The Securities and Exchange Commission recently charged Ernst & Young LLP for ethics lapses involving audit professionals cheating on their ethics exams, which are required for acquiring and maintaining a CPA license. The company then covered up the lapse by withholding evidence of the misconduct during the SEC’s investigation into the matter, which was brought to their attention by an internal whistleblower in 2019. In paying the penalty, the largest ever imposed on an audit firm, E&Y admitted to the SEC underlying charges.
Moreover, the company will take remedial measures to fix the firm’s ethical issues. This will involve two compliance reviews conducted by outside auditors. One review will focus on new policies for encouraging integrity and ethical behavior. The second will delve into the E&Y lawyers’ and managers’ responses to the SEC’s initial 2019 inquiry about the reports of cheating. The latter will examine their response in creating and failing to correct the misleading submission and coverup. These audits will be confidential and not shared with the SEC.
“This action involves breaches of trust by gatekeepers within the gatekeeper entrusted to audit many of our nation’s public companies,” said Gurbir S. Grewal, Director of the SEC’s Enforcement Division, in the SEC’s statement about the matter. “It’s simply outrageous that the very professionals responsible for catching cheating by clients cheated on ethics exams of all things. “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.”
An initial internal investigation recognized that the cheating involved more than a single department or small group of individuals in a single office. Rather than come forward to the SEC with this information, the company claims it wanted to handle the matter internally but then tried to cover it up because of the scope of the problem – an estimated 91 employees shared answer keys with colleagues, requested the answers, or used ethics test answers.
The SEC has levied other large fines recently, including $186 million from Charles Schwab in June 2022 and $200 million last December from JPMorgan Chase. This E&Y action follows KPMG’s $50 million fine in 2019 as the latest blemish on the so-called “Big Four” accounting firms responsible for overseeing publicly-traded companies’ financial statements.
