An investigation by the U.S. Securities and Exchange Commission found that hundreds of Ernst & Young auditors had cheated on various ethics exams to obtain or maintain their professional licenses and that the firm did not do nearly enough to stop the practice. The firm has agreed to pay a $100 million fine.
To date, the Securities and Exchange Commission has imposed the largest fine on an auditing firm, which holds a unique position of moral authority in the financial world. They are responsible for verifying the accuracy of companies’ financial statements and warning investors if they detect dubious accounting techniques.
The big auditing firm, also known as EY, was accused by regulators of misleading investigators, withholding evidence, and violating public accounting rules intended to preserve the profession’s integrity.
When the commission announced a settlement agreement, Gurbir S. Grewal, director of enforcement, said, “It is simply outrageous that the very professionals who are responsible for catching cheating by clients cheated on ethics exams of all things.”
KPMG, another major auditing firm, was fined in 2019 for similar allegations of cheating by auditors on internal training exams, but this penalty is twice as much. Additionally, securities regulators sent EY a formal request this summer seeking information about any complaints EY had received regarding employees cheating on exams.
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It was revealed on Tuesday by the SEC that, despite receiving an internal tip about employees cheating on certain ethics exams, EY did not initially disclose it to authorities. After a thorough investigation, regulators and EY officials discovered that there was a much larger cheating problem.
SEC records show that 49 EY auditors received the “answer key” to an ethics exam that is part of the initial process of becoming a CPA. An auditing firm’s ethics exams were allegedly cheated on by hundreds of other employees, according to the Commission on Continuing Professional Education. Accountants’ professional licenses are typically up for renewal through state-mandated exams of this nature. The Securities and Exchange Commission (S.E.C.) said EY did not adequately address the misconduct that occurred between 2017 and 2021.
“Work commitments or an inability to pass training exams after multiple attempts” were among the reasons given by some employees to investigators, according to the S.E.C’s civil order obtained by NBC News.
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EY admitted that its actions were wrong in the order they were taken. In a statement, the company said, “Nothing is more important than our integrity and ethics.” Code of Conduct violations will not be tolerated, and the firm will step up efforts to enforce compliance with ethical rules, according to the statement.
Along with Deloitte, KPMG, and PwC, EY is one of the so-called “Big Four” accounting firms that audits the accounts of nearly all of the world’s largest companies regularly.
Accounting firms have been the focus of regulatory scrutiny for the better part of two decades. In the wake of Enron’s demise in 2001, the role of Arthur Andersen, Enron’s auditor, was brought to light. Arthur Andersen was later indicted by federal prosecutors. The company has ceased to exist.
Enron and other major corporate frauds led Congress to pass legislation creating the Public Company Accounting Oversight Board, which is housed within the SEC but takes its enforcement actions against audit companies. The S.E.C. stated in its administrative order against EY that the board’s rules had been violated in some instances by the firm’s conduct.
The SEC is also concerned about auditor independence on a broader scale. Financial records audited by an accounting firm should not be compromised by other consulting, advisory, or lobbying work the firm does for it, according to regulators.
The Financial Times reported this month that EY was thinking about separating its audit and financial advisory operations into two separate entities.
EY employees have been caught cheating on ethics exams before, according to regulators. According to the SEC, a similar internal cheating scandal occurred between 2012 and 2015.
According to the Securities and Exchange Commission, EY had previously sent out warnings to its employees about not cheating on exams, but only recently put in place adequate controls to prevent this from happening. On Tuesday, EY agreed to hire two independent consultants as part of a settlement agreement. One will look at the company’s ethics policies, and the other will look at the company’s failure to properly disclose the cheating.
An outside consultant may be required by the SEC to ensure that a company adheres to the settlement terms. These violations were serious enough to warrant a second consultant’s appointment by the Securities and Exchange Commission (S.E.C.), which is unusual for regulators to do.
According to the Securities and Exchange Commission (SEC), its investigation is ongoing, which indicates that some individuals may be subject to enforcement actions.
SEC will not tolerate integrity failures by independent auditors is Mr. Grewal’s takeaway from the settlement.