SEC Charges Audit Firm, Audit Partners, with Audit Independence Misconduct

The SEC charged accounting firm Ernst & Young LLP (EY), one of its partners, and two of its former partners with improper professional conduct for violating auditor independence rules in connection with EY’s pursuit to serve as the independent auditor for a public company with nearly $5 billion in revenue. Separately, the SEC brought charges against the company’s then-chief accounting officer for his role in the misconduct. All respondents have agreed to settle the charges and will collectively pay more than $10 million in monetary relief. The SEC’s order against the auditors finds that EY, the partner and former partners improperly interfered with the company’s selection of an independent auditor by soliciting and receiving confidential competitive intelligence and confidential audit committee information from the company’s then-chief accounting officer during the request for proposal process. EY’s misconduct in connection with the audit pursuit, the order finds, would cause a reasonable investor to conclude that EY and its partners were incapable of exercising objectivity and impartiality once the audit engagement began. The SEC’s separate order against the company’s former chief accounting officer finds that, through his misconduct during the request for proposal process, including withholding key information from the company’s audit committee, the officer caused the issuer’s reporting violations. “Auditor independence is not merely an obstacle to overcome, it is the bedrock foundation that supports the integrity, transparency, and reliability of financial reporting,” said Charles Cain, Chief of the SEC Enforcement Division’s FCPA Unit. “Auditor independence requires auditors to analyze all of the relevant facts and circumstances from the perspective of the reasonable investor. EY and its partners lost sight of this fundamental principle in their pursuit of a new client. This action further underscores that auditors must apply heightened scrutiny when making independence determinations.” EY and the other subjects of the action consented to the SEC’s order without admitting or denying the findings and agreed to cease and desist from future violations, among other sanctions.