Risk & Compliance

EY Fined $9M Over Auditor Intimacy With Clients

The SEC says EY didn't do enough to prevent two former auditors from getting "too close" to finance executives at companies they were inspecting.
Matthew HellerSeptember 20, 2016

In a case of friendship not mixing with auditing, Ernst & Young has agreed to pay $9.3 million to settle charges that two of its former auditors compromised their objectivity by getting “too close” to financial executives at companies they were inspecting.

The U.S. Securities and Exchange Commission said Gregory S. Bednar maintained an “improperly close friendship” with the CFO of a New York-based public company, while Pamela Hartford had a romantic relationship with Robert Brehl, the chief accounting officer of another company, while she served on the engagement team auditing the firm.

According to an administrative order, Bednar exchanged hundreds of personal text messages, emails, and voicemails with his client’s CFO during the auditing period and even became friends with the executive’s son, treating the two of them to sporting events and other gifts.

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“These are the first SEC enforcement actions for auditor independence failures due to close personal relationships between auditors and client personnel,” Andrew J. Ceresney, director of the SEC’s Division of Enforcement, said in a news release. “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.”

The SEC said in another administrative order that Hartford’s supervisor on the audit, Ernst & Young partner Michael Kamienski, “became aware of facts suggesting the improper relationship yet failed to perform a reasonable inquiry or raise concerns internally.”

EY agreed to pay $4.975 million in monetary sanctions for the violations involving Bednar, who was himself fined $45,000. In Hartford’s case, the firm will pay $4.366 million in sanctions and Hartford and Brehl agreed to pay penalties of $25,000 each.

SEC rules bar auditors from misrepresenting they are independent. “The individuals at the center of these matters violated multiple EY policies, hid their conduct and behaved in a way that was antithetical to EY’s Global Code of Conduct, culture, values, policies, and training,” EY spokeswoman Amy Call Well said in a statement.

The SEC’s orders did not name the EY clients but Brehl served as CAO of Ventas Inc., which disclosed in July 2014 that he had left the company due to an “inappropriate personal relationship” with an EY partner.