EY Learns the Hard Way Not to Screw Around with the SEC’s Auditor Independence Rules

Again on Aug. 12, 2019, Bubble Wrap maker Sealed Air Corp. disclosed in an 8-K that it had fired EY as its “unbiased” registered public accounting agency and acknowledged that it had employed PwC. OK, no biggie, the auditor carousel is all the time going spherical and spherical within the Large 4. However probably the most fascinating tidbit within the Sealed Air securities submitting was this (daring emphasis added):

This modification is being made in mild of the Firm’s beforehand disclosed receipt of a subpoena from the U.S. Securities and Change Fee (“SEC”) on Could 2, 2019 for paperwork and knowledge referring to the course of by which the Firm chosen its unbiased audit agency for the interval starting with fiscal yr 2015, and referring to the independence of that audit agency. EY has reaffirmed to the Firm that EY believes there was no independence violation, and the Firm has not reached a opposite conclusion. Nonetheless, the pendency of the SEC investigation, together with the Committee’s dissatisfaction with info it realized concerning the course of by which EY was chosen as auditor, brought on the Firm to make this modification now to permit for an orderly transition for the audit of the Firm’s fiscal 2019 consolidated monetary statements and to attenuate the danger of disruption that might come up within the occasion of an unplanned change in unbiased auditors at an undetermined time sooner or later.

Properly, after it concluded its investigation, the SEC DID consider there was an independence violation and determined to take EY and some folks to the woodshed earlier than a settlement was reached with the agency for $10 million on Monday. The SEC stated Monday afternoon:

EY, EY accomplice James Herring, CPA, and former EY companions, James Younger, CPA and Curt Fochtmann, CPA improperly interfered with the issuer’s number of an unbiased auditor by soliciting and receiving confidential aggressive intelligence and confidential audit committee info from the issuer’s then-Chief Accounting Officer, William Stiehl, through the request for proposal course of. EY’s misconduct in reference to the audit pursuit, the order finds, would trigger an inexpensive investor to conclude that EY and its companions have been incapable of exercising objectivity and impartiality as soon as the audit engagement started. The SEC’s separate order in opposition to Stiehl finds that, by his misconduct through the request for proposal course of, together with withholding key info from the issuer’s audit committee, Stiehl brought on the issuer’s reporting violations.

“Auditor independence is just not merely an impediment to beat, it’s the bedrock basis that helps the integrity, transparency, and reliability of economic reporting,” stated Charles Cain, Chief of the SEC Enforcement Division’s FCPA Unit. “Auditor independence requires auditors to research all the related details and circumstances from the attitude of the affordable investor. EY and its companions overlooked this elementary precept of their pursuit of a brand new consumer. This motion additional underscores that auditors should apply heightened scrutiny when making independence determinations.”

The SEC’s order in opposition to the auditors finds that EY, Herring, Younger, and Fochtmann violated the auditor independence provisions of the federal securities legal guidelines and that EY, Herring, and Younger brought on the Issuer to violate its obligation to have its monetary statements audited by unbiased public accountants. The order additionally finds that each one respondents engaged in improper skilled conduct inside the which means of Rule 102(e) of the SEC’s Guidelines of Apply.

Sealed Air is just not talked about by identify within the SEC order against EY, however the firm is unquestionably “the issuer” acknowledged within the above press launch and the SEC order. William Stiehl’s employer is rarely named in a separate SEC order concerning his self-discipline. It says, “Stiehl served as Issuer’s CAO and controller from January 2013 to October 2017, after which Stiehl served as Issuer’s performing after which everlasting CFO till his employment was terminated in June 2019.” However Stiehl’s LinkedIn profile confirms it was Sealed Air.

[The Sealed Air press release dated June 20, 2019, announcing that Stiehl had been fired as CFO “for cause” can be found here.]

Additionally, the SEC stated when EY received the issuer [Sealed Air] engagement, the corporate turned EY’s largest audit consumer in Charlotte, NC. EY collected greater than $13 million in audit, tax, and different service charges from the corporate throughout fiscal yr 2015, based on the SEC.

In its order in opposition to EY, the SEC stated the agency’s regional administration and nationwide management “have been, or ought to have been, conscious of the conduct undertaken by EY companions in reference to in the end profitable the engagement.”

EY, Herring, Younger, and Fochtmann agreed to the SEC’s punishment with out admitting or denying the findings and agreed to stop and desist from future violations. Identical with Stiehl.

For these scoring at dwelling, listed here are the penalties:

  • EY agreed to a censure, to pay a civil cash penalty of $10 million, and to adjust to an in depth set of undertakings for a interval of two years, that are detailed within the SEC order.
  • James Herring agreed to pay a civil cash penalty of $50,000 and was suspended from showing or practising earlier than the SEC, with a proper to reapply for reinstatement after three years. Herring, an assurance accomplice at EY since July 2012, based on his LinkedIn profile, led EY’s request-for-proposal pursuit of Sealed Air in 2014 after which served because the engagement accomplice on the EY engagement workforce that offered audit and different companies to the corporate from 2015 to March 2018.
  • James Younger agreed to pay a civil cash penalty of $25,000 and was suspended from showing or practising earlier than the SEC, with a proper to reapply for reinstatement after two years. Younger, who retired from EY in 2020, was an assurance accomplice at EY throughout this time. In keeping with the SEC, Younger joined EY’s RFP pursuit of Sealed Air starting in August 2014, and have become the coordinating accomplice on the corporate’s engagement for the fiscal yr ending Dec. 31, 2015. As coordinating accomplice on the engagement, Younger had ultimate duty for the audits and quarterly opinions of Sealed Air’s monetary statements from 2015 by August 2019.
  • Curt Fochtmann agreed to pay a civil cash penalty of $15,000 and was suspended from showing or practising earlier than the SEC, with a proper to reapply for reinstatement after one yr. Fochtmann, who retired from EY in 2020, was a tax accomplice at EY, in addition to the EY Carolinas tax market chief throughout this time. Fochtmann was on the EY RFP pursuit of Sealed Air and served because the tax accomplice on the next audit engagement groups from 2015 till Could 2019. Because the tax accomplice, Fochtmann reviewed the work of, and supervised, EY’s tax professionals on the audit engagement workforce who carried out audit and assessment procedures associated to Sealed Air’s revenue tax accounting all through that interval.
  • William Stiehl agreed to pay a civil cash penalty of $51,000 and was suspended from showing or practising earlier than the SEC, with a proper to reapply for reinstatement after two years.

[SEC order against EY, Herring, Young, and Fochtmann]
[SEC Order against Stiehl]

Associated article:

Auditor Swap: Bubble Popped On EY’s Engagement with Sealed Air Corp.

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