The Securities and Exchange Commission charged Ernst & Young LLP (EY) for cheating by its audit professionals on exams required to obtain and maintain Certified Public Accountant (CPA) licenses, and for withholding evidence of this misconduct from the SEC’s Enforcement Division during the Division’s investigation of the matter. EY admits the facts underlying the SEC’s charges and agrees to pay a $100 million penalty and undertake extensive remedial measures to fix the firm’s ethical issues.
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.
In addition to paying a $100 million penalty, the Order requires EY to engage in extensive undertakings, including retaining two separate independent consultants to help remediate its deficiencies. One consultant will review the firm’s policies and procedures relating to ethics and integrity. The other will review EY’s conduct regarding its disclosure failures, including whether any EY employees contributed to the firm’s failure to correct its misleading submission.
The Order https://www.sec.gov/litigation/admin/2022/34-95167.pdf finds that EY violated a Public Company Accounting Oversight Board (PCAOB) rule requiring the firm to maintain integrity in the performance of professional service, committed acts discreditable to the accounting profession, and failed to maintain an appropriate system of quality control. EY has admitted the facts underlying these findings and acknowledged that its conduct violated the integrity standard and provides a basis for the SEC to impose remedies against the firm pursuant to Sections 4C(a)(2) and (a)(3) of the Exchange Act and Rules 102(e)(1)(ii) and (iii) of the Commission’s Rules of Practice.
One section of the Order emphasizes the failure of EY to act with integrity;
. “This case involves Ernst & Young’s failures to act with the integrity required of a
public company auditor. Over multiple years, a significant number of EY audit professionals
cheated on the ethics component of the Certified Public Accountant (CPA) exam, as well as on a
variety of other examinations required to maintain their CPA licenses. As this was ongoing, EY
withheld this misconduct from SEC staff conducting an investigation of potential cheating at the
firm. EY audit professionals’ repeated cheating on exams and the firm’s misrepresentations to the
SEC violated ethics and integrity standards and discredited the accounting profession“
In another paragraph, the SEC noted that this is not the first time the EY employees cheated:
“This sharing of answer keys is not the first time in recent years that a large number
of EY audit professionals cheated on exams. From 2012 to 2015, over 200 EY audit professionals
across the country exploited a software flaw in EY’s CPE testing platform to pass exams while
answering only a low percentage of questions correctly. Following EY’s discovery of that earlier
cheating scheme, the firm took disciplinary actions and repeatedly warned its audit professionals
not to cheat on exams. Still, the cheating continued.“
The Order also noted that 91 EY audit professionals requested, used or shared the test answer keys;
“Notably, 91 audit professionals requested, used, or shared answer keys with
colleagues after EY’s U.S. Chair and Managing Partner sent the message highlighting the SEC
enforcement action against the other large audit firm, yet again reminding personnel not to cheat,
and yet again discussing the importance of integrity.”
JEFFREY NEWMAN, A FORMER PROSECUTOR IS A WHISTLEBLOWER LAWYER WITH THE FIRM NEWMAN & SHAPIRO AND HANDLES MAJOR SEC WHISTLEBLOWER CASES AS WELL AS FALSE CLAIMS ACT CASES. HE CAN BE REACHED AT 617-823-3217 OR AT JNEWMAN@NEWMNSHAPIRO.COM