• Daniel Goelzer

EY Fined $100 Million for Ethics Exam Cheating

The SEC has charged Ernst & Young with violations of SEC and PCAOB rules requiring auditors that practice before the Commission to “maintain integrity,” adhere to professional ethics standards, and monitor the effectiveness of professional development activities. The Commission’s order is based on allegations that EY personnel shared answer keys to the ethics component of the CPA exam and other examinations required to maintain their CPA licenses. The Commission also charged that EY withheld information concerning this misconduct from the SEC staff during an investigation of potential cheating. Without admitting or denying the SEC’s allegations, EY consented to a penalty of $100 million and to remedial measures to address the underlying ethics issues. In announcing the settlement, SEC Director of Enforcement Gurbir Grewal stated, “This action involves breaches of trust by gatekeepers within the gatekeeper entrusted to audit many of our Nation’s public companies. It’s simply outrageous that the very professionals responsible for catching cheating by clients cheated on ethics exams of all things.”

This is the fourth case that U.S. regulators have brought alleging audit firm personnel wrongdoing in connection with training examinations. In 2019, KPMG consented to an SEC order and $50 million penalty based on (among other things) allegations that its audit professionals had shared answers and manipulated results in connection with internal training examinations. The PCAOB has brought similar cases against PwC Canada and KPMG Australia. While actions of this nature do not relate directly to the performance of audits, as part of the annual evaluation of its audit firm, the audit committee should review any SEC, PCAOB, or other disciplinary actions against its auditor and discuss with the engagement partner how the firm is addressing the violations and whether the issues raised by the regulatory authorities could have affected the company’s audit.

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