EY member firm fined $1.5M for failure to uncover $3B homebuilding fraud

Mancera S.C., EY’s Mexican member firm, as well as a former partner and a current partner of the firm, allegedly committed the violations when Mancera filed “deficient” audits of the Mexican homebuilding company Desarrolladora Homex S.A.B. de C.V. from 2010-12, the SEC said.

Without admitting or denying the SEC’s charges, Mancera agreed to be censured and pay $1,089,926 in disgorgement and prejudgment interest and $500,000 in civil penalties, according to Thursday’s SEC press release. Mancera’s former engagement partner on the Homex audit, Alejandro Valdez Mendoza, who is no longer with the firm, agreed to be suspended from appearing before the SEC as an accountant for five years. Current Mancera Senior Manager Angel Radames Corral Nieblas, a partner, agreed to be suspended from appearing before the SEC for two years.

As part of the settlement, Mancera also agreed to a provide staff reports on the firm’s quality controls and audit-and-quality-related guidance and policies to the SEC, as well as validation plans to test compliance with Commission regulations and Public Company Accounting Oversight Board standards and rules and increased auditor training.

The SEC previously charged Homex and four of its executives for accounting fraud for reporting fake sales of 100,000 homes during the period it was being audited by Mancera.

According to the SEC’s order, Mancera’s audits of Homex from 2010-12 failed to meet auditing standards. Mancera auditors were not adequately trained or supervised as they performed visits to Homex construction sites throughout Mexico and failed to document that Homex had recognized sales on homes under construction and, in many cases, not even begun.

“The order further finds that Valdez and Corral failed to properly evaluate responses to certain bank confirmations and failed to properly test and document journal entries in certain Homex entities to identify material misstatements due to fraud,” the SEC said.

While Mancera auditors recognized the risk of fraud at Homex, even increasing the risk factor from moderate to a more significant fraud risk factor category of “close monitoring,” noted the SEC, Mancera auditors failed to adequately address those fraud risks.

The SEC said the Mancera auditors “failed to exercise due professional care and skepticism; adequately plan the audits; adequately train and supervise the engagement team; prepare audit documentation in sufficient detail; obtain sufficient competent or appropriate audit evidence to support the audit opinions; and properly evaluate audit results.”

In a statement, an EY spokesman said EY Mexico has made “continuous improvements to enhance audit quality and controls” over the past decade.

“EY’s robust system of quality control is proactively assessed, managed and monitored on an ongoing basis. EY’s commitment to high audit quality is central to our responsibility as independent auditors to perform audits that promote trust and confidence in the capital markets,” the spokesman said.