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Read the case study below and answer the questions that follow….
Read the case study below and answer the questions that follow.
Ernst & Young to Pay $100 Million Penalty for Employees Cheating on CPA Ethics Exams and Misleading
Investigation:
Largest Penalty Ever Imposed by SEC Against an Audit Firm
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.”
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.
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 Public Company Accounting Oversight Board (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 SEC’s investigation, which is continuing, has been conducted by Ian Rupell and supervised by Rami Sibay. The
SEC thanks the PCAOB for its assistance in this matter.
US SEC Washington D.C., (2022). Ernst & Young to Pay $100 Million Penalty for Employees Cheating on CPA Ethics
Exams and Misleading Investigation: Largest Penalty Ever Imposed by SEC Against an Audit Firm. (online). Available
at:
https://www.sec.gov/news/press-release/2022-114
Answer ALL the questions in this section which are based on the case study above.
QUESTION 1
(10 Marks)
Based on your knowledge of the concept of business ethics and your studying of this case, explain how did
the actions of Ernst & Young violate the principles of professional conduct and integrity in the accounting
profession?
QUESTION 2
(15 Marks)
Using the information in this case study, identify the ethical violations committed by Ernst & Young, and
evaluate the implications of these actions for the accounting profession.
QUESTION 3
(15 Marks)
Discuss the business ethics consequences Ernst & Young (EY) faces for violating the Public Company
Accounting Oversight Board (PCAOB) rule.
