Wall Street firm fined $100 million for cheating on ethics tests

Hundreds of auditors at accounting giant Ernst & Young (EY) cheated on ethics tests they were required to take to get or maintain their professional licenses, and the company withheld evidence of the misconduct from federal authorities investigating the matter, according to the Securities and Exchange Commission.

While the SEC is imposing a $100 million fine on the company, the largest ever on an audit firm by the agency announced Tuesday but one New Jersey Democrat said the pubishment is not enough.

“The SEC fined a $40 billion company only a quarter of one percent of its revenue for cheating by its audit professionals on exams required to obtain and maintain CPA licenses, and for covering up this misconduct by withholding evidence from investigators,” said Lisa McCormick, who reiterated her call for a corporate death penalty.

“This action involves breaches of trust by gatekeepers within the gatekeeper entrusted to audit many of our nation’s public companies,” Gurbir Grewal, SEC enforcement director, said in a statement. “It’s simply outrageous that the very professionals responsible for catching cheating by clients cheated on ethics exams of all things.”

In a statement, Ernst & Young admitted to the SEC’s charges and said it is complying with the agency’s penalty.

“We have repeatedly and consistently taken steps to reinforce our culture of compliance, ethics, and integrity in the past,” Suzanne Bouhia, a company spokeswoman, said in an email. “We will continue to take extensive actions, including disciplinary steps, training, monitoring and communications that will further strengthen our commitment in the future.”

The agency found that beginning in 2017, 49 Ernst & Young professionals shared or received answers to ethics exams they needed to pass to get licensed as certified public accountants. Hundreds more cheated on courses they needed to take to maintain their standing with state oversight boards, while others who didn’t participate themselves helped facilitate the behavior, the SEC said.

The firm’s leaders then covered up the activity, failing to report it to the SEC after the agency asked Ernst & Young about complaints it had received and the company launched an internal investigation that confirmed the misconduct, according to the SEC. The record-breaking fine — twice the $50 million tab that rival KPMG paid the agency in 2019 over its cheating scandal — in part reflects the gravity of the firm’s decision not to cooperate with the investigation, an SEC official told reporters.

“I am once again astounded by the injustice of America’s securities fraud system,” said McCormick. “Judicial dissolution, or the corporate death penalty, a legal procedure in which a corporation is forced to dissolve or cease to exist, is a more appropriate penalty for serious white-collar crimes.”

“The Securities and Exchange Commission recently charged a nationally recognized statistical rating organization with violating conflict of interest provisions, charged a registered broker-dealer with selling $13.3 million worth of high-risk bonds to retirees, and charged an investment advisory firm with unlawfully purchasing stock in seven public offerings after selling short those same stocks,” said McCormick. “But every one of the crooked companies will go to work making money on the trust of unaware consumers because we do not have a corporate death penalty.”

Grewal also said, “And it’s equally shocking that Ernst & Young hindered our investigation of this misconduct. 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 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 employees contributed to the firm’s failure to correct its misleading submission.

“The SEC will not permit the submission of misleading information or any action that delays or frustrates our mandate to protect investors and our markets,” said Melissa R. Hodgman, associate director of the SEC’s Enforcement Division. “Ernst & Young faces significant sanctions and extensive remediation to ensure that its culture and conduct meet the ethical standards required of those responsible for the integrity of our capital markets.”

The Order finds that EY violated a Public Company Accounting Oversight Board (PCAOB) rule requiring the firm to maintain integrity in the performance of a professional service, committed acts discreditable to the accounting profession, and failed to maintain an appropriate system of quality control.

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