Ernst & Young’s $100 Million SEC Penalty:
A Case Study of Cheating on CPA Ethics Examinations and Cover-Up
Abstract
The U.S. securities and exchange commission (SEC) monitors the financial reporting practices of business firms that sell stock on U.S. exchanges. The SEC requires certified public accountants (CPAs) to audit those firms in order to provide reasonable assurance that the firms’ financial statements contain no material misstatements and that the firms have good internal accounting controls. Since CPAs serve as a watchdog for the SEC, the CPA exam content should be rigorous and the exam should be securely administered; this helps to ensure that only qualified applicants become CPAs and that audits are performed competently. Accordingly, the SEC was disappointed to learn that some of the auditors at Ernst & Young (E&Y), one of the four largest international CPA firms, had cheated on CPA ethics examinations. Furthermore, E&Y management attempted to cover up the cheating. E&Y admitted its culpability and agreed to pay a $100 million penalty and undertake remedial measures to correct the firm’s ethical issues. At the end of this study, the author: (1) emphasizes the critical importance of ethical behavior to CPAs; (2) makes recommendations for avoidance of internal exam cheating at CPA firms; and (3) makes recommendations to the SEC for improvement of its enforcement quality.
Downloads
Download data is not yet available.
References
Barbarino, A. (2022, 1 Juli). After EY cheating scandal, will the “big four” finally get it? Law360. https://www.law360.com/articles/1507293.
Detzen, D. (2018). A “new deal” for the profession: Regulatory initiatives, changing knowledge conceptions and the committee on accounting procedure. Accounting, Auditing & Accountability Journal, 31(3), 970-992. https://doi.org/10.1108/AAAJ-06-2016-2584.
Feroz, E. H., Kwon, T. M., Pastena, V. S., & Park, K. (2000). The efficacy of red flags in predicting the SEC’s targets: An artificial neural networks approach. International Journal of Intelligent Systems in Accounting, Finance & Management, 9(3), 145-157. https://doi.org/10.1002/1099-1174(200009)9:3<145::AID-ISAF185>3.0.CO;2-G.
Francis, J. R. (2011). A framework for understanding and researching audit quality. Auditing: A Journal of Practice & Theory, 30(2), 125-152. https://doi.org/10.2308/ajpt-50006.
Glover, S., Jiambalvo, J., & Kennedy, J. (2001, 1 Maret). Research summary 8: The effects of formal sanctions on auditor independence. Journal of Accountancy, 18, 27-35. https://www.journalofaccountancy.com/issues/2001/mar/researchsummary8theeffectsofformalsanctionsonauditorindependence.html.
Gonzalez, A. (2023, 13 April). EY hasn’t finished that independent review into procedures to prevent another cheating scandal. Going Concern. https://www.goingconcern.com/ey-hasnt-finished-that-independent-review-into-procedures-to-prevent-another-cheating-scandal/.
Goss, L. (2022, 21 Desember). UK’s audit watchdog calls on top accounting firms to boost measures against exam cheating. CityA.M. https://www.cityam.com/uks-audit-watchdog-calls-on-top-accounting-firms-to-boost-measures-against-exam-cheating/.
Hall, S., & Shaner, H. (2022, 7 Desember). SEC must improve enforcement quality with 3 key factors. Law360 Expert Analysis-Corporate. https://www.law360.com/articles/1555348/sec-must-improve-enforcement-quality-with-3-key-factors.
Hodgkins, G., Nguyen, L., & Shin, M. (2022, 30 November). SEC enforcement numbers show shift to high-impact cases. Law360. https://www.law360.com/articles/1553691/sec-enforcement-numbers-show-shift-to-high-impact-cases.
Hoos, F., Pruijssers, J. L., & Lander, M. W. (2019). Who’s watching? Accountability in different audit regimes and the effects on auditors’ professional skepticism. Journal of Business Ethics, 156(2), 563-575. https://doi.org/10.1007/s10551-017-3603-6.
Juric, D., O’Connell, B., Rankin, M., & Birt, J. (2018). Determinants of the severity of legal and employment consequences for CPAs named in SEC accounting and auditing enforcement releases. Journal of Business Ethics, 147(3), 545-563. https://doi.org/10.1007/s10551-015-2956-y.
Kleinman, G., Strickland, P., & Anandarajan, A. (2016). The accounting court: Some speculations on why not? Group Decision & Negotiation, 25(4), 845-871. https://doi.org/10.1007/s10726-015-9456-4.
