Ernst & Young agreed to pay $9.3 million to settle charges with the Securities and Exchange Commission that two EY audit partners became too close to audit clients, including one who had a romantic relationship with the client.
The firm and partners violated rules that ensure auditing firms maintain their objectivity and impartiality, according to the SEC. SEC investigators found the senior partner on an engagement team auditing a New York-based public company struck up an improperly close friendship with the company’s CFO. A different partner serving on an engagement team for the audit of another public company was romantically involved with its chief accounting officer. EY thus misrepresented in audit reports issued with the companies’ financial statements that it maintained its independence throughout these audits, according to the SEC.
The SEC found that then-partner Pamela Hartford violated auditor independence rules at EY from March 2012 to June 2014 by having a romantic relationship with financial executive Robert Brehl, the chief accounting officer of a public company, while she served on the engagement team auditing his company. Another EY partner, Michael Kamienski, who supervised Hartford on the audit, became aware of facts suggesting the improper relationship, but failed to perform a reasonable inquiry or raise concerns internally to Ernst & Young’s U.S. independence group.
“Their relationship was marked by a high level of personal intimacy, affection and friendship, near daily communications about personal and romantic matters (as well as work-related matters), and the occasional exchange of gifts of minimal value on holidays such as Valentine’s Day and birthdays,” said the SEC. “Hartford and Brehl lived in different cities, but they saw each other in person when performing work duties in their home towns, at industry conferences, and at entertainment events sponsored by either the Issuer or EY.”
Another EY partner, Gregory S. Bednar, violated auditor independence rules at the firm from January 2012 to March 2015. He was specifically tasked by the firm to improve its relationship with a New York-based audit client because it was a “troubled account.” Bednar and the company’s CFO stayed overnight at each other’s homes on several occasions and traveled together with their family members on overnight trips that had no valid business purpose. They also exchanged hundreds of personal text messages, emails, and voicemails with one another during the auditing periods.
Bednar also became friends with the CFO’s son and frequently treated him to sports events and other gifts. Some EY partners became aware of Bednar’s excessive entertainment spending but took no action to confirm Bednar was complying with his independence obligations.
“These are the first SEC enforcement actions for auditor independence failures due to close personal relationships between auditors and client personnel,” said SEC Division of Enforcement director Andrew J. Ceresney in a statement. “Ernst & Young did not do enough to detect or prevent these partners from getting too close to their clients and compromising their roles as independent auditors.”
EY responded to the SEC charges. “Auditor independence is of paramount importance to EY,” said a statement forwarded by EY spokesperson Amy Call Well. “It is fundamental to our work and a source of confidence for our stakeholders. Each of us at EY is continuously trained and tested on auditor independence standards and we have a rigorous system of quality controls to monitor and detect violations. The individuals at the center of these matters violated multiple EY policies, hid their conduct and behaved in a way that was antithetical to EY’s Global Code of Conduct, culture, values, policies and training. The decisions they made betrayed the trust placed in them. All have been separated from our organization. We regret these matters arose and are pleased to put them behind us.”
On the Bednar matter, EY consented to the SEC’s order without admitting or denying the findings. The firm agreed to pay $4.975 million in monetary sanctions for these violations. Bednar also consented to the findings and must pay a $45,000 penalty. He has been suspended from appearing and practicing before the SEC as an accountant, so he will not be able to participate in the financial reporting or audits of public companies. The SEC’s order allows him to apply for reinstatement after three years, but he no longer works for EY.
On the matter involving Hartford, Kamienski and Brehl, all of them and EY consented to the SEC’s order without admitting or denying the findings. The firm agreed to pay $4.366 million in monetary sanctions for the violations, while Hartford and Brehl agreed to pay penalties of $25,000 each. Hartford, Kamienski and Brehl have been suspended from appearing and practicing before the SEC as accountants, which includes not participating in the financial reporting or audits of public companies. The SEC’s order allows Brehl to apply for reinstatement after one year, while Hartford and Kamienski can apply after three years. Hartford and Kamienski no longer work at EY.
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