Posted on 06/28/2022 8:34:14 AM PDT by BenLurkin
Ernst & Young, one of the top accounting firms in the world, is being fined $100 million by federal regulators after admitting its employees cheated on their ethics exams.
For years, the firm's auditors had cheated to pass key exams that are needed for certified public accountant licenses, the Securities and Exchange Commission found. Ernst & Young also had internal reports about the cheating but didn't disclose the wrongdoing to regulators during the investigation.
"It's simply outrageous that the very professionals responsible for catching cheating by clients cheated on ethics exams of all things," Gurbir S. Grewal, director of the SEC's Enforcement Division, said in a release.
The fine is the largest penalty ever imposed by the SEC on an audit firm.
The CPA, or certified public accountant, licenses are needed by auditors to evaluate the financial statements of companies and ensure they are complying with laws.
However, the SEC says that a "significant number" of Ernst & Young audit professionals specifically cheated on the ethics component of the CPA exams that were required for their accounting jobs.
Audit firms serve a critical gatekeeping role in the financial markets and it is their jobs to ensure integrity of the financial reporting done by companies. It's why the independence and integrity of these firms are paramount.
Because it's their job to hold others accountable, Ernst & Young — one of the "big four" accounting firms — says it holds itself to a high standard of ethics. In fact, the firm's entire global code of conduct is based on an "ethical" framework.
"At EY, nothing is more important than our integrity and our ethics. These core values are at the forefront of everything we do," Brendan Mullin, a spokesperson for Ernst & Young, said in an email to NPR. "Our response to this unacceptable past behavior has been thorough, extensive, and effective."
Many of the employees interviewed during the federal investigation said they knew cheating was a violation of the company's code of conduct but did it anyway because of work commitments or the fact that they couldn't pass training exams after multiple tries.
The SEC said that the cheating went on for many years, going back to 2012. Following the discovery of an earlier cheating scheme, the firm took disciplinary actions and repeatedly warned its audit professionals not to cheat on exams. Still, the cheating continued.
Along with paying the $100 million fine, Ernst & Young has to audit itself and report the findings to the SEC, including an assessment of its ethics and integrity training. It'll also be reviewed by independent consultants that the firm will have to pay for.
The cheating scandal comes just a couple of weeks after the Financial Times reported that Ernst & Young is planning to split its auditing and consulting arms, a huge shakeup in the accounting world that would award its partners up to $8 million in shares each.
In Florida, the ethics exam is part of the application (or renewal process) for a CPA license.
Ethics exam is based on state law; one must show a knowledge of the rules. Until one passes the requisite ethics exam they will not be allowed to even take the CPA exam.
Also, an ethics course must be completed every two years as part of the 80 hours continuing education requirement.
EIGHTY Hours! I know of no other licensed profession that has such a high burden of hours for license renewal (aviation licenses, anyone?).
Thanks.
Incredible.
Continuing education is a racket. When I was self employed, I never had the money to attend “conferences”. I could do 80 “hours” of online CPE in less than 10.
Ernst & Young Agrees to Pay $99 Million in Lehman Settlement
Auditor Was Sued Over Investment Bank’s ‘Repo 105’ Transactions
By Michael Rapoport
Updated Oct. 18, 2013 4:57 pm ET
Ernst & Young LLP has agreed to pay $99 million to settle investor class-action allegations that it turned a blind eye when its audit client Lehman Brothers Holdings Inc. misled investors before the investment bank’s 2008 collapse. . .
* * *
https://elischolar.library.yale.edu/journal-of-financial-crises/vol1/iss1/5/
The Lehman Brothers Bankruptcy D: The Role of Ernst & Young
Abstract
For many years prior to its demise, Lehman Brothers employed Ernst & Young (EY) as the firm’s independent auditors to review its financial statements and express an opinion as to whether they fairly represented the company’s financial position. EY was supposed to try to detect fraud, determine whether a matter should be publicly disclosed, and communicate certain issues to Lehman’s Board audit committee. After Lehman filed for bankruptcy, it was discovered that the firm had employed questionable accounting with regard to an unorthodox financing transaction, Repo 105, which it used to make its results appear better than they were. EY was aware of Lehman’s use of Repo 105, and its failure to disclose its use. EY also knew that Lehman included in its liquidity pool assets that were impaired. When questioned, EY insisted that it had done nothing wrong. However, Anton R. Valukas, the Lehman bankruptcy examiner, concluded that EY had not fulfilled its duties and that probable claims existed against EY for malpractice. In this case, participants will consider the role and effectiveness of independent auditors in ensuring complete and accurate financial statements and related public disclosure.
Does it have to dismiss—and refer for any appropriate prosecution—its cheating staffers (presumably including, by now, some partners)?
How about its liability to all its clients for having fraudulently presented its work and credentials? Many years of refunds from the firm all around?
Believe it or not those were the same scores I had.
I didn't realize it at the time, but my professor's style of teaching was structured for the best success on the CPA exam, when essay questions dominated the test.
Like I said before, I didn't take the CPA until I was 37, after military service and other jobs. Kids came along, and accounting provided a steadier paycheck.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.