EY Auditors Cheated on Ethics Exams and Tried to Cover It Up, Will Pay a Record Fine for Naughtiness

Well this is bad.

The SEC has fined EY a record $100 million after an investigation revealed auditors at EY were cheating on ethics exams (open book ethics exams we presume) and CPE; worse than cheating alone, they actively tried to cover it up and hide the cheating from the SEC.

From the SEC news release:

The Securities and Exchange Commission today charged Ernst & Young LLP (EY) for cheating by its audit professionals on exams required to obtain and maintain Certified Public Accountant (CPA) licenses, and for withholding evidence of this misconduct from the SEC’s Enforcement Division during the Division’s investigation of the matter. EY admits the facts underlying the SEC’s charges and agrees to pay a $100 million penalty and undertake extensive remedial measures to fix the firm’s ethical issues.

“This action involves breaches of trust by gatekeepers within the gatekeeper entrusted to audit many of our Nation’s public companies. It’s simply outrageous that the very professionals responsible for catching cheating by clients cheated on ethics exams of all things,” said Gurbir S. Grewal, Director of the SEC’s Enforcement Division. “And it’s equally shocking that Ernst & Young hindered our investigation of this misconduct. This action should serve as a clear message that the SEC will not tolerate integrity failures by independent auditors who choose the easier wrong over the harder right.”

You’ll recall that KPMG got busted cheating not that long ago however in the case of KPMG cheating it was internal exams (well, they also cheated on PCAOB inspections but that’s a different subject). EY’s cheating is without a doubt worse as it ironically involves the ethics exam one takes to prove to the public they are worthy of the esteemed and trustworthy title of Certified Public Accountant AND instead of being like “shit, yeah, you caught us” they straight up lied to the SEC. Mind the KPMG cheating also involved ethics. So really what we can take away from all of this is that there’s a serious ethics problem at large firms that clearly isn’t being addressed through traditional testing methods. Moving on.

Just how many people were involved? A significant number. Over multiple years. So let’s just guess a lot.

EY admits that, over multiple years, a significant number of EY audit professionals cheated on the ethics component of CPA exams and various continuing professional education courses required to maintain CPA licenses, including ones designed to ensure that accountants can properly evaluate whether clients’ financial statements comply with Generally Accepted Accounting Principles.

EY further admits that during the Enforcement Division’s investigation of potential cheating at the firm, EY made a submission conveying to the Division that EY did not have current issues with cheating when, in fact, the firm had been informed of potential cheating on a CPA ethics exam. EY also admits that it did not correct its submission even after it launched an internal investigation into cheating on CPA ethics and other exams and confirmed there had been cheating, and even after its senior lawyers discussed the matter with members of the firm’s senior management. And as the Order finds, EY did not cooperate in the SEC’s investigation regarding its materially misleading submission.

Hol up. So EY told SEC investigators they didn’t have issues with cheating even though they knew they did and then they opened their own internal investigation into cheating, talked amongst themselves about the cheating, and still didn’t think maybe the SEC should know? Tsk tsk.

Understandably the SEC is pissed off so it’s off to the reeducation camp for you, EY.

In addition to paying a $100 million penalty, the Order requires EY to engage in extensive undertakings, including retaining two separate independent consultants to help remediate its deficiencies. One consultant will review the firm’s policies and procedures relating to ethics and integrity. The other will review EY’s conduct regarding its disclosure failures, including whether any EY employees contributed to the firm’s failure to correct its misleading submission.

“The SEC will not permit the submission of misleading information or any action that delays or frustrates our mandate to protect investors and our markets,” said Melissa R. Hodgman, Associate Director of the SEC’s Enforcement Division. “Ernst & Young faces significant sanctions and extensive remediation to ensure that its culture and conduct meet the ethical standards required of those responsible for the integrity of our capital markets.”

