It is impossible to ignore the Securities and Exchange Commission’s (SEC) record $100 million fine against EY for employee exam cheating is exactly double the amount the regulator penalized fellow Big Four firm KPMG in 2019 for its infamous cheating scandal. Especially since the latter served as a catalyst for the former.
It was two days after the SEC fined KPMG $50 million for stealing inspection information from the Public Company Accounting Oversight Board (PCAOB) in addition to internal exam cheating by its employees that the agency sent EY a voluntary request asking whether the firm was aware of any cheating by its workers. The request carried a 24-hour response deadline, which EY met when it disclosed five historic matters of misconduct regarding training programs and assessments.
Not among those disclosures was an internal whistleblower complaint lodged at EY on June 19—the same day the SEC sent its voluntary request—regarding cheating on a certified public accountant (CPA) ethics exam. By the time EY’s senior attorneys learned of the tip June 21, they had already signed off on the firm’s submission to the SEC a day earlier that no ongoing cheating was taking place. The firm’s handling of the matter from that point would be what earned it the largest fine the SEC has ever imposed against an audit firm.
It isn’t common that an SEC commissioner dissent from one of the agency’s most significant enforcement actions. Especially when the firm on the receiving end admits to the misconduct.
For Hester Peirce, the seriousness of the CPA exam cheating at EY isn’t what she believes should be questioned. Instead, its the actions of her agency that led to her disagreement.
A significant part of the SEC’s gripe with EY is that the firm did not amend its disclosure to the agency after its attorneys learned of the whistleblower tip a day later. EY launched an internal investigation that discovered exam cheating at the firm was more widespread than anticipated and disclosed this information to the PCAOB, which in turn notified the SEC in March 2020. That gap in time from the initial request drew the SEC’s ire.
But, on the other hand, the SEC’s June 2019 request to EY was voluntary. Where in the rules does it say such disclosures need to be amended, Peirce questioned.
“Ought EY to have disclosed the one incident that awkwardly appeared on the firm’s radar nearly simultaneous to its report to the SEC? Given the benefit of hindsight that I have, I would have preferred that EY do so. And, as a prudential matter, cautious legal counsel might say yes; however, what I might prefer and what one might do as a matter of prudence should not be confused with what one must do as a consequence of a legal obligation,” she wrote in her dissenting statement. “Treating the failure to take the prudent and cautious path as though it is a strict liability violation of some affirmative legal obligation is not supported by the law. If we do intend responses to voluntary information requests to carry with them an ongoing obligation to correct and supplement the information provided, let us spell it out.”
Peirce further acknowledged the expectation that the whistleblower tip make it up the chain of command at a firm as big as EY in order to have been initially included in the June 20 disclosure was “objectively unreasonable.” The SEC’s description of the June 20 disclosure as “materially misleading,” she said, is “woefully misguided and patently unfair.”
“The unduly punitive terms of this settlement and its focus on imperfect compliance with a voluntary staff request for information with a one-day-turnaround detract from the central issue—pervasive cheating by audit firm employees,” she wrote. “I am sorry that I could not support this settlement.”
Looking back on KPMG
“Comparisons are inevitable,” Peirce said regarding the EY and KPMG fines. She described the EY penalty as “puzzling” when considering the KPMG case also involved stolen inspection information from the PCAOB but noted the obvious fact each matter is unique. The KPMG scandal did see three individuals receive prison time for their respective roles.
For EY, the significantly steeper penalty it received was no doubt a result of the SEC’s frustration regarding the firm’s conduct in the aftermath of the KPMG case. The agency’s voluntary request that June carried higher stakes than EY might have anticipated. And it paid for that misinterpretation.
“[B]y withholding information about misconduct that EY knew SEC staff was investigating, EY’s continued misrepresentations to the SEC’s Division of Enforcement significantly hindered the SEC’s ability to take action that would protect investors from audit professionals who do not understand their ethical obligations, fail to act with appropriate professional integrity, and have not met—or needed to cheat in order to meet—minimum professional requirements to demonstrate their knowledge of important accounting principles,” the agency stated.
The SEC’s requirements on EY beyond paying the penalty—the hiring of two separate consultants to remediate deficiencies in its ethics policies and procedures—is another message from the agency to the rest of the audit firm community regarding exam cheating. The KPMG case might get the most attention, but it’s far from the first time the issue has been uncovered. Indeed, exam cheating at EY from 2012-15 was mentioned prominently in the SEC’s administrative proceeding Tuesday.
It’s clear to see EY was made an example of by the SEC with its $100 million penalty. Let other audit firms take note.