Washington D.C., Aug. 2, 2021 — The Securities and Exchange Commission (SEC) has announced charges against Ernst & Young LLP (EY), a prominent accounting firm, along with one of its partners and two former partners. These charges stem from improper professional conduct related to auditor independence rules. The case involves EY’s pursuit of becoming the independent auditor for a public company boasting nearly $5 billion in revenue. In a separate but related action, the SEC also charged the public company’s former Chief Accounting Officer for his role in the misconduct. Collectively, all parties involved have agreed to settle these charges, resulting in monetary relief exceeding $10 million.
According to the SEC’s order against the auditors, EY and its personnel, including EY partner James Herring, CPA, and former EY partners James Young, CPA, and Curt Fochtmann, CPA, acted improperly. They are found to have interfered with the public company’s auditor selection process. This interference involved soliciting and receiving confidential competitive intelligence and sensitive audit committee information from William Stiehl, the company’s Chief Accounting Officer at the time. Stiehl was providing this information during the company’s request for proposal (RFP) process as it sought a new independent auditor. The SEC order concludes that EY’s actions during this audit pursuit were significant enough that a reasonable investor would question EY’s objectivity and impartiality had they secured the audit engagement.
In a separate SEC order, William Stiehl, the former Chief Accounting Officer, also faces charges. The SEC determined that Stiehl’s misconduct during the RFP process, specifically his withholding of crucial information from the company’s audit committee, was a direct cause of the company’s reporting violations.
Charles Cain, Chief of the SEC Enforcement Division’s FCPA Unit, emphasized the critical nature of auditor independence, stating, “Auditor independence is not merely an obstacle to overcome, it is the bedrock foundation that supports the integrity, transparency, and reliability of financial reporting.” Cain further noted, “Auditor independence requires auditors to analyze all of the relevant facts and circumstances from the perspective of the reasonable investor. EY and its partners lost sight of this fundamental principle in their pursuit of a new client. This action further underscores that auditors must apply heightened scrutiny when making independence determinations.”
The SEC’s findings indicate that EY, Herring, Young, and Fochtmann violated auditor independence provisions within federal securities laws. Furthermore, EY, Herring, and Young are found to have caused the public company to violate its obligation to have its financial statements audited by genuinely independent public accountants. All respondents have also been found to have engaged in improper professional conduct as defined by Rule 102(e) of the SEC’s Rules of Practice.
Without admitting or denying the SEC’s findings, EY, Herring, Young, and Fochtmann have consented to the SEC’s order and agreed to cease and desist from future violations. EY faces a censure, a civil money penalty of $10 million, and must adhere to a detailed set of undertakings for a two-year period. Individually, Herring, Young, and Fochtmann have agreed to pay civil money penalties of $50,000, $25,000, and $15,000, respectively. They also face temporary suspensions from appearing or practicing before the Commission, with the right to apply for reinstatement after three years for Herring, two years for Young, and one year for Fochtmann.
William Stiehl also consented to the SEC order without admitting or denying the findings. The SEC order against Stiehl concludes that he caused and willfully aided and abetted the public company’s reporting obligations violations stemming from the flawed auditor selection process. Stiehl will cease and desist from future securities law violations, pay a civil money penalty of $51,000, and is suspended from appearing or practicing before the Commission for two years, with the option to reapply for reinstatement afterward.
The SEC investigation was carried out by Jim Valentino and Natalie Lentz, with trial counsel provided by Sarah Heaton Concannon. Tracy L. Price and Charles Cain provided supervision for the case.
Last Reviewed or Updated: Aug. 2, 2021
