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What Happened With EY & The Importance Audit Independence

ast week, the SEC charged Ernst & Young (EY) with a hefty $10 million fine following investigation for misconduct in the company’s contract acquisition process. In the settlement, however, EY was not required to admit nor deny any wrongdoing.

SUMMARY

The SEC claims that William Stiehl, former Chief Accounting Officer at Sealed Air, helped to privately secure a $5 billion contract for EY to serve as the company’s auditor. Stiehl communicated with James Herring, partner at EY, as well as James Young and Curt Fochtmann, former partners at EY to share confidential competitive information, thus violating auditor independence rules and interfering with Sealed Air’s ability to select other, outside auditors.

REPERCUSSIONS

The SEC and EY came to a settlement for $10 million, wherein EY was not required to make an admission of misconduct; however, all individuals involved face a financial penalty. Stiehl is subjected to a fine of $51,000, and the current and former EY partners—James Herring, James Young, and Curt Fochtmann—have agreed to pay $50,000, $25,000, and $15,000, respectively. On top of the fines, Herring, Young, and Fochtmann face a suspension of trading abilities with the maximum being a 3-year prohibition and the minimum a 1-year ban.

Above all, the misconduct has created negative buzz and a bad reputation for the “Big Four” accounting firm.

WHY WE NEED AUDIT INDEPENDENCE

The American Institute of CPAs “requires that members in public practice be objective, free of conflicts of interest, and independent in fact and appearance.” Audit independence means using integrity and objective approaches when establishing a relationship between internal and external auditors to prevent a company from benefitting solely on its own personal financial interests.

Without audit independence, an auditor working for a publicly traded company can use their authority to skew numbers and manipulate the market for their own financial profit. Or, in EY’s case, they can use personal connections to unfairly and improperly secure a multi-billion-dollar contract.

Audit independence exists to maintain the integrity of financial reporting. Charles Cain, an SEC official, said in a statement that, “Auditor independence is not merely an obstacle to overcome, it is the bedrock foundation that supports the integrity, transparency, and reliability of financial reporting… EY and its partners lost sight of this fundamental principle in their pursuit of a new client.”

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