Big Four firm Ernst & Young has agreed to pay more than $11.8 million to the Securities and Exchange Commission for failing to detect fraud in its audits of an oil services company.
That company, Weatherford International, agreed to pay $140 million a few weeks ago to settle charges that it used deceptive income tax accounting to inflate earnings. (See “Weatherford to Pay $140 mn for Accounting Fraud.”)
The SEC also charged the EY partner who coordinated the audits, Craig Fronckiewicz, and a former tax partner who was part of the audit engagement team, Sarah Adams. Both agreed to suspensions to settle charges that they disregarded significant red flags during the audits and reviews, according to the commission.
EY had treated the Weatherford audits as high risk, but “repeatedly failed to detect the company’s fraud until it was more than four years ongoing,” according to a statement from the SEC. The commission also reported that audit team knew of post-closing adjustments Weatherford made to lower its year-end provision for income taxes each year, but relied on the company’s unsubstantiated explanations, instead of performing the appropriate audit procedures.
“Audit and national office professionals must appropriately address known deficiencies in their auditing of high-risk areas, and auditors must have the fortitude to refuse to sign off on an audit if important issues remain unresolved,” Andrew Ceresney, director of the SEC’s Division of Enforcement, said in a statement. “Ernst & Young failed to ensure that material post-closing accounting adjustments were justified by appropriate audit evidence, leading to a significant audit failure.”
The firm and the two partners consented to the SEC’s order without admitting or denying the findings that they engaged in improper professional conduct. EY agreed to pay disgorgement of $9 million, prejudgment interest of more than $1.8 million, and a penalty of $1 million. The two partners agreed to be suspended from appearing or practicing before the SEC, including participating in the financial reporting or audits of public companies, though Fronckiewicz may apply for reinstatement after two years, and Adams after one year.
“Audit quality is central to EY and all of our stakeholders," the firm said in a statement. "Since the time of the Weatherford audits, and as referenced in the SEC order, EY has taken significant steps in improving audit quality. Our commitment to audit quality is ongoing, and we are continually reviewing and enhancing our audit procedures, policies and training of our people. We are pleased to put this matter behind us.”