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E&Y Settles Two Auditor Independence Violations with the SEC

Ernst and Young recently agreed to settle two cases of independence violations stemming from personal relationships between audit partners and members of the accounting or financial control staff at audit clients.  In the first case, the SEC order states that the lead partner on an audit engagement for a public company maintained a close friendship with the company’s CFO that included traveling together for non-business purposes, thousands of dollars in entertainment-related expenses, and hundreds of personal emails, texts, and voicemails.  In addition, the SEC found that despite the fact that several senior partners were made aware of certain facts about the friendship, they never further investigated whether the spending violated E&Y’s policies or provided evidence of an inappropriate relationship.

In the other case, the SEC found that E&Y violated independence rules when a member of the E&Y engagement team had a romantic relationship with the chief accounting officer of an audit client.  According to the SEC’s order, the coordinating partner on the engagement was aware of facts indicating the two were engaged in a relationship, but failed inquire into the relationship.

Director of the SEC’s Division of Enforcement, Andrew Ceresney, stated that “[t]hese are the first SEC enforcement actions for auditor independence failures due to close personal relationships between auditors and client personnel.  Ernst & Young did not do enough to detect or prevent these partners from getting too close to their clients and compromising their roles as independent auditors.”  E&Y agreed to pay $9.3 million to settle the charges.