Securities and Exchange Commission (SEC) investigations found that the senior partner on an engagement team for the audit of a New York-based public company maintained an improperly close friendship with its chief financial officer, while a different partner serving on an engagement team for the audit of another public company was romantically involved with its chief accounting officer. 

The regulator said EY misrepresented in audit reports issued with the companies’ financial statements that it maintained its independence throughout these audits.

In the first case, the SEC investigation found that from January 2012 to March 2015 Gregory Bednar was specifically tasked by the firm to improve its relationship with the New York-based audit client because it was a ‘troubled account.’ 

Bednar and the company’s CFO stayed overnight at each other’s homes on multiple occasions and travelled together with family members on overnight trips with no valid business purpose, and they exchanged hundreds of personal text messages, emails, and voicemails during the auditing periods, the regulator said. 

Bednar also became friends with the CFO’s son and often treated them to sporting events and other gifts, with up to $100,000 spent on hospitality.  Some EY partners became aware of Bednar’s excessive entertainment spending but took no action to confirm that Bednar was complying with his independence obligations.

Bednar and EY have consented to the SEC’s order without admitting or denying the findings.  The firm agreed to pay $4.97m in monetary sanctions for the violations.  Bednar must pay a $45,000 penalty and is suspended from appearing and practicing before the SEC as an accountant, but can apply for reinstatement after three years.  Bednar no longer works at EY.

In the second case, the SEC found that Pamela Hartford caused auditor independence rule violations at EY from March 2012 to June 2014, when she maintained a romantic relationship with financial executive Robert Brehl while serving on the engagement team auditing his company.  Meanwhile another EY partner named Michael Kamienski, who supervised Hartford on the audit, became aware of facts suggesting the improper relationship yet failed to perform a reasonable inquiry or raise concerns internally to EY’s US independence group.

According to the SEC’s finding, EY required audit engagement teams to follow certain procedures to assess their independence, and employees were asked whether they had familial, employment, or financial relationships with audit clients that could raise independence concerns.  But these procedures did not specifically inquire about non-familial close personal relationships that could impair the firm’s independence.

EY, Hartford, Kamienski, and Brehl consented to the SEC’s order without admitting or denying the findings.  The firm agreed to pay $4.366m in monetary sanctions for these violations, and Hartford and Brehl agreed to pay penalties of $25,000 each.  Hartford, Kamienski, and Brehl are suspended from appearing and practicing before the SEC as accountants. Brehl can apply for reinstatement after one year, and Hartford and Kamienski after three years. Hartford and Kamienski no longer work at EY.

Andrew. Ceresney, director of the SEC’s division of enforcement, said: ‘These are the first SEC enforcement actions for auditor independence failures due to close personal relationships between auditors and client personnel. EY did not do enough to detect or prevent these partners from getting too close to their clients and compromising their roles as independent auditors.’

A spokesman for EY in the US said that the individuals involved ‘violated multiple EY policies, hid their conduct and behaved in a way that was antithetical to EY’s global code of conduct, culture, values, policies, and training.’ EY also said that they had been ‘separated from our organisation’.

The SEC’s order did not name the client companies involved, but in July 2014 Chicago-based real estate company Ventas, which is listed on the New York stock exchange, put out a statement saying it had ‘dismissed E&Y as its public accounting firm, effective July 5, 2014, due to E&Y’s determination that it was not independent solely as a result of an inappropriate personal relationship between an E&Y partner and Ventas’s former chief accounting officer and controller.’ The firm was replaced by KPMG as auditors. 

In the same statement, Ventas also announced the separation of Robert Brehl from his position as Ventas’s chief accounting officer and controller ‘in relation to these matters’.

Ventas noted that the senior E&Y partner on the Ventas account, who signed the 2012 and 2013 audit reports, was not the individual involved in the inappropriate personal relationship. It said it did not have concerns that the improper relationship had affected its accounting figures, but had asked KPMG to complete a re-audit and re-review of the relevant periods.