To resolve allegations that dozens of its employees had cheated on an ethics exam and that it had misled investigators, Big Four auditing firm EY has reached a record-breaking $100 million settlement with the US Securities regulator.
The penalty, which is double the amount KPMG was forced to pay in 2019 for exam-cheating and illegal tip-offs, is the highest the US Securities and Exchange Commission has ever imposed on an auditor.
Gurbir Grewal, head of the SEC's enforcement division, said in a statement that "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."
An SEC representative stated that the regulator could also file cases against specific people while the investigation is still ongoing.
According to the SEC order, hundreds more EY employees cheated on tests necessary to keep their certification between 2017 and 2021, including 49 employees who sent or received ethics exam answer keys. According to the agency, a "significant" portion of employees neglected to file reports of the violations.
EY acknowledged the SEC's conclusions and declared that it was observing the order. Its response to “this unacceptable past behaviour has been thorough, extensive, and effective”, the auditor said, adding that it would continue taking steps including disciplinary action and training to “strengthen” commitments to “compliance, ethics, and integrity”.
The unheard-of fine comes as EY considers global plans to split its audit and advisory practices, releasing consultants from future regulatory fines and legal awards for wrongdoing or negligence on the part of the company's auditors.
The announcement of the fine came during a week of turmoil at EY. On Thursday, US CEO Kelly Grier, who left the company following a power struggle with its global CEO Carmine Di Sibio, is expected to do so. Julie Boland, who triumphed in a partner election in February, will take her place.
According to the SEC order, EY formally denied any problems with its own employees cheating on exams shortly after the KPMG case in 2019. However, despite receiving a tip the day before that an employee had shared answers to a CPA ethics exam, launching an internal investigation, confirming instances of cheating, and discussing the issue with senior management and attorneys, EY did not change its SEC submission.
According to an SEC official, EY did not communicate with the SEC or the Public Company Accounting Oversight Board for nearly nine months, which contributed to the regulator's decision to seek a record fine.
After the US chair and managing partner sent a note to US staff in 2019 warning against cheating in light of the KPMG case, 91 EY employees are said to have requested, used, or shared answers with coworkers, according to the SEC order.
Grewal called it "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."
The SEC will also assign two impartial consultants to EY in addition to the fine. As they examine EY's submissions to regulators, one will examine policy on ethics and integrity while the other will have access to privileged information that has not been made available to the SEC as well as the authority to enact employment actions and other remedies.
The order issued on Tuesday is EY's most recent run-in with the law. Since 2014, the SEC has brought five lawsuits against the auditor.
Additionally, it is the most recent in a string of penalties imposed on Big Four companies for lying during SEC audit inspections or cheating on exams. The country's accounting watchdog censured and fined the former US head of audit of KPMG $100,000 earlier this year for failing to oversee colleagues who had been informed in advance about audits the regulator intended to investigate.
By fLEXI tEAM