Lewis, T. B., & Barnes, J. N. (2015). An accounting liability heuristic. Journal of Business Case Studies, 11(4), 189-224. https://doi.org/10.19030/jbcs.v11i4.9447.
Messier, W. F. Jr., Kozloski, T. M., & Kochetova-Kozloski, N. (2010). An analysis of SEC and PCAOB enforcement actions against engagement quality reviewers. Auditing: A Journal of Practice & Theory, 29(2), 233-252. https://doi.org/10.2308/aud.2010.29.2.233.
Mintz, S. (2022, 19 Juli). Cheating on exams: Should accounting professionals be trusted? Ethics Sage. https://www.ethicssage.com/2022/07/cheating-on-exams-should-accounting-professionals-be-trusted.html.
Peirce, H. M. (2022, 28 Juni). When voluntary means mandatory and forever: Statement on in the matter of Ernst & Young LLP. U.S. Securities and Exchange Commission. https://sec.gov/news/statement/peirce-statement-ernst-and-young-062822.
Smith, C. F., Bandy, A. B., & Fuchs, A. J. (2023, 12 Januari). Expect analysis: Expect more SEC enforcement against auditors this year. Law360. https://www.law360.com/articles/1565144/xpect-more-sec-enforcement-against-auditors-this-year.
Smith, K. J., Davy, J. A., & Easterling, D. (2004). An examination of cheating and its antecedents among marketing and management majors. Journal of Business Ethics, 50(1), 63-80. https://doi.org/10.1023/B:BUSI.0000020876.72462.3f.
U.S. SEC. (2022, 21 Juli). Testimony on “oversight of the SEC’s division of enforcement” before the United States House of Representatives Committee on Financial Services Subcommittee on Investor Protection, Entrepreneurship and Capital Markets. U.S. Securities Exchange Commission. https://www.sec.gov/news/statement/grewal-statement-house-testimony-071922.
U.S. SEC. (2022, 28 Juni). Administrative proceeding file no. 3-20911: In the matter of Ernst & Young LLP, respondent. U.S. Securities Exchange Commission. https://sec.gov/litigation/admin/2022/34-95167.pdf.
U.S. SEC. (2022, 28 Juni). Ernst & Young to pay $100 million penalty for employees cheating on CPA ethics exams and misleading investigation. U.S. Securities Exchange Commission. https://www.sec.gov/news/press-release/2022-114.
U.S. SEC. (2022, 9 Juni). Critical importance of the general standard of auditor independence and an ethical culture for the accounting profession—remarks of P. Munter, Acting Chief Accountant of SEC. U.S. Securities Exchange Commission. https://www.sec.gov/news/statement/munter-20220608.
Detzen, D. (2018). A “new deal” for the profession: Regulatory initiatives, changing knowledge conceptions and the committee on accounting procedure. Accounting, Auditing & Accountability Journal, 31(3), 970-992. https://doi.org/10.1108/AAAJ-06-2016-2584.
Feroz, E. H., Kwon, T. M., Pastena, V. S., & Park, K. (2000). The efficacy of red flags in predicting the SEC’s targets: An artificial neural networks approach. International Journal of Intelligent Systems in Accounting, Finance & Management, 9(3), 145-157. https://doi.org/10.1002/1099-1174(200009)9:3<145::AID-ISAF185>3.0.CO;2-G.
Francis, J. R. (2011). A framework for understanding and researching audit quality. Auditing: A Journal of Practice & Theory, 30(2), 125-152. https://doi.org/10.2308/ajpt-50006.
Glover, S., Jiambalvo, J., & Kennedy, J. (2001, 1 Maret). Research summary 8: The effects of formal sanctions on auditor independence. Journal of Accountancy, 18, 27-35. https://www.journalofaccountancy.com/issues/2001/mar/researchsummary8theeffectsofformalsanctionsonauditorindependence.html.
Gonzalez, A. (2023, 13 April). EY hasn’t finished that independent review into procedures to prevent another cheating scandal. Going Concern. https://www.goingconcern.com/ey-hasnt-finished-that-independent-review-into-procedures-to-prevent-another-cheating-scandal/.
Goss, L. (2022, 21 Desember). UK’s audit watchdog calls on top accounting firms to boost measures against exam cheating. CityA.M. https://www.cityam.com/uks-audit-watchdog-calls-on-top-accounting-firms-to-boost-measures-against-exam-cheating/.
