Big Four auditing firm EY has agreed to a record $100mn settlement with the US securities regulator to resolve claims that dozens of its employees cheated on an ethics exam and that it misled investigators.
The fine is the highest ever imposed by the US Securities and Exchange Commission on an auditor, twice the penalty paid by KPMG in 2019 for exam cheating and illegal tip-offs.
“This action involves breaches of trust by gatekeepers within the gatekeeper entrusted to audit many of our nation’s public companies,” said Gurbir Grewal, director of the SEC’s enforcement division, in a statement. “It’s simply outrageous that the very professionals responsible for catching cheating by clients cheated on ethics exams of all things.”
The investigation is ongoing, and an SEC official said the regulator could also bring cases against individuals.
Between 2017 and 2021, 49 EY staff sent or received answer keys to the ethics portion of the Certified Public Accountant exam, with hundreds more cheating on tests required to maintain the certification, according to the SEC order. A “significant” number of employees also failed to report the violations, the agency said.
EY acknowledged the SEC’s findings and said it was complying with the order. Its response to “this unacceptable past behaviour has been thorough, extensive, and effective,” the auditor said, adding it would continue taking steps including disciplinary action and training to “strengthen” commitments to “compliance, ethics, and integrity”.
The unprecedented penalty comes as EY weighs plans to split its audit and advisory practices globally, a move that would liberate consultants from liability for future regulatory fines and legal awards for misconduct or negligence by the firm’s auditors.
The fine was announced during a week of upheaval at EY. US boss Kelly Grier, who said she would quit the company after a power struggle with its global chief Carmine Di Sibio, is due to step down on Thursday. She will be replaced by Julie Boland, who won a partner election in February.
Shortly after the KPMG case in 2019, EY formally denied any issues with its own employees cheating on exams, according to the SEC order. On the previous day, however, EY received a tip that an employee had shared answers to a CPA ethics exam, but it did not modify its SEC submission even after launching an internal investigation, confirming instances of cheating and discussing the matter among senior management and lawyers.
EY said nothing to the SEC or the Public Company Accounting Oversight Board for nearly nine months, according to an SEC official, which was a contributing factor to the regulator’s decision to seek a record penalty.
According to the SEC order, 91 EY employees requested, used or shared answers with colleagues after the US chair and managing partner in 2019 sent a note to US staff warning against cheating in light of the KPMG case.
It is “shocking that Ernst & Young hindered our investigation of this misconduct,” Grewal said. “This action should serve as a clear message that the SEC will not tolerate integrity failures by independent auditors who choose the easier wrong over the harder right.”
In addition to the fine, the SEC will install two independent consultants at EY. One will review policy on ethics and integrity, while the other will have access to privileged information that has not been available to the SEC, as well as powers to enforce employment actions and other remedies, as they probe EY’s submissions to regulators.
The order handed down on Tuesday is EY’s latest regulatory run-in. The SEC has filed five cases against the auditor since 2014.
It is also the latest in a series of fines levied against Big Four firms for cheating on exams or in SEC audit inspections. Earlier this year, KPMG’s former US head of audit was fined $100,000 and censured by the country’s accounting watchdog for failing to supervise colleagues who received advance warning on audits the regulator planned to scrutinise.