Wal-Mart Auditor E&Y Violated Federal Rules In Light of Bribery Charges, Firm Tells PCAOB

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By Michael Greene

May 27 — A union-backed pension advisory firm is requesting that the Public Accounting Oversight Board investigate whether long-time Wal-Mart auditor Ernst & Young LLP responded appropriately after learning about alleged bribes made by senior officials at a Mexican subsidiary of the megastore.

In a May 21 letter, CtW Investment Group states that an internal memo released during long-running shareholder litigation reveals that E&Y was informed that a whistle-blower had provided evidence of the alleged Mexico bribery scheme during the 2006 and 2007 audit engagements.

The advisory group claims that the whistle-blower's allegations along with other “red flags” suggests “there is a strong prima facie case that E&Y’s conduct of these Wal-Mart engagements violated PCAOB auditing standards and rules, as well as the Exchange Act.”

“Especially given the broader context in which the bribery allegations emerged, E&Y should have brought a high degree of professional skepticism to the task of assessing the significance of the allegations and management’s response to them. Instead, the evidence strongly suggests that E&Y relied excessively upon erroneous and less-than-persuasive representations from management to support its audit opinions,” the letter states.

A spokesperson from Ernst & Young declined to comment on the letter.

The PCAOB’s chief spokeswoman said that the board can’t comment on whether it received the letter. In addition, the board wouldn’t disclose publicly “any correspondence regarding any complaints or concerns regarding a registered firm,” Colleen Brennan said. In addition, Brennan declined to comment on whether the PCAOB was investigating E&Y regarding the CtW allegations.

Wal-Mart Stores Inc. spokesman Randy Hargrove told Bloomberg BNA that “the investigation is ongoing and it would be inappropriate to comment further on specific allegations, or for us or others to come to specific conclusions until it is finished.”

PCAOB Investigation?

CtW alleges that E&Y's conduct of the engagements for the years ending Jan. 31, 2006 and 2007 violated PCAOB and federal securities laws in at least five areas, including failing “to apply audit procedures specifically directed to ascertaining whether an illegal act had occurred and to exercise sufficient professional skepticism with respect to Management’s representations regarding the alleged violations.”

The letter also asks the PCAOB to investigate whether E&Y violated Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 by allegedly knowingly issuing audit reports that included false representations.

“When a company like Wal-Mart breaks the rules, the potential negative consequences for investors and distortions of the competitive landscape are severe. As Wal-Mart’s external auditor for more than 40 years, Ernst & Young has accepted the responsibility of helping to ensure that Wal-Mart and its officials do not break the law and the rules. The PCAOB, of course, has a critical role to play in making sure that E&Y fulfills that responsibility,” the letter concludes.

Heavily Litigated FCPA Claims

Since the alleged bribery scheme came to light, several shareholders have filed lawsuits alleging that Wal-Mart officials violated U.S. and international laws to accelerate new store openings in Mexico.

Most recently, the Delaware Chancery Court May 7 closed a hotly contested books and records action after denying a contempt motion filed against the megastore. 

Chancellor Andre G. Bouchard concluded that the retailer had fully complied with a 2014 Delaware Supreme Court order requiring the company to release internal documents related to what directors may have known about the alleged bribes made at the company's Mexico subsidiary.

In another recent ruling, an Arkansas federal district judge March 31 dismissed a shareholder derivative lawsuit alleging that executives breached their fiduciary duties by covering up possible Foreign Corrupt Practices Act violations stemming from the alleged bribes.

Applying Delaware law, Judge Susan O. Hickey held that the plaintiff stockholders had not established that a pre-suit demand on Wal-Mart's directors to take action would have been futile because they failed to show that a majority of the board knew about or consciously ignored the alleged wrongful conduct. The case is being appealed to the U.S. Court of Appeals for the Eighth Circuit.

To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

To contact the editor responsible for this story: Ryan Tuck at rtuck@bna.com

The letter is available at http://op.bna.com/car.nsf/r?Open=mgre-9wwsz7.