Hall, S., & Shaner, H. (2022, 7 Desember). SEC must improve enforcement quality with 3 key factors. Law360 Expert Analysis-Corporate. https://www.law360.com/articles/1555348/sec-must-improve-enforcement-quality-with-3-key-factors.
Hodgkins, G., Nguyen, L., & Shin, M. (2022, 30 November). SEC enforcement numbers show shift to high-impact cases. Law360. https://www.law360.com/articles/1553691/sec-enforcement-numbers-show-shift-to-high-impact-cases.
Hoos, F., Pruijssers, J. L., & Lander, M. W. (2019). Who’s watching? Accountability in different audit regimes and the effects on auditors’ professional skepticism. Journal of Business Ethics, 156(2), 563-575. https://doi.org/10.1007/s10551-017-3603-6.
Juric, D., O’Connell, B., Rankin, M., & Birt, J. (2018). Determinants of the severity of legal and employment consequences for CPAs named in SEC accounting and auditing enforcement releases. Journal of Business Ethics, 147(3), 545-563. https://doi.org/10.1007/s10551-015-2956-y.
Kleinman, G., Strickland, P., & Anandarajan, A. (2016). The accounting court: Some speculations on why not? Group Decision & Negotiation, 25(4), 845-871. https://doi.org/10.1007/s10726-015-9456-4.
Lewis, T. B., & Barnes, J. N. (2015). An accounting liability heuristic. Journal of Business Case Studies, 11(4), 189-224. https://doi.org/10.19030/jbcs.v11i4.9447.
Messier, W. F. Jr., Kozloski, T. M., & Kochetova-Kozloski, N. (2010). An analysis of SEC and PCAOB enforcement actions against engagement quality reviewers. Auditing: A Journal of Practice & Theory, 29(2), 233-252. https://doi.org/10.2308/aud.2010.29.2.233.
Mintz, S. (2022, 19 Juli). Cheating on exams: Should accounting professionals be trusted? Ethics Sage. https://www.ethicssage.com/2022/07/cheating-on-exams-should-accounting-professionals-be-trusted.html.
Peirce, H. M. (2022, 28 Juni). When voluntary means mandatory and forever: Statement on in the matter of Ernst & Young LLP. U.S. Securities and Exchange Commission. https://sec.gov/news/statement/peirce-statement-ernst-and-young-062822.
Smith, C. F., Bandy, A. B., & Fuchs, A. J. (2023, 12 Januari). Expect analysis: Expect more SEC enforcement against auditors this year. Law360. https://www.law360.com/articles/1565144/xpect-more-sec-enforcement-against-auditors-this-year.
Smith, K. J., Davy, J. A., & Easterling, D. (2004). An examination of cheating and its antecedents among marketing and management majors. Journal of Business Ethics, 50(1), 63-80. https://doi.org/10.1023/B:BUSI.0000020876.72462.3f.
U.S. SEC. (2022, 21 Juli). Testimony on “oversight of the SEC’s division of enforcement” before the United States House of Representatives Committee on Financial Services Subcommittee on Investor Protection, Entrepreneurship and Capital Markets. U.S. Securities Exchange Commission. https://www.sec.gov/news/statement/grewal-statement-house-testimony-071922.
U.S. SEC. (2022, 28 Juni). Administrative proceeding file no. 3-20911: In the matter of Ernst & Young LLP, respondent. U.S. Securities Exchange Commission. https://sec.gov/litigation/admin/2022/34-95167.pdf.
U.S. SEC. (2022, 28 Juni). Ernst & Young to pay $100 million penalty for employees cheating on CPA ethics exams and misleading investigation. U.S. Securities Exchange Commission. https://www.sec.gov/news/press-release/2022-114.
U.S. SEC. (2022, 9 Juni). Critical importance of the general standard of auditor independence and an ethical culture for the accounting profession—remarks of P. Munter, Acting Chief Accountant of SEC. U.S. Securities Exchange Commission. https://www.sec.gov/news/statement/munter-20220608.
Published
2025-05-07
How to Cite
BLYTHE, Stephen Errol.
Ernst & Young’s $100 Million SEC Penalty:.
Journal of Accounting, Business and Management (JABM), [S.l.], v. 32, n. 1, p. 147-158, may 2025.
ISSN 2622-2167.
Available at: <https://journal.stie-mce.ac.id/index.php/jabminternational/article/view/1231>. Date accessed: 08 may 2025.
doi: https://doi.org/10.31966/jabminternational.v32i1.1231.
Section
Articles
