SEC Hits EY, Four Others for Rules Violations

The Securities and Exchange Commission (SEC) this week charged accounting firm Ernst & Young LLP (EY) along with one current and two former partners with improper professional conduct for violating auditor independence rules in connection with EY’s pursuit to serve as the independent auditor for a public company with nearly $5 billion in revenue (the company was not named). The SEC also brought separate charges against the public company’s then-chief accounting officer for his role. The parties have all agreed to settle the charges and will pay more than $10 million in combined penalties.

The SEC found EY, EY partner James Herring, CPA, and former EY partners, James Young, CPA and Curt Fochtmann, CPA improperly interfered with the public company’s selection of an independent auditor by soliciting and receiving confidential competitive intelligence and confidential audit committee information from the company’s then-chief accounting officer, William Stiehl, during the RFP process.

“EY’s misconduct in connection with the audit pursuit, the order finds, would cause a reasonable investor to conclude that EY and its partners were incapable of exercising objectivity and impartiality once the audit engagement began,” the SEC said in a statement.

The SEC found Stiehl’s misconduct during the reporting process, which included withholding key information from the company’s audit committee, caused the reporting violations.

“Auditor independence is not merely an obstacle to overcome, it is the bedrock foundation that supports the integrity, transparency, and reliability of financial reporting,” said Charles Cain, chief of the SEC Enforcement Division’s FCPA Unit. “Auditor independence requires auditors to analyze all of the relevant facts and circumstances from the perspective of the reasonable investor. EY and its partners lost sight of this fundamental principle in their pursuit of a new client. This action further underscores that auditors must apply heightened scrutiny when making independence determinations.”

The SEC found EY, Herring, Young, and Fochtmann violated the auditor independence provisions of the federal securities laws and EY, Herring, and Young caused the company to violate its obligation to have its financial statements audited by independent public accountants. The order also found all respondents engaged in improper professional conduct within the meaning of Rule 102(e) of the SEC’s Rules of Practice.

EY, Herring, Young, and Fochtmann consented to the SEC’s order without admitting or denying the findings and agreed to cease and desist from future violations. EY has agreed to a censure, a civil money penalty of $10 million, and to comply with a detailed set of undertakings for a period of two years. Herring, Young, and Fochtmann agreed to pay civil money penalties of $50,000, $25,000, and $15,000, respectively, and to be suspended from appearing or practicing before the SEC, with a right to reapply for reinstatement after three, two, and one years, respectively.

The SEC found Stiehl caused and willfully aided and abetted the company’s reporting obligations stemming from the auditor selection process improprieties. Stiehl, who consented to the order without admitting or denying the findings, has agreed to cease and desist from future violations of the securities laws, to pay a civil money penalty of $51,000, and to be suspended from appearing or practicing before the SEC, with a right to reapply for reinstatement after two years.

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