In the first enforcement action of its kind, the SEC charged Ernst & Young and former personnel with violations of the auditor independence rules arising from improper personal relationships between two former audit partners and client personnel. The firm agreed to pay $9.3 million to settle the charges. According to Andrew J. Ceresney, director of the SEC’s Division of Enforcement, “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.”

In the first case, Gregory S. Bednar, the senior partner on an engagement team for the audit of a New York-based public company, allegedly caused auditor independence rule violations for more than three years. Bednar and the company’s CFO became close personal friends, and also became close with the CFO’s son. According to the SEC, Bednar and the CFO would stay overnight at each other’s homes and often traveled together with family members. During audit periods, Bednar and the CFO “exchanged hundreds of personal text messages, emails, and voicemails,” and the audit partner provided the CFO and his son with tickets to sporting events and other gifts.  The SEC alleged that other firm partners knew of Bednar’s excessive entertainment spending but took no action.

Ernst & Young agreed to pay $4.975 million in monetary sanctions for Bednar’s conduct, and imposed a $45,000 penalty on Bednar. The SEC suspended him from appearing and practicing before the Commission as an accountant for a minimum of three years.

In the second case, Pamela Hartford caused auditor independence rule violations due to a romantic relationship with Robert Brehl, a financial executive of a client, while she served on the engagement team auditing his company.  A supervisory partner, Michael Kamienski, allegedly became aware of the relationship but failed to take sufficient steps to prevent the independence violations. The SEC also noted that the firm’s independence policies did not specifically require inquiries into non-familial personal relationships that could impair the firm’s independence.

Ernst & Young settled for $4.366 million in monetary sanctions, while Hartford and Brehl will pay $25,000 each.  The SEC suspended Hartford and Kamienski from appearing and practicing before the Commission as accountants for a minimum of three years, and suspended Brehl for a minimum of one year.

In the Matter of Ernst & Young LLP and Gregory S. Bednar, CPA, SEC Release No. 34-78872 (Sept. 19, 2016); In the Matter of Ernst & Young LLP and Robert J. Brehl, CPA, Pamela J. Hartford, CPA, and Michael T. Kamienski, CPA, SEC Release No. 34-78873 (Sept. 19, 2016).