The US Securities and Exchange Commission (SEC) has charged Ernst & Young LLP (EY) for cheating by its audit professionals on exams required to obtain and maintain certified public accountant (CPA) licences and for withholding evidence of this misconduct from the SEC's enforcement division during the investigation. Admitting the facts underlying the SEC's charges, EY has agreed to pay a US$100mn (million) penalty and undertake extensive remedial measures to fix the firm's ethical issues, the SEC says in a release
. The US$100mn is the largest penalty ever imposed by SEC against an audit firm.
"This action involves breaches of trust by gatekeepers within the gatekeeper entrusted to audit many of our Nation's public companies. It's simply outrageous that the very professionals responsible for catching cheating by clients cheated on ethics exams of all things," said Gurbir S Grewal, director of the SEC's enforcement division. "And it's equally shocking that Ernst & Young hindered our investigation of this misconduct. This action should serve as a clear message that the SEC will not tolerate integrity failures by independent auditors who choose the easier wrong over the harder right."
EY admits that, over multiple years, a significant number of its audit professionals cheated on the ethics component of CPA exams and various continuing professional education courses required to maintain CPA licenses, including ones designed to ensure that accountants can properly evaluate whether clients' financial statements comply with generally accepted accounting principles (GAAP).
During the enforcement division's investigation of potential cheating at the firm, EY made a submission conveying that it did not have current issues with cheating when, in fact, it had been informed of potential cheating on a CPA ethics exam.
The Commission says, "EY also admits that it did not correct its submission even after it launched an internal investigation into cheating on CPA ethics and other exams and confirmed there had been cheating, and even after its senior lawyers discussed the matter with members of the firm's senior management. And as the Order finds, EY did not cooperate in the SEC's investigation regarding its materially misleading submission."
In addition to paying a US$100mn penalty, the SEC order requires EY to engage in extensive undertakings, including retaining two separate independent consultants to help remediate its deficiencies. One consultant will review the firm's policies and procedures relating to ethics and integrity. The other will review EY's conduct regarding its disclosure failures, including whether any EY employees contributed to the firm's failure to correct its misleading submission, the regulator added.
"The SEC will not permit the submission of misleading information or any action that delays or frustrates our mandate to protect investors and our markets," said Melissa R Hodgman, associate director of the SEC's enforcement division. "Ernst & Young faces significant sanctions and extensive remediation to ensure that its culture and conduct meet the ethical standards required of those responsible for the integrity of our capital markets."
According to the SEC order, EY violated a public company accounting oversight board (PCAOB) rule requiring the firm to maintain integrity in the performance of professional service, committed acts discreditable to the accounting profession, and failed to maintain an appropriate system of quality control.
EY has admitted the facts underlying these findings and acknowledged that its conduct violated the integrity standard and provided a basis for the SEC to impose remedies against the firm under sections 4C(a)(2) and (a)(3) of the Exchange Act and Rules 102(e)(1)(ii) and (iii) of the Commission's Rules of Practice.
The SEC's investigation, which is continuing, has been conducted by Ian Rupell and supervised by Rami Sibay. The SEC thanks the PCAOB for its assistance in this matter.