EY pays $9.3m to settle charges that former auditors got ‘too close’ to clients on a personal level
Accounting firm Ernst & Young (EY) is to pay out $9.3m (£7.1m) to settle charges that two of its former auditors got "too close to clients on a personal level", according to the US Securities and Exchange Commission (SEC).
The SEC said the ex-auditors broke rules aimed at ensuring reviews were impartial.
SEC investigations found that the senior partner on an engagement team for the audit of a New York-based public company maintained an "improperly close friendship" with its chief financial officer, and a different partner serving on an engagement team for the audit of another public company was romantically involved with its chief accounting officer. The SEC said EY misrepresented in audit reports issued with the companies’ financial statements that it maintained its independence throughout these audits.
Read more: The seven key qualities of accountants of the future
“These are the first SEC enforcement actions for auditor independence failures due to close personal relationships between auditors and client personnel,” said Andrew J. Ceresney, director of the SEC’s division of enforcement.
“Ernst & Young did not do enough to detect or prevent these partners from getting too close to their clients and compromising their roles as independent auditors.”
EY said today: “Auditor independence is of paramount importance to EY. It is fundamental to our work and a source of confidence for our stakeholders. Each of us at EY is continuously trained and tested on auditor independence standards and we have a rigorous system of quality controls to monitor and detect violations.
"The individuals at the center of these matters violated multiple EY policies, hid their conduct and behaved in a way that was antithetical to EY’s global code of conduct, culture, values, policies, and training. The decisions they made betrayed the trust placed in them. All have been separated from our organisation."
We regret these matters arose and are pleased to put them behind us.
The SEC found that Gregory S. Bednar caused auditor independence rule violations at EY from January 2012 to March 2015. Bednar was tasked by EY to improve its relationship with the New York-based audit client because it was a “troubled account".
He and the company’s CFO stayed overnight at each other’s homes on multiple occasions and traveled together with family members on overnight trips with no valid business purpose, and they exchanged hundreds of personal text messages, emails, and voicemails during the auditing periods. Bednar also became friends with the CFO’s son and often treated them to sporting events and other gifts.
Certain EY partners became aware of Bednar’s excessive entertainment spending but took no action to confirm that Bednar was complying with his independence obligations, the SEC said.
Read more: 714 new partners worldwide for Big Four firm EY
Pamela Hartford was also found to have committed auditor independence rule violations at EY, from March 2012 to June 2014, during which time she maintained a romantic relationship with financial executive Robert Brehl while she served on the engagement team auditing his company.
Meanwhile another Ernst & Young partner named Michael Kamienski, who supervised Hartford on the audit, became aware of facts suggesting the improper relationship yet failed to perform a reasonable inquiry or raise concerns internally to EY's US independence group.
Bednar, Hartford and Kamienski all no longer work for the firm.