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EY Cheating a ‘Wake-Up Call’ as SEC Targets Market Gatekeepers

June 29, 2022, 7:57 PM

Ernst & Young LLP’s $100 million fine for unchecked cheating on ethics tests and other training, coupled with a string of similar cases at other firms, threatens to undermine a profession that sells itself as a trusted protector of the public’s interest, from taxpayers to shareholders.

The latest news means affiliates of three of the Big Four firms have faced discipline after staff was found cheating on professional training programs since 2019. And EY’s record penalty effectively resets the bar for audit enforcement under Gary Gensler’s leadership of the Securities and Exchange Commission, which has repeatedly warned firms about risks that threaten their objectivity and cautioned that repeat violations would carry tougher penalties.

It should be “a wake-up call” that the profession can’t put profits and client deadlines ahead of auditors’ obligations to the public, said Mike Shaub, an accounting professor at Texas A&M University, who teaches ethics and auditing.

“If you’re going to compromise your integrity for an exam,” Shaub said, “why would people believe you wouldn’t compromise your integrity for something that would involve a $10 million fee or a $50 million fee?”

According to the SEC’s order released Tuesday, 49 audit professionals shared or received answers to CPA ethics exams—often required by states in order for accountants to obtain their license. “Hundreds” of other audit staff also cheated on routine professional education—including ethics and financial accounting training—by sharing or receiving answers between 2017 and 2021.

“Sharing answers on any assessment or exam is a violation of our Code of Conduct and is not tolerated at EY. Our response to this unacceptable past behavior has been thorough, extensive, and effective,” EY said in a statement. The firm said it will continue to take disciplinary actions and will provide more training and monitoring to bolster its commitment to ethics and integrity.

Tone at the Top

Francine McKenna, who teaches financial accounting at the Wharton School of Business, sees a “pervasive disregard for the seriousness” of such training and testing among audit firm leaders—and that trickles down to staff. “There is no meaning to it. It’s something you have to get through,” she said.

Such cheating isn’t isolated to EY. In 2019, competitor KPMG LLP agreed to a $50 million penalty for widespread cheating on internal testing as well as relying on stolen plans to boost their annual regulatory inspection.

Since then, PwC Canada and KPMG Australia have settled similar cases with the Public Company Accounting Oversight Board, which is the US audit regulator. Penalties were less than $1 million in both cases.

EY’s chair sent a message to staff in the wake of KPMG’s then record-setting penalty, reminding them that they should not share test answers and that doing so would violate the firm’s code of conduct. Despite the clear warning, 91 audit professionals either used, shared, or asked for answer keys after that message went out, according to the SEC order.

Staff explained that they cheated because they were busy with other work obligations or couldn’t pass the test after multiple attempts, according to the order.

That suggests a more fundamental problem faces audit firms: overworked staff who don’t have enough time to prepare for or take their professional training, said Robert Conway, a retired Big Four audit partner and a former regional inspections director at the PCAOB.

“It’s poor tone at the top if the top guy doesn’t also give the people the resources, and the time, and the tools that they need to succeed,” Conway said. “It’s not enough just to say how important this stuff is. You need to back it up.”

Profits & Consequences

With EY’s hefty fine, the SEC aims to change the Big Four’s culture that has put profits and client deadlines over auditors’ professional obligations to the public, Shaub said. “If you will not assume a duty, the only thing that someone can do to change your behavior is change the consequence.”

It’s the third SEC settlement involving the firm and its professionals in 12 months, and those past violations, coupled with the ethics violations and failure to update the commission as the firm uncovered the cheating, all contributed to the hefty fine, an SEC official said.

Fines historically have been too low to provide any sort of meaningful deterrent, McKenna said.

“It’s not a lot of money,” she said of EY’s record-setting SEC fine. “It’s maybe high for audit firms, but that’s only because the fines for audit firms have been so piddly in the past.”

EY’s latest regulatory action comes as the firm’s global leaders consider a major shakeup that would spin off its consulting services into a separate business worldwide. Consulting-business growth is driving the plans, but the firm faces mounting pressure to avoid conflicts of interest that could weaken its ability to safeguard investors.

A Check on Gatekeepers

SEC officials have warned auditors, lawyers, and other professionals to uphold their roles as gatekeepers. Auditors serve a unique role in the market by ensuring that investors get a reliable picture of a company’s health and performance. They can prevent and detect what could be misleading or inaccurate financial information.

“The last two weeks have shown how serious they are,” said Tom Bednar, a former litigator with the SEC’s enforcement division and now counsel with Cleary Gottlieb Steen & Hamilton LLP, about the SEC’s focus on such gatekeepers. In recent days the SEC announced cases involving audit firm CohnReznick LLP, and charges against a former general counsel of Synchronoss Technologies Inc., he said.

The EY settlement also includes a menu of sanctions, not just financial penalties—in keeping with another pledge from SEC enforcement officials to tap all available remedies when settling cases, noted Junaid Zubairi, chair of the government investigations group at law firm Vedder Price PC.

For EY, those remedies include hiring two independent consultants—one to review the firm’s ethics policies and another to assess the firm’s decision, including the role of its lawyers, not to update the SEC after staff asked about any possible cheating at the firm in 2019.

And the firm’s admission to the core facts of the case is rare in securities actions and is considered another form of sanction, Zubairi said.

Commissioner Hester Peirce, however, questioned the SEC’s logic in punishing EY for not responding to a request for information, suggesting that the firm had no legal obligation to update the regulator on its internal investigation or findings.

“The unduly punitive terms of this settlement and its focus on imperfect compliance with a voluntary staff request for information with a one-day-turnaround detract from the central issue—pervasive cheating by audit firm employees,” Peirce wrote in her dissent.

To contact the reporter on this story: Amanda Iacone in Washington at aiacone@bloombergtax.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergindustry.com; Kathy Larsen at klarsen@bloombergtax.com