In trying to become the auditor of publicly held Sealed Air, maker of Bubble Wrap, Ernst & Young LLP and three of its partners went too far. Way too far, according to the Securities and Exchange Commission. And they were assisted by Sealed Air’s chief accounting officer at the time, William Stiehl (who later became the company’s acting CFO).
A set of charges released in the case on Monday may reignite the discussion around the too-cozy relationship of some finance executives and their audit firms.
The SEC charged accounting firm EY, two former partners, and an existing partner with improper professional conduct during 2014 for violating auditor independence rules in connection with EY’s attempt to win Sealed Air’s audit business. Former CAO Stiehl was also charged.
The SEC’s settlement order says EY, EY partner James Herring, CPA, and former EY partners, James Young, CPA, and Curt Fochtmann, CPA, improperly interfered with the issuer’s selection of an independent auditor. They solicited and received confidential competitive intelligence and confidential audit committee information from Stiehl during the request for proposal (RFP) process.
Stiehl had a long relationship with EY, the SEC said. From 2004 through December 2012, he served in internal audit and in senior financial roles for two public companies at which EY was the independent auditor.
During the RFP process in 2014, Stiehl enlisted EY to assist in drafting portions of Sealed Air’s RFP for a new auditor (without the audit committee’s knowledge). Stiehl also solicited talking points from EY for his presentation to the audit committee of his views on the bidding audit firms. He also arranged for EY to meet with his finance personnel at least a month before other audit firms were invited to do so. In addition, he helped EY revise its bid to meet a reduced bid by Sealed Air’s incumbent audit partner, KPMG.
EY was named Sealed Air’s independent auditor for fiscal 2015.
In charging EY, the SEC said its “regional management and national leadership were, or should have been, aware of the conduct undertaken by EY partners in connection with ultimately winning the engagement and that it would violate the SEC’s and the Public Company Accounting Oversight Board’s auditor independence rules.” According to the SEC’s order, confidential bid info and competitive intelligence that Stiehl gave to EY was broadly circulated through the firm, including to “personnel in regional and national leadership positions.”
“EY’s misconduct in connection with the audit pursuit, the order finds, would cause a reasonable investor to conclude that EY and its partners were incapable of exercising objectivity and impartiality once the audit engagement began,” the SEC said.
The SEC said the action “further underscores that auditors must apply heightened scrutiny when making independence determinations.”
EY has agreed to a censure, to pay a civil money penalty of $10 million, and to comply with a detailed set of undertakings for a period of two years. It did not admit or deny the findings.
Herring, Young, and Fochtmann agreed to pay civil money penalties of $50,000, $25,000, and $15,000, respectively, and to be suspended from appearing or practicing before the commission, with a right to apply for reinstatement after three, two, and one year, respectively. They did not admit or deny the findings.
The SEC’s separate order against Stiehl found that his misconduct during the RFP process, including withholding key information from the issuer’s audit committee, caused issuer reporting violations.
Stiehl, who consented to the order without admitting or denying the findings, agreed to cease and desist from future violations of the securities laws, to pay a civil money penalty of $51,000, and to be suspended from appearing or practicing before the commission, with a right to reapply for reinstatement after two years.
Sealed Air terminated Stiehl’s employment on June 19, 2019. Later, in August, the board unanimously ended EY’s audit engagement and named PwC its new auditor.