Ernst & Young, one of the world’s largest audit firms, agreed to pay a $100 million fine after US securities regulators discovered hundreds of its auditors had cheated on various ethical tests they were required to obtain or retain professional licenses – and that The company has not done enough to stop this practice.
The penalty, announced on Tuesday, is the largest ever imposed by the Securities and Exchange Commission against an audit firm, which holds a unique ethical position in the financial world. These companies are responsible for checking the accuracy of companies’ financial statements and issuing warnings to investors if they identify questionable accounting practices.
Regulators said the large audit firm – also known as EY – misled investigators, withheld evidence and violated public accounting rules designed to preserve the integrity of the profession.
Grewal, the commission’s director of enforcement, in announcing the settlement, said, “It is simply disgraceful that the professionals responsible for controlling fraud by clients cheat ethics tests of everything.”
The punishment Double the amount of KPMG, another large audit firm, pushed in 2019 to dissolve an investigation into similar allegations of cheating by auditors in its internship exams. That summer, the securities regulator also sent a formal request to EY for information about complaints the company might have received about employees cheating in any tests.
On Tuesday, the SEC said that although EY received internal advice about employees cheating on some ethics tests, the company did not initially disclose it to investigators. In the end, when regulators and EY officials conducted their investigations, the problem of fraud turned out to be more prevalent.
According to the SEC, 49 EY auditors have received an “answer key” for an ethics exam that is part of the initial process for becoming a certified public accountant. Separately, hundreds of other employees of the audit firm have been cheated on ethics exams they must take as part of continuing education programs, according to the commission. States usually conduct such exams for accountants to maintain their professional licenses. The Securities and Exchange Commission said EY failed to adequately address the misconduct – which occurred between 2017 and 2021 -.
Some employees told investigators they were cheated because of “work obligations or the inability to pass training exams after several attempts,” according to the SEC’s civil code.
EY admitted in the matter that her behavior was wrong. “Nothing is more important than our integrity and our ethics,” the company said in a statement. “Sharing answers to any assessment or test is a violation of our Code of Conduct and is not tolerated,” she said, and that the company would step up its efforts to enforce ethical compliance.
EY, with more than 300,000 employees, is one of the Big Four accounting firms – along with Deloitte, KPMG and PwC – that audit nearly all of the world’s largest companies.
Regulators began to take a closer look at the affairs of accounting firms about two decades ago. The collapse of Enron in 2001 Highlight the role of its auditor, Arthur Andersen, which helped commit accounting fraud at the energy giant. Later, federal prosecutors filed criminal charges against Arthur Andersen. The company no longer exists.
In the wake of the Enron fraud and other major corporate fraud, Congress passed a law to create the Public Company Accounting Oversight Board, which sits within the Securities and Exchange Commission but takes its own enforcement action against audit firms. In the administrative order against EY, the SEC said some of the company’s behavior violated board rules.
More broadly, one of the SEC’s areas of concern is the issue of auditor independence. Regulators want to ensure that the accounting firm’s review of the company’s financial records is not jeopardized by consulting, advisory or other pressure work it might do for the company.
This led many companies to split their accounting and consulting businesses, especially as the latter became a greater source of revenue for the Big Four. This month , financial times She stated that EY was considering separating its auditing business from its financial advisory business.
Regulators said this was not the first time that cheating on ethics exams by EY employees had become widespread. The SEC said a somewhat similar fraud scandal, which the company handled internally, occurred from 2012 to 2015.
The Securities and Exchange Commission noted that EY has in the past sent warnings to employees about not cheating in exams, but it has not put in place adequate controls until recently. As part of Tuesday’s settlement, EY will hire independent advisors. One will review the company’s policies on ethical actions, and the other will review its failure to properly detect fraud.
It is not unusual for the Securities and Exchange Commission to require a company to appoint an outside advisor to monitor its compliance with the terms of a settlement. But it is rare for regulators to ask for two advisers to be appointed — a sign that the Securities and Exchange Commission has looked into these serious abuses.
The Securities and Exchange Commission said its investigation is ongoing, indicating that it may be considering enforcement action against some individuals.
Mr. Grewal said the settlement “should serve as a clear message that the SEC will not tolerate integrity failures by independent auditors”.
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