EY has agreed to a combined $9.3 million settlement of auditor independence charges with the Securities and Exchange Commission in two separate cases where auditors got a bit too chummy with their public company audit clients.
While the SEC’s auditor independence cases typically involve inappropriate financial relationships, these two cases instead involve inappropriate personal relationships, said Andrew Ceresney, director of the enforcement at the SEC, in a press briefing. EY is paying stiff fines because of the firm’s “failure to take action when confronted with red flags,” he said.
In a statement, EY says it regrets the issues and is pleased to wrap up the cases. “The individuals at the center of these matters violated multiple EY policies, hid their conduct, and behaved in a way that was antithetical to EY’s global code of conduct, culture, values, policies, and training,” the firm said. “The decisions they made betrayed the trust placed in them. All have been separated from our organization.”
One case involves a previously disclosed romantic relationship between Pamela Hartford, then a partner at EY, and Robert Brehl, who was a chief accounting officer and controller for real estate investment trust Ventas in Chicago. Upon discovering the nature of the relationship, Ventas fired EY and Brehl and hired KPMG to re-audit 2012 and 2013 financial statements. The new audits did not reveal any accounting anomalies.
The SEC says Hartford’s supervisor, Michael Kamienski, became aware of information suggesting something was up between Hartford and Brehl, but did not perform an adequate inquiry into the facts and did not report the matter internally for further investigation. The SEC says EY agreed to pay $4.366 million to settle that case, while Hartford and Brehl each agreed to penalties of $25,000. Hartford, Brehl, and Kamienski all are under bars from practicing before the SEC.
The second case involves another former EY partner, Gregory Bednar, who got particularly close to the unnamed CFO of a New York-based company audited by EY. Bednar was assigned to the audit in 2012, specifically tasked with improving the relationship on the “troubled account,” the SEC says.
Ceresney would not name the company to whose audit Bednar was assigned, saying the SEC does not name parties who are not the specific subject of enforcement actions. The enforcement order says Bedar and the CFO stayed at each other’s homes on multiple occasions and traveled together with family members on overnight trips that had no business purpose. “Certain Ernst & Young partners became aware of Bednar’s excessive entertainment spending but took no action to confirm that Bednar was complying with his independence obligations,” the SEC says.
In that case, the SEC collected $4.975 million from the firm and $45,000 from Bednar, who also is barred from appearing or practicing before the SEC. EY consented to the orders without admitting or denying the findings. The former EY partners can apply for reinstatement to practice before the SEC after three years, while Brehl can apply after one year.