SEC charges EY and partners with audit independence misconduct

Cecilia Nysing

The Securities and Exchange Commission charged Ernst & Young, one of its current partners, and two of the firm’s former partners Monday with violating auditor independence rules and improper professional conduct.

The case involves EY’s efforts to serve as auditor for Sealed Air, a public company in Charlotte, North Carolina, with nearly $5 billion in revenue. The SEC separately brought charges against Sealed Air’s former chief accounting officer for his role. All of those charged have agreed to settle the charges for a collective total of over $10 million.

The SEC found that EY, firm partner James Herring, and former partners James Young and Curt Fochtmann improperly interfered with Sealed Air’s selection of an outside auditor by asking for and receiving confidential competitive intelligence and confidential audit committee information from the Sealed Air’s then-chief accounting officer, William Stiehl, during the request for proposal process. Stiehl, Fochtmann, and Sealed Air did not immediately respond to a request for comment, while Herring and Young could not be reached for comment.

Ernst & Young said it has changed its policies since the events occurred. “EY is committed to competing fairly for new business and on the basis of our qualifications and merits,” the firm said in a statement to Accounting Today. “The matter at issue occurred in 2014; since then we have reinforced our policies and procedures when responding to requests for proposals and have implemented additional training, testing and monitoring processes for compliance with these policies for all professionals involved in pursuits. Integrity and ethics are the cornerstones of our profession and maintaining the highest level of audit quality and independence is our top priority. We are fully committed to the critical role we play in providing independent assurance with respect to our clients’ financial reporting.”

The SEC found that EY’s misconduct in connection with the audit pursuit would cause a reasonable investor to conclude that EY and its partners were incapable of exercising objectivity and impartiality once the audit engagement began. The SEC’s separate order against Stiehl found that, through his misconduct during the request for proposal process, including withholding key information from the issuer’s audit committee, he caused Sealed Air’s reporting violations. Sealed Air announced in June 2019 that it had terminated Stiehl in connection with the SEC investigation.

“Auditor independence is not merely an obstacle to overcome, it is the bedrock foundation that supports the integrity, transparency, and reliability of financial reporting,” said Charles Cain, chief of the SEC Enforcement Division’s FCPA Unit, in a statement Monday. “Auditor independence requires auditors to analyze all of the relevant facts and circumstances from the perspective of the reasonable investor. EY and its partners lost sight of this fundamental principle in their pursuit of a new client. This action further underscores that auditors must apply heightened scrutiny when making independence determinations.”

EY, Herring, Young, and Fochtmann consented to the SEC’s order without admitting or denying the findings and agreed to cease and desist from future violations. EY agreed to a censure, to pay a penalty of $10 million, and to comply with a set of undertakings for two years. Herring, Young, and Fochtmann agreed to pay penalties of $50,000, $25,000, and $15,000, respectively, and to be suspended from appearing or practicing before the SEC, with a right to reapply for reinstatement after three, two, and one years, respectively.

The SEC order against Stiehl found he caused and willfully aided and abetted Sealed Air’s reporting obligations stemming from the auditor selection process improprieties. He consented to the order without admitting or denying the findings, and agreed to cease and desist from future violations of the securities laws, to pay a penalty of $51,000, and to be suspended from appearing or practicing before the SEC, with a right to reapply for reinstatement after two years.

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