On September 19, 2016, the SEC announced that it had settled two enforcement actions against Ernst & Young LLP (“EY”) based upon the behavior of two EY partners. In the first enforcement action, the SEC asserted that an EY partner developed and maintained a close personal relationship with the CFO of a New York-based public company and members of the CFO’s family, including spending extensive leisure time and frequent overnight trips with the CFO and his family. In the second enforcement action, the SEC asserted that an EY partner serving on the engagement team for another public company was romantically involved with the company’s chief accounting officer. In both cases, according to the SEC, senior EY personnel should have identified or acted upon certain red flags.
The SEC concluded that the relationships of the two partners caused EY to violate Rule 2-02(b)(1) of Regulation S-X by causing EY’s to certify falsely that the two issuers’ respective audits were conducted by an independent auditor, and the partners and EY caused the audit client to violate Section 13(a) of the Exchange Act and Rule 13a-1 thereunder. Section 13(a) and Rule 13a-1 require public issuers to file annual reports with the SEC that have been audited by an independent accountant. In settlement of both enforcement actions, without admitting or denying the SEC’s findings, EY agreed to disgorge audit fees and pay civil penalties totaling $9.3 million. According to Andrew Ceresney, Director of the SEC’s Division of Enforcement, “these are the first SEC enforcement actions for auditor independence failures due to close personal relationships between auditors and client personnel.”
Separately, one of the two issuers dismissed EY and withdrew its EY-audited financial statements for two prior fiscal years. The financial statements were reissued after they were examined and certified by another auditor.