Ernst & Young-Auditors Cheat to Pass Ethics Exam

Case Code: FINC205
Case Length: 10 Pages
Period: 2020-22
Pub Date: 2023
Teaching Note: Available

Price: Rs.300
Organization: Ernst & Young
Industry: Financial Services
Countries: United States
Themes: Corporate Ethics, Ethics in Business, Ethical Decision Making

Abstract Case Intro 1 Case Intro 2 Excerpts

Excerpts

E&Y’S Global Code of Conduct

E&Y’s Global Code of Conduct provided an ethical framework on which the company based its decisions. This code underpinned what the company did..

The KPMG Issue

Auditing firms had been attracting close scrutiny from the SEC and other authorities in the US since 2001 after the collapse of Enron . At that time, the role of its auditor Arthur Andersen had come under the spotlight, as it was alleged to have perpetrated the accounting fraud at the company. In the aftermath of the investigation into the collapse of Enron, criminal charges were filed against Arthur Andersen, and the firm indicted for its role in the Enron Accounting Scandal. After the Enron incident, the Sarbanes-Oxley Act came into force..

Practices at E&Y

To become a licensed CPA, applicants were required to clear ethics related examinations. This was made necessary in order to ensure that accountants understood their ethical responsibilities as they started guiding their clients. The accountants were also required to undergo and complete Continuing Professional Education (CPE) courses to ensure that they were up-to-date with accounting standards and ethical obligations. To retain their licenses, CPAs were required to pass these examinations..

SEC Questions E&Y

After KPMG was asked to pay a fine, the Chair and Managing partner of E&Y, USA, sent a message on June 19, 2019, to all the employees in the country. The message read, “[s]haring answers on internal or external tests or evaluations is highly unethical behavior, in violation of our Code of Conduct, and will not be tolerated at EY.”..

Internal Investigation

After submitting its report to the SEC, E&Y conducted an internal investigation and found that several auditors had cheated while taking the CPA ethics exams. The investigation noted that the auditors had cheated on courses like Summary of Audit Differences, which were designed to help them evaluate client statements, and determine whether they had been presented fairly..

SEC’S Allegations

The director of the SEC pointed out that while the Code of Conduct of the company asked the employees to report unethical conduct, employees who were aware of the wrongdoings in the CPA exams did not report it..

E&Y’S Corrective Actions

E&Y agreed that during the investigation, it had submitted that it was not facing any issues with cheating, even though it had received a complaint about potential cheating. It also admitted that even after the internal investigation found that cheating was prevalent, and the matter had been discussed with senior management, it had not corrected the submission made to the SEC..

What lies ahead?

E&Y admitted that its auditors had cheated and also agreed to pay the penalty. It also agreed to take corrective measures and address the ethical issues in the organization. The firm released a statement, “Nothing is more important than our integrity and our ethics. Sharing answers on any assessment or exam is a violation of our Code of Conduct and is not tolerated.”..

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