The Order finds that EY violated a PCAOB rule requiring the firm to maintain integrity in the performance of a professional service, committed acts discreditable to the accounting profession, and failed to maintain an appropriate system of quality control. EY has admitted the facts underlying these findings and acknowledged that its conduct violated the integrity standard and provides a basis for the SEC to impose remedies against the firm pursuant to Sections 4C(a)(2) and (a)(3) of the Exchange Act and Rules 102(e)(1)(ii) and (iii) of the Commission’s Rules of Practice.

The $100 million penalty is the largest penalty ever imposed by the SEC on an audit firm.

Ernst & Young to Pay $100 Million Penalty for Employees Cheating on CPA Ethics Exams and Misleading Investigation [SEC]

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17 Comments

  1. How is this possible?
    Didn’t E&Y hire a PCAOB Commissioner, Franzel, a few years ago?
    What is she doing at E&Y?

  2. No surprise. This is coming from a firm that let go of a bunch of people in the middle of the pandemic, but called it “performance” related….. They haven’t recovered since.

  3. I’m confused…aren’t most of those ethics exams for initial CPA licensing and CPEs OPEN BOOK?!?!?!

    1. Yes, the exam is open book, but you’re not allowed to discuss or share answers with other people, which I’m guessing is what happened here. The idea behind an ethics exam is that the professionals are supposed to conduct themselves ethically.

      Please don’t try to argue why its ok for CPAs to do this. This penalty against EY is in the news and not only damages EY’s reputation, but the reputation of the entire profession. I think its terrible, and infuriating.

      1. You guessed correctly. In the order, the SEC says EY slapped warnings all over exam modules reminding them not to cheat and to do the assessment alone without help: “You must complete the assessment without assistance from others. Adherence to that requirement is part of your acceptance of and commitment to the EY Global Code of Conduct which includes acting with integrity in connection with professional education. Acting with integrity also means that you should not share or discuss the contents of the assessment, or your responses, with anyone who has yet to complete it. Failure to adhere to these requirements may result in disciplinary action.”

  4. So this has been known to firm leadership for at least 1 year and a half. In the all-hands meetings all throughout last year, Kelly Grier kept going on about not cheating on CPE and other testing.

    1. Longer. From the SEC order: “In December 2014, an internal EY whistleblower reported a flaw in the firm’s software that allowed professionals to pass CPE exams without the required number of correct responses. This vulnerability allowed exam takers to achieve a passing score while answering as little as one question correctly. The firm’s investigation of this matter determined that from 2012 to 2015, over 200 EY audit professionals in multiple offices exploited this flaw to pass CPE exams.”

      Kelly sent a warning out to everyone two days after KPMG got busted cheating in July, 2019.

  5. I don’t get it. The CPA exams is administered by the government. How would EY be involved. They would only be aware of cheating on internal CPE

    1. Right? How did they share answer keys for the CPA, a computer-based, random test administered by Prometric? How would EY have access to the answers?

  6. These types of “exams” are such a waste of time. Conducting oneself ethically is important but let’s not kid ourselves into thinking that any CPA is going to be more ethical because they completed an open book test.

  7. I would agree with the previous comments. These exams are all open book and not technically challenging. The only reason someone would choose to cheat is because CPA firms squeeze the life out of their employees and people are looking for a shortcut to save time. That doesn’t make it right, but the $100M fine is gross overreaction to something that on the surface looks bad for publicity but these trainings are hardly effective at teaching people how to be ethical.

    1. I agree with the previous two anonymous comments. The ethics exams and trainings are ineffectual and without much substance. One doesn’t learn how to be ethical from these trainings (exams) – it comes from other sources. I often thought about how I would design these classes myself if I my objective were to teach ethics. Some books published by Harvard Business School come to mind (i.e. How would you measure your life?) are much more thoughtful and nuanced. Not excusing the cheating but do think that the CPAs were just working 60+ hours a week and then are being asked to spend another 20 hours on training. Since many know these classes are ineffective, they look for a short cut and just go through the motions.

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