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Ernst & Young fined $100 million after auditors cheated on ethics audits

Ernst & Young fined $100 million after auditors cheated on ethics audits
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Ernst & Young, one of the world’s largest accounting firms, has agreed to pay a $100 million fine after U.S. securities regulators found hundreds of their accountants cheated on ethics exams they were required to take to obtain professional licenses — and did so the company did not do enough to end the practice.

The penalty announced Tuesday is the highest ever imposed by the Securities and Exchange Commission on a firm in the accounting business, which has a unique ethical standing in the financial world. These firms are responsible for verifying the accuracy of companies’ financial statements and warning investors if they discover dubious accounting practices.

A civil administrative order filed by regulators said the big accounting firm — also known as EY — misled investigators, withheld evidence and violated public accounting rules designed to protect the integrity of the profession.

“It’s just outrageous that the very professionals responsible for detecting fraud by customers cheated in ethics reviews of all things,” said Gurbir S. Grewal, the commission’s director of enforcement, in announcing the settlement.

The penalty is twice as much as KPMGanother major accounting firm, paid in 2019 to complete an investigation into similar allegations of fraud by auditors in internal training audits.

49 auditors at EY were given the “answer key” to an ethics review, part of the initial process to become a certified public accountant, according to the SEC official order. In some cases, employees exchanged answer keys even after the SEC issued its fine on KPMG.

Hundreds of others at the accounting firm have cheated on ethics reviews, which are part of the continuing education programs offered by most states for accountants to retain their professional licenses, the commission said.

Some employees told investigators they cheated because of “work commitments or an inability to pass training exams after multiple attempts,” the order said.

EY admitted in the order that their behavior was wrong. “Nothing is more important than our integrity and our ethics,” the company said in a statement. It states that “sharing responses to an assessment or exam is a violation of our Code of Conduct and will not be tolerated” and that the firm will increase efforts to enforce ethical compliance.

With over 300,000 employees, EY is one of the so-called Big Four auditing firms alongside Deloitte, KPMG and PwC, auditing the financial statements of almost all of the world’s largest companies.

Regulators began scrutinizing the affairs of accounting firms about two decades ago. The collapse of Enron in 2001 highlighted the role of his accountant, Arthur Andersenwho helped in the energy giant’s accounting fraud. Federal prosecutors later filed criminal charges against Arthur Andersen. The company no longer exists.

After Enron and other major corporate scams, Congress passed legislation establishing the Public Company Accounting Oversight Board, which sits within the SEC but has its own enforcement actions against accounting firms. In the administrative order against EY, the SEC said some of the company’s conduct violated board rules.

More broadly, one area of ​​concern to the SEC is the issue of auditor independence. Regulators want to ensure that an accounting firm’s review of a company’s financial records is not interfered with by other advisory, consulting, or lobbying work that it may perform on behalf of the company.

This has led many companies to split their accounting and consulting businesses, especially as the latter has become a major source of revenue for the Big Four. This month is the financial times reported that EY is considering separating its auditing business from its financial advisory business.

Regulators said this is not the first case of widespread ethics review fraud by EY employees. The SEC said a similar fraud scandal, which the company handled internally, took place from 2012 to 2015.

In the decision, the commission found that EY had warned employees not to cheat on exams in the past, but had failed to put adequate controls in place until recently. As part of the settlement, EY will hire two independent advisors. One will review the company’s ethics procedures policy and the other will review its failure to properly disclose the fraud.

It is not uncommon for the SEC to require a company to appoint an outside consultant to monitor compliance with the terms of a settlement. But it’s rare for regulators to require the appointment of two advisors — an indication of the seriousness of the SEC’s assessment of EY’s violations.

The SEC said its investigation is continuing, suggesting it may consider taking enforcement action against some individuals.

Mister. Grewal said the settlement “should serve as a clear message that the SEC will not tolerate flaws in integrity by independent auditors.”

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