Ernst & Young to pay US$100m fine after auditors cheated on ethics exams

ERNST & Young, one of the world’s largest auditing firms, has agreed to pay a US$100 million fine after US securities regulators found that some of its auditors had cheated on ethics exams - and that the firm did not do enough to stop the practice.

The penalty is the largest ever imposed by the Securities and Exchange Commission against an auditing firm. An administrative civil order filed by regulators said Ernst - also known as EY - had misled investigators, withheld evidence and violated public accounting rules designed to maintain the integrity of the profession.

“It’s simply outrageous that the very professionals responsible for catching cheating by clients cheated on ethics exams, of all things,” said Gurbir Grewal, the commission’s director of enforcement, in announcing the settlement on Tuesday (June 28).

The penalty is twice the sum that KPMG, another big audit firm, paid in 2019 to resolve an investigation into similar allegations of cheating by auditors on internal training exams.

Ernst, which admitted in the order that its conduct was wrong, said in a statement that “nothing is more important than our integrity and our ethics.” The firm also said that “sharing answers on any assessment or exam is a violation of our Code of Conduct and is not tolerated” and said it would take efforts to enforce compliance with ethical rules.

The ethics exams that Ernst auditors cheated on were part of a continuing education programme offered by most states for accountants to keep their professional licences, according to the commission. The SEC said the cheating involved hundreds of the firm’s auditors from 2017 to 2021.

Forty-nine auditors at Ernst received the “answer key” to an ethics exam that is part of the initial process of becoming a certified public accountant, according to the SEC’s administrative order.

Regulators said this was not the first time that there had been widespread cheating on ethics exams by Ernst employees. The SEC said a somewhat similar cheating scandal, which the firm handled internally, took place from 2012 to 2015.

The SEC, in the order, noted that Ernst had sent out warnings in the past to employees about not cheating on exams but did not put in place sufficient controls until recently.

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As part of the settlement, the SEC has required Ernst to hire two independent consultants. One will review the firm’s policies on ethics procedures, and the other will review its failure to properly disclose the cheating.

Grewal said the settlement “should serve as a clear message that the SEC will not tolerate integrity failures by independent auditors.” NYTimes