The SEC on Dec. 10 decided that two EY partners and one principal didn’t take the auditor independence rules seriously and doled out a few fines and sanctions. And like many of these auditor independence violations that get firms in hot water with the SEC or the PCAOB, the flagrant rules bending by EY had to do with providing non-audit services to an audit client. In this particular instance, the audit client was Cintas Corp.:
This matter involves aiding and abetting and causing violations of the auditor independence rules arising from Ernst & Young LLP (“EY”), a public accounting firm, performing non-audit services for its audit client Cintas Corporation (“Cintas”) on a contingent fee basis.
EY billed and received payment from Cintas on invoices calculated on a contingent fee basis for tax credit and incentive services (“C&I services”) performed between July 2009 and August 2018. An audit firm is not independent of its audit client if it provides any non-audit services to the audit client for a contingent fee. As a result, EY was not independent of Cintas during that time period, and Cintas filed annual and quarterly reports with the Commission that were not audited or reviewed by an independent public accountant, as required by Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder.
During that time period, Philip Hurak, Alan Greenwell, and Adam Bering also blissfully ignored Rule 2-01(c)(5) of Regulation S-X which says “[a]n accountant is not independent if, at any point during the audit and professional engagement period, the accountant provides any service or product to an audit client for a contingent fee … or receives a contingent fee … from an audit client.” The SEC also found out that EY’s policies and procedures also prohibited billing audit clients on a contingent fee basis.
As Cintas’s auditor, EY had to obtain pre-approval from the company’s audit committee in order to provide non-audit tax services to Cintas, according to the SEC administrative order. In obtaining pre-approval from the audit committee to provide those services, EY said it would bill for C&I services on a time and materials basis. The audit committee gave its blessing.
Despite EY’s … representations that EY would perform C&I services for Cintas on a time and materials basis, in fact EY improperly billed Cintas for C&I services based on a percentage of the relevant tax credit or incentive secured. Specifically, from July 2009 through August 2018, EY charged, and Cintas paid, fees of approximately—sometimes exactly—10% of the benefit Cintas received for federal tax credits and 15% of the benefit Cintas received for state and local tax credits resulting from EY’s C&I engagements.
For example, from 2009 through 2018, EY assisted Cintas in obtaining certain federal tax credits related to hiring. Initially, EY billed Cintas for this work annually at exactly 10% of the credits Cintas obtained. In later years, EY billed Cintas for this work on a quarterly basis and reconciled the bills at the end of the year so that EY’s annual fees were approximately 10% of the total credits Cintas obtained for that year. Certain EY bills to Cintas summarized the amount of each credit and then stated the applicable charges. It was clear on the face of the invoices that the charges were 10% of the amount of the tax credits.
During that time period, Greenwell, who was the tax account leader for tax services EY provided to Cintas, including C&I services, failed to investigate red flags indicating that EY was billing Cintas on a contingent fee basis for C&I services, according to the SEC.
For example, in February 2016, Respondent received an email from Cintas indicating that, for 2014 and 2015, EY had billed Cintas estimated amounts for federal tax credit work and that a reconciliation would occur once the precise amount of the federal tax credits was known. The email suggested that the final fee would be contingent on the amount of credit Cintas received for the work, which Respondent failed to investigate.
Similarly, in March 2017, Respondent was copied on several emails regarding an EY invoice to Cintas for certain state tax credits. In the emails, EY managers told Cintas that the final invoice would be calculated and sent to the company once Cintas had secured the expected incentives. This suggested that EY’s fees would depend upon the final amount of the tax credits, and Respondent again failed to investigate.
During the relevant period, Respondent completed audit work papers certifying that EY complied with applicable auditor independence requirements. Respondent also verbally told Cintas’s audit committee that there were no issues that impacted EY’s independence. As described above, EY was not independent of Cintas. Respondent failed to investigate red flags indicating that EY was performing certain C&I services for Cintas on a contingent fee basis, which violated the auditor independence rules.
Hurak, who was an engagement manager for certain C&I services that EY provided to Cintas from April 2013 to August 2018, reviewed and approved certain EY invoices sent to Cintas for C&I services, including those services provided to Cintas on a contingent fee basis.
For example, in November 2016, Respondent approved billing Cintas for obtaining a large federal hiring-related tax credit. The invoice listed both the amount of the credit and the amount of the fee. The amount of the bill was almost exactly 10% of the credit amount that Cintas received. Cintas paid the invoice in January 2017.
Similarly, in September 2017, Respondent emailed Cintas an invoice for C&I services relating to three federal tax credits. The email also summarized the amount of each federal credit and the charges for each credit. Those charges were approximately 10% of the tax benefit Cintas received for each credit. Cintas paid the invoice in October 2017.
Bering, who was the engagement partner for C&I services that EY provided to Cintas from July 2009 through June 2018, failed to perform a reasonable inquiry in response to information that EY staff under his supervision were billing Cintas for C&I services on a contingent fee basis, according to the SEC.
By at least 2016, Respondent became aware of information that EY staff under his supervision were billing Cintas for C&I services on a contingent fee basis. In March 2016, in response to questions he raised to EY staff about Cintas invoices, an EY manager emailed Respondent that “[h]istorically [Cintas] has agreed to pay us fees that reflect the amount of benefit we bring.” In that same email, the EY manager included a chart showing Cintas’s tax credits and EY’s corresponding fees, which were a percentage of the tax credits. Respondent failed to investigate the information in the email suggesting that a contingent fee arrangement existed between EY and Cintas.
In January 2017, Respondent did not respond to an email from an EY manager specifically raising concerns that EY had been invoicing Cintas on a contingent fee basis for C&I services. When the manager followed up during a phone call, Respondent directed the manager to discuss the issue with the person responsible for invoicing Cintas and otherwise failed to perform a reasonable inquiry as to the manager’s concerns.
Hurak, an attorney licensed in the state of Ohio who became an EY principal on July 1, 2018 before resigning from the firm in February 2019, agreed to pay a $20,000 fine and to cease and desist from future violations of auditor independence rules. He is also suspended from appearing or practicing before the SEC as an attorney for two years. He is currently a shareholder with accounting and advisory firm Clark Schaefer Hackett, according to his LinkedIn profile.
Greenwell, a partner throughout the relevant time period who left the firm involuntarily in March 2019, agreed to pay a $15,000 fine and to cease and desist from future violations. In addition, he is barred from appearing or practicing before the SEC as an accountant for two years. Greenwell currently is a shareholder and Cincinnati markets leader at tax and accounting firm Brixey & Meyer, according to his LinkedIn profile.
Bering, an attorney licensed in the state of Ohio and current principal at EY, agreed to pay a $10,000 fine and to cease and desist from future violations. He also is suspended from appearing or practicing before the SEC as an attorney for one year.
In addition, Scott Clark, an accountant and former vice president of corporate taxation for Cintas, had his wrist slapped by the SEC for negotiating and approving payment of EY’s contingent fee invoices on Cintas’s behalf. He was fined $30,000 and agreed to cease and desist from future violations. Clark was also suspended from appearing or practicing before the SEC as an accountant for one year.