On June 28, the U.S. Securities and Exchange Commission (SEC) announced charges against Ernst & Young LLP (EY) for cheating by audit professionals on ethics exams and for withholding information from the SEC on the matter. The $100 million penalty imposed by the SEC is the largest ever for an auditing firm. The cheating scandal was internally revealed at EY by a whistleblower.
“This action involves breaches of trust by gatekeepers within the gatekeeper entrusted to audit many of our Nation’s public companies. It’s simply outrageous that the very professionals responsible for catching cheating by clients cheated on ethics exams of all things,” said Gurbir S. Grewal, Director of the SEC’s Enforcement Division. “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 June 2019, the SEC charged another auditing firm, KPMG, for misconduct including that auditors were cheating on internal training exams. Following the announcement of those charges, the SEC Division of Enforcement sent EY a formal request inquiring into whether EY had received any ethics or whistleblower complaints on employees cheating on ethics exams.
According to the SEC’s order, EY responded on June 20, 2019 and its submission “created the impression that EY did not have current issues with cheating – either on training programs and assessments or CPA ethics exams.” However, on June 19, 2019, an EY employee internally blew the whistle on EY auditors cheating on a CPA ethics exam.
“The [whistleblower] tip EY’s submission failed to include involved cheating on a CPA ethics exam,” the SEC’s order states. “It was sufficiently concerning to the firm that it began an extensive investigation. Yet, despite the message from EY’s U.S. Chair and Managing Partner only two days earlier about the importance of integrity and honesty, EY did not correct its submission to the SEC’s Enforcement Division.”
The SEC found that EY audit professionals cheated on CPA ethics exams “by using answer keys they had received from colleagues to pass exams and sharing answer keys with others.” The order states that “[t]hey also cheated on a wide variety of CPE courses, including courses on ethics and other topics, such as the Summary of Audit Differences, which are designed to ensure that audit professionals can properly evaluate whether clients’ financial statements are presented fairly in all material respects and comply with Generally Accepted Accounting Principles.”
EY admitted to violations charged by the SEC and agreed to pay a $100 million penalty and undertake extensive remedial measures to fix the firm’s ethical issues.
Through the SEC Whistleblower Program, qualified whistleblowers, individuals who voluntarily provide the SEC with original information that leads to a successful enforcement action are entitled to monetary awards of 10-30% of the funds collected by the government. Overall, the SEC has awarded approximately $1.2 billion to 268 whistleblowers since issuing its first award in 2012.
It is unclear whether or not the EY whistleblower ever filed a formal whistleblower complaint with the SEC. According to the U.S. Supreme Court’s ruling in Digital Realty Trust, Inc. v. Somers, a whistleblower must contact the SEC directly in order to qualify for the whistleblower protections of the Dodd-Frank Act.