company.
That has led many firms to split their accounting and consulting businesses, especially as the latter has become a bigger source of revenue for the Big Four. This month, the financial times reported that EY was considering separating its audit business from its financial advisory business.
Regulators said this was not the first case of widespread ethics exam fraud by EY employees. The SEC said a somewhat similar cheating scandal, which the firm handled internally, took place between 2012 and 2015.
In the order, the commission noted that EY had warned employees in the past about cheating on exams, but had not implemented enough controls until recently. As part of the agreement, EY will hire two independent consultants. One will review the company’s policies on ethics procedures and the other will review its failure to properly disclose cheating.
It is not unusual for the SEC to require a company to appoint an outside consultant to monitor its compliance with the terms of an agreement. But it is rare for regulators to require the appointment of two consultants, an indication of how serious the SEC viewed violations at EY.
The SEC said its investigation was continuing, suggesting it may be considering legal action against some people.
Mister. Grewal said the agreement “should serve as a clear message that the SEC will not tolerate integrity failures by independent auditors.”