CPA Exam Cheating Scandal: EY involved in leaking ethics paper, Pays $100 Million Penalty

In response to allegations that hundreds of its audit staff members had falsified answers on an ethics exam and mislead investigators, Ernst & Young, one of the biggest accounting firms in the world, agreed to pay a record $100 million as a penalty to US regulators on Tuesday.

The Securities and Exchange Commission on Tuesday announced the highest fine it has ever levied on an auditing company, which enjoys a special ethical position in the financial industry. These companies are in charge of examining the accuracy of financial statements of companies and alerting investors to questionable accounting practises.

The Securities and Exchange Commission (SEC) claimed that EY’s audit professionals “over multiple years” cheated on exams necessary to obtain and maintain Certified Public Accountant (CPA) licences, and during an investigation of the matter, withheld evidence of this misconduct from the SEC’s enforcement division.

Gurbir Grewal, the director of SEC enforcement, stated that “this action involves breaches of trust by gatekeepers within the gatekeeper entrusted to audit many of our nation’s public companies.”

The fine is twice that KPMG, a significant auditing company, paid to settle a probe into claims of similar deception by auditors on internal training exams in 2019. Securities authorities also issued a formal inquiry to EY over that summer, asking for details regarding any complaints the company may have had about staff members cheating any tests.

“It’s absolutely absurd that the very experts who were tasked with discovering client cheating cheated on ethics examinations of all things. And Ernst & Young’s interference with our inquiry into this misbehaviour is equally surprising,” he said.

Officials from the SEC stated that they could file charges against specific people while the inquiry is still continuing.

The SEC stated on Tuesday that despite EY having received an internal tip concerning employees cheating on several ethics exams, the company did not immediately inform inspectors of the information. After conducting their inquiry, authorities and EY officials discovered a much more pervasive cheating issue.

49 EY auditors cheated on tests between 2017 and 2019, according to the SEC’s inquiry, by using answer keys and disseminating them among their peers. Additionally, “hundreds of additional audit professionals” plagiarised assignments in classes that covered ethical requirements.

And a sizable portion of EY employees who did not cheat themselves but were aware that their coworkers were cheating and encouraging cheating violated the firm’s code of conduct by failing to report this misbehaviour, claims the SEC.

The SEC claims that between 2012 and 2015, EY was aware of a similar wave of staff members cheating on ethics exams. Although those problems were resolved internally, the SEC said that EY had not implemented enough controls to prevent a recurrence.

In the order, EY acknowledged that its actions were improper. Nothing is more crucial than our ethics and honesty, the company declared in a statement. It stated that the company would increase efforts to ensure adherence to ethical standards and that “sharing answers on any assessment or exam is a breach of our Code of Conduct and is not tolerated.”

Along with Deloitte, KPMG, and PwC, EY, which has over 300,000 employees, is one of the “Big Four” accounting firms that audits the financial records of almost all of the largest corporations in the world.

Congress passed legislation creating the Public Company Accounting Oversight Board, which is housed within the S.E.C. but takes independent enforcement measures against audit firms, in the wake of Enron and other significant corporate crimes. The SEC claimed that some of EY‘s actions had breached the board’s regulations in the administrative decision against the company.

The SEC is particularly concerned about the problem of auditor independence in general. Regulators want to make sure that other consulting, advisory, or lobbying work an accounting firm might conduct for the company does not impair its evaluation of the company’s financial records.

EY is reportedly thinking of separating its audit business from its financial advisory division, according to a report from this month.

The S.E.C. frequently demands that a corporation employ an outside consultant to check on its adherence to settlement conditions. However, it is unusual for regulators to request the hiring of two experts, suggesting that the S.E.C. thought these offences were significant.

The SEC stated that its investigation was ongoing, which implies that it may be thinking about taking enforcement measures against some people.

The settlement, in Mr. Grewal’s words, “should serve as a strong statement that the SEC will not tolerate integrity violations by independent auditors,” he added.

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