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State Board Report

October 2016

Ernst & Young agreed to pay $9.3 million to settle charges in the Securities and Exchange Commission’s first enforcement actions based on auditor independence failures due to close personal relationships between auditor and client personnel. On September 19, it was announced that the firm would be settling two cases that involved audit partners getting too close to their clients on a personal level and, consequently, violating the rules of professional conduct to maintain objectivity. Andrew J. Ceresney, Director of the SEC’s Division of Enforcement, stated: “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 order found that Gregory S. Bednar had been told by the firm to improve its relationship with a New York-based audit client that was a “troubled account.” According to the SEC’s findings, from January 2012 until March 2015, Mr. Bednar caused independence rule violations by: going on overnight trips with the company’s CFO and his family with no valid business purpose; staying at each other’s homes; exchanging hundreds of personal messages, e-mails and voice mails during the audit period; and treating the CFO’s son to sporting events. Although some E&Y partners knew about Mr. Bednar’s entertainment spending, they took no action to confirm he was complying with his independence obligation, the SEC stated.

In the second case, an E&Y partner, Michael Kamienski, became aware of a romantic relationship between E&Y’s Pamela Hartford and a financial executive, Robert Brehl, while Ms. Hartford was serving on the engagement team auditing his company, from March 2012 through June 2014. According to the SEC, the firm did not specifically inquire about non-familial close personal relationships that could impair the firm’s independence.

In both cases, E&Y consented to the SEC’s order without admitting or denying the findings. Mr. Bednar must pay $45,000 and is suspended from practicing before the SEC for at least three years and E&Y must pay $4,975,000 in monetary sanctions. Ms. Hartford and Mr. Brehl are to pay penalties of $25,000 each and E&Y has agreed to pay $4,366,000 in monetary sanctions. In addition, Ms. Hartford and Mr. Kamienski are suspended from appearing before the SEC as accountants for at least three years and Mr. Brehl for one year. Ms. Hartford, Mr. Kamienski and Mr. Bednar no longer work for E&Y.

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