The Securities and Exchange Commission announced its first enforcement actions for auditor independence failures. I expect your auditors may have a bunch of new restrictions and questionnaires when it is time for the annual audit.
The SEC announced two separate enforcement actions, both involving Ernst & Young.
In one case, Gregory S. Bednar got too cozy with a audit client’s CFO. Bednar and the CFO stayed overnight at each other’s homes, took family trips together and they exchanged hundreds of personal messages.
In the other case, Pamela Hartford violated the auditor independence rule by having a romantic relationship with an executive at an audit client.
According to the SEC’s orders, Ernst & Young required audit engagement teams to follow certain procedures to assess their independence. They asked employees if they had family, employment, or financial relationships with audit clients that could raise independence concerns. The SEC says that is not enough. Apparently the SEC is expecting a broader question about “non-familial close personal relationships” that could impair the audit firm’s independence.
Ernst & Young’s independence policies “recognized that a non-familial close personal relationship between an engagement team member and a client employee in an accounting or financial reporting oversight role could present an independence problem”. But the firm had no procedures to identify those relationships and whether a relationship could jeopardize independence.
I expect that audit firms are going to broaden their independence questionnaires. I expect some of the questions and responses could be quite awkward.
Sources:
- Ernst & Young, Former Partners Charged With Violating Auditor Independence Rules
- SEC order – E&Y, Bednar
- SEC order – E&Y, Hartford et al
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