PCAOB Gives EY a Partial Fail on 2018 Remediation
On October 17, the PCAOB made public a portion of the previously nonpublic section of Ernst & Young’s 2018 inspection report. This action indicates that, in the Board’s view, the firm did not satisfactorily address the quality control issue discussed in that portion of the inspection report within 12 months of the report date. Criticisms of a firm’s quality control system are discussed in Part II of the firm’s inspection report. Under the Sarbanes-Oxley Act, Part II is nonpublic when the report is issued. If the firm does not satisfactorily address the quality control criticism within 12 months, the Board makes the criticism public.
The now-public PCAOB criticism in EY’s 2018 report relates to EY’s policies and procedures with respect to independence. In 2018, EY conducted a sampling review of compliance with its internal requirement that firm personnel report certain financial relationships to the firm. The review found that 33 percent of partners and 46 percent of managers in the sample had not reported financial relationships that they were required to report. The PCAOB’s inspection report states: “These high rates of non-compliance with the firm’s policies, which are designed to provide compliance with applicable independence regulatory requirements, provide cause for concern, especially considering that these individuals are required to certify on a quarterly basis that they have complied with the firm’s independence policies and procedures.” The 2018 EY inspection report is dated April 28, 2020. Therefore, release of this portion of the inspection report indicates that EY failed to persuade the PCAOB that, as of April 28, 2021, it had satisfactorily remediated this quality control deficiency.
Disclosure of a portion of Part II of a major firm’s inspection report is unusual, but not unprecedented. The Board has taken such action at least once with respect to each of the Big Four firms.