Ernst & Young settles charges ex-auditors got 'too close' to clients

(Reuters) - Accounting firm Ernst & Young [ERNY.UL] will pay $9.3 million to settle charges that two of its former auditors got “too close to clients on a personal level” and broke rules aimed at ensuring reviews were impartial, the U.S. Securities and Exchange Commission said on Monday.

The seal of the U.S. Securities and Exchange Commission hangs on the wall at SEC headquarters in Washington, June 24, 2011. REUTERS/Jonathan Ernst

The agency said the two former Ernst & Young partners also settled SEC charges that they lacked independence when auditing the clients’ companies. Another partner and a client’s chief accounting officer also settled SEC charges that they engaged in unprofessional conduct. All agreed to penalties and suspensions from doing any accounting work relating to SEC matters.

Neither Ernst & Young nor the individuals charged admitted or denied any wrongdoing in settling the charges, the SEC said.

The SEC said these cases marked its first enforcement actions against auditors who failed to remain independent due to “close personal relationships” with clients’ employees. It said that in both situations, Ernst & Young ignored red flags that signaled their partners’ inappropriate conduct.

Auditors are independent, outside accountants who examine a public company’s financial statements and certify their accuracy. The process, required by the SEC, is designed to give investors assurances beyond the company that they can rely on the statements.

The SEC said it found that Gregory Bednar, a former senior partner on the audit team for a New York-based public company, had “maintained an improperly close friendship” with its chief financial officer. The SEC did not name the company.

The SEC said that Pamela Hartford, a former partner on another audit team, had been “romantically involved” with Robert Brehl, a different client’s former chief accounting officer, between 2013 and 2014. The SEC did not identify Brehl’s former employer.

It said a third former partner, Michael Kamienski, had information that should have caused him to inquire about a possible romantic relationship between Hartford and Brehl. Kamienski’s lawyer declined to comment.

Lawyers for the other individuals did not return calls for comment.

The SEC said Ernst & Young, during the periods of the relationships, violated SEC rules by representing that it was independent in auditing the companies when it was not.

“The individuals at the center of these matters violated multiple EY policies, hid their conduct and behaved in a way that was antithetical to EY’s Global Code of Conduct, culture, values, policies, and training,” Ernst & Young spokeswoman Amy Call Well said in a statement.


In 2014, real estate investment trust Ventas, Inc, said in a statement that it had “dismissed Ernst & Young as its public accounting firm effective July 5, 2014 due to E&Y’s determination that it was not independent solely as a result of an inappropriate personal relationship between an E&Y partner and Ventas’s former Chief Accounting Officer and Controller.”

In the statement, Ventas announced “the separation of Robert J. Brehl from his position as Ventas’s Chief Accounting Officer and Controller in relation to these matters.”

On Monday, a Ventas spokesman did not return a call for comment.

The SEC said that two of Kamienski’s colleagues told him of their concerns that Hartford and Brehl were romantically involved. One of those colleagues later filed a whistleblower complaint, the SEC said.

The SEC said on Monday that Kamienski had authorized releasing a Ventas auditing report despite knowing information that suggested the relationship between Hartford and Brehl.

It said Kamienski left Ernst & Young last April.

Ventas said in the 2014 statement that it had withdrawn its 2012 and 2013 audit reports by Ernst & Young.

In the other case, former Ernst & Young partner Gregory Bednar was tasked with mending a client relationship.

The SEC said he developed a close friendship with that client’s chief financial officer and that Ernst & Young did not act on Bednar’s more than $100,000 in entertainment expenses for the client, including sporting events.

Reporting by Suzanne Barlyn in New York; Additional reporting by Susan Heavey in Washington; Editing by Meredith Mazzilli and Lisa Von Ahn