Question

Short Writing Assignment 3: Independence

Due: submitted through Online midnight on Tuesday

Assignment: The SEC (Securities and Exchange Commission) is a regulatory body that enforces federal securities laws. The SEC requires annual filings (10-K) of public companies’ financial statements to be audited, and thus, auditors are in the scope of SEC regulation. As part of that regulation, the SEC issues Accounting and Auditing Enforcement Releases (AAERs) that detail violations and the related outcomes and consequences. Recently, EY was the subject of two AAERs for violating independence rules. Pick one of the two AAERs (links below) and write a short essay to answer the following questions:

What is the situation and why was EY’s independence threatened? Who is involved?

What consequences do the individuals or the firm (EY) face?

What should EY do to improve their independence policies?

https://www.sec.gov/litigation/admin/2016/34-78873.pdf

https://www.sec.gov/litigation/admin/2016/34-78872.pdf

Answer 1

I have selected the first AAER provided (i.e. the one pertaining to the matter of E&Y, Robert Brehl, Pamela Hartford and Michael Kamienski).

The situation in this case arose due to the close personal relationship between a former EY partner and the former chief accounting officer of an EY audit client. This close relationship between the two individuals violated the auditor independence rule of SEC. In this case Ms. Hartford, a former EY partner, and Mr. Brehl, former chief accounting officer of the Issuer, maintained romantic relationship between the period March 2012 to June 2014. During this period Ms. Hartford was the partner on the EY engagement team that provided audit services and review services for the Issuer. This threatened the independence of EY. The people involved were Ms. Hartford, a former EY partner, and Mr. Brehl, former chief accounting officer of the Issuer. Michael Kamienski was also involved. He was the coordinating partner on the engagement team and was aware of the romantic relationship between Ms. Hartford and Mr. Brehl.

The consequences being faced by the individuals are censorship and denial of privilege of practicing before SEC as accountants/preparers/reviewers as the individuals are guilty of improper professional conduct and had violated provision of Federal securities law. EY faced the consequences of being censured and levy of civil money penalty.

To improve their independence policies EY should improve its annual audit and quarterly review of its independence policies and procedures. Training, controls and reporting with regards to close personal relationship between professionals of EY and employees of audit client should be done and monitored. Audit professionals should be asked to certify that they have consulted with an EY independence leader in those cases where they have a close personal relationship with an audit client employee who is employed in an accounting role or in a financial reporting role.