June 29, 2022
SEC Enforcement: EY Sanctioned for Role in CPA Exam Cheating Scandal
There’s a point at which I should no longer be shocked by scandals involving the Big 4. I guess I’m not there yet, because I was really taken aback by the enforcement proceeding against EY that the SEC announced yesterday. This excerpt from the SEC’s press release describes the conduct that led to the proceeding:
EY admits that, over multiple years, a significant number of EY audit professionals cheated on the ethics component of CPA exams and various continuing professional education courses required to maintain CPA licenses, including ones designed to ensure that accountants can properly evaluate whether clients’ financial statements comply with Generally Accepted Accounting Principles.
EY further admits that during the Enforcement Division’s investigation of potential cheating at the firm, EY made a submission conveying to the Division that EY did not have current issues with cheating when, in fact, the firm had been informed of potential cheating on a CPA ethics exam. EY also admits that it did not correct its submission even after it launched an internal investigation into cheating on CPA ethics and other exams and confirmed there had been cheating, and even after its senior lawyers discussed the matter with members of the firm’s senior management. And as the Order finds, EY did not cooperate in the SEC’s investigation regarding its materially misleading submission.
That’s a really ugly set of admissions. Not surprisingly, the sanctions imposed on the firm are no bargain either. In addition to a $100 million civil money penalty – the largest ever imposed by the SEC on an auditor – the SEC’s order imposes a set of sweeping undertakings on the firm.
The undertakings begin by requiring EY to investigate the “sufficiency and adequacy of its quality controls, policies, and procedures relevant to ethics and integrity” and to responding to SEC information requests. It then must report the results of that investigation to the SEC. That report must set forth in writing how the policies and procedures are “designed and implemented in a manner that provides reasonable assurance of compliance with all professional standards” referenced in the order.
The SEC’s order goes on to require EY to retain two independent consultants. The first consultant must conduct an independent review of the policies & procedures that EY is required to investigate and report on to the SEC. The second will work in conjunction with a special review committee comprised of senior EY personnel to conduct a review of the firm’s conduct relating to its response to the SEC’s information request, “including whether any member of EY’s executive team, General Counsel’s Office, compliance staff, or other EY employees contributed to the firm’s failure to correct its misleading submission.” Subject to certain limitations, the order requires EY to adopt the recommendations made by either of the two consultants.
The order also imposes various certification and training requirements and requires the firm to provide a copy of the SEC’s order to all of its public company and broker dealer audit clients. This last requirement seems to me to be the equivalent of requiring EY to lay the order on the table of the audit committees that have retained it. That should make for some interesting conversations.
Check out Commissioner Peirce’s dissenting statement, which provides a less damning perspective on EY’s conduct surrounding the firm’s response to the SEC’s information request, and this WSJ article, which provides additional details & background on the case.
– John Jenkins