On 19 September 2016, the SEC announced that it had reached a settlement with Ernst & Young ("EY") regarding the actions of two audit partners who violated the rules that are designed to maintain the objectivity and impartiality of auditors. When announcing this settlement, the Director of the SEC's Division of Enforcement noted that these were "the first SEC enforcement actions for auditor independent failures due to close personal relationships between auditors and client personnel. " The SEC alleged that EY and its auditors violated several rules related to the requirement that auditors maintain independence from the companies that they audit, and caused its issuer clients to violate Section 13(a) of the Exchange Act by certifying that its audits were independent.
One sanctioned partner maintained an inappropriately close personal friendship with the CFO of the firm he was auditing, including joint family trips and nights spent in each other's houses, with expenses topping $100,000. However, this decision creates some uncertainty about what types of client engagement are appropriate for auditors. The other partner became romantically involved with the Chief Accounting Officer of the firm that she was auditing.
EY was sanctioned for deficiencies in the firm's internal controls and reporting procedures for preventing these types of relationships. Supervisory partners who were aware, or should have been aware, of the inappropriate relationships failed to take remedial action. The supervisory partners also continued to represent that the firm was independent in SEC and audit filings. According to the SEC, while EY procedures required audit teams to assess their independence, those procedures did not specifically address non-familial close personal relationships.
This settlement included EY's agreement to pay a total of $9.3 million and the suspension of the individual parties involved (including the EY audit partners, an EY coordinating partner and the Chief Accounting Officer of the EY client who had a relationship with one of the EY partners) from practicing before the SEC for between one and three years. EY has also engaged in certain remedial efforts, including requiring a review of any close relationships between EY and client personnel, as well as the disclosure by audit team members of any such relationships and the certification that they have consulted with an EY independence leader if they have such a relationship. With these enforcement actions, the first of their kind, the SEC has announced that it is interested in interpersonal relationships that may undermine auditor independence. Auditors and issuers should take note and review their internal procedures accordingly